Corporate culture in a nutshell, i.e. a few words about what determines the company’s success in the long term

day 16.10.2020 * Reading time: 10min.

 
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Corporate culture in a nutshell, i.e. a few words about what determines the company’s success in the long term

Current or periodic corporate reports say little about the culture of reporting companies. Unlike the profit and loss statement, balance sheet and business updates that dominate the quarterly report, the internal behavioral characteristics of a firm are usually not a determinant of stock prices. Yet I believe that corporate culture is actually the secret sauce to sustainability because in a knowledge economy, cultivating human capital is essential to building a company that wants to stay strong. And for Investors focused on environmental, social and governance issues, this awareness is key to engaging more effectively with management and Stakeholders and integrating research on the company’s culture with its business perspectives.
What defines corporate culture? A healthy culture values ​​science, discovery, experimentation, and above all, trust and responsibility. Cultures that value relentless evaluation can avoid falling into the trap of group thinking when views and practices are blindly defended. Essentially, three building blocks make up a thriving growth culture:

  1. Visionary management – Senior management sets the tone for daily operations and setting long-term goals. It’s no wonder that corporate culture icons tend to be charismatic, influential, and visionary CEOs.
  2. Team Focused Flexibility – High performing growth cultures are team oriented but flexible. Jeff Bezos coined the term “team of two pizzas” – if the team couldn’t be fed two pizzas, it was too big. Working groups must be small, diverse and transparent. They feel comfortable giving and receiving honest feedback and understand that their input must constantly change to drive innovation.
  3. Motivational incentives – as every Investor knows, past performance does not guarantee future results. Likewise, compensation for past achievements is less effective than motivating employees for future development, which motivates them to achieve success.

How can Investors distinguish companies that have a dynamic culture from those that do not? Answers to the five questions below are a good starting point for identifying companies that can become market leaders in the next decade.

  1. What kind of innovation is financed? Most companies invest in innovation, but often these activities are simply investments in “me too” products. Look closely where the money is going.
  2. Does cost control mask a lack of creativity? Cutting costs is a relatively easy way to increase profitability, at least for a while. It requires less creativity and usually less risk than investing in a new, speculative idea. Continuous cost cuts can signal a company lacking the vision or the courage to identify and invest in promising new business opportunities.
  3. How deep is the company’s pipeline, ie the offer of current and future products/solutions? When management raises the bar on funding new ideas, it narrows the path to new products or services. Don’t be fooled by solid profitability when organic growth is weak. Fewer ideas means the cost of failure is higher if the company bets the wrong horse.
  4. Does the company make too many acquisitions? Watch out for companies making important technology purchases directly in their core business. This is often a sign of early underinvestment and a poor growth culture.
  5. What can we learn from employees’ moods and motivations? In monitoring cultural health, the mood inside can be just as important as the tone at the top of the corporate ladder. The size and structure of salaries, commitment and development, diversity of backgrounds, team orientation, dropout and satisfaction rates – all these can and should be monitored. By engaging companies and Stakeholders, or by using tools such as third party sites such as Glassdoor and LinkedIn, Investors can see how people in the enterprise think and feel.

Regardless of the size of the company, people with the right cultural characteristics are more likely to successfully overcome crises such as a virus pandemic. Enterprises that trust their employees are better equipped to comfortably transition to a remote work environment. Keeping employees motivated in times of crisis is much easier when the employer values ​​the well-being of employees in good times and bad. COVID-19 provides a real test where companies with a truly innovative culture will have a big advantage in dealing with the crisis.

Even in good times, finding true growth potential isn’t easy. Many companies implementing new ideas have not achieved scale enough to ensure a profit. Companies with a culture that balances short-term flexibility with long-term strategic goals are, in my opinion, often well placed to deliver sustainable growth.

By treating culture as an integral part of basic research and by regularly engaging with management, Investors can and should gain insight into promising businesses that are thriving before their potential is reflected in equity valuations.

Rafal Ciepielski

Rafal Ciepielski

CEO RCieSolution

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The views expressed in this document are not research, investment or commercial advice, and do not necessarily reflect the views of all management teams. They change over time.