Investors should check company culture before they buy the shares
Costco’s co-founder, Jim Sinegal, once said that in business: “Culture is not the most important thing, it’s the only thing.”
Warren Buffett, arguably the world’s greatest investor, agrees. At Berkshire Hathaway’s 2022 Annual Meeting, he said: “Our culture is 99.9% of running the business.”
Next’s long-running CEO, Simon Wolfson, dedicated a whole page of his recent results to discussing Next’s ‘Culture and Expectations’, instructing staff to “Keep it simple and speak in plain English; you will achieve so much more”.
These three businesses have enviable long-term track records. And all three occupy cut-throat industries where the textbooks say profits like this shouldn’t be possible.
Time and again, history teaches us the same lesson. A great culture can turn an ordinary business into a wonderful one. Meanwhile, a poor culture can poison an otherwise promising position.
The reason culture matters is simple - it determines how business decisions get made. Culture is the glue that holds a company together. Get the culture of a business right, and everything else tends to look after itself.
Would Silicon Valley Bank and Credit Suisse have gotten into such a mess if they had cultures that properly considered the risks they were taking? I doubt it.
The ‘right’ culture will be different for every business, varying by industry and company size. But the message is the same – ignore culture at your peril.
Which is why it’s so odd that many investors seem to pay culture lip service.
In my experience, by far the most common investing approach is to gloss over culture altogether. The assumption, presumably, is that the business model is so good (or the shares are so cheap), it doesn’t really matter what the culture is like.
Another common approach is to invest into a company where the management and culture leave a lot to be desired (sometimes unwittingly!), then attempt to change it through ‘active engagement’.
The tactic I find the most perplexing, is to invest into a business and act as a cheerleader for management, seemingly irrespective of their performance.
There are occasions when each of these strategies will work.
Shares bought cheaply enough, or a business model suitably robust, can outweigh all but the most incompetent of cultures. Some CEOs will defy human nature and change their ways, transforming the culture with it. And sometimes, offering support to an under-performing CEO is the right thing to do.
But, in my experience, these tend to be the exception rather than the rule.
It begs the question – why is culture so often ignored by investors? I can think of a few possible reasons.
The first is short time horizons. The average holding period for investors is less than a year, which isn’t much time for culture to make a difference.
The second is the difficulty of thoroughly assessing culture as an ‘outsider’.
The third, somewhat related, is that you can’t boil down culture to a number on a spreadsheet. Fund managers tend to like models, numbers and ‘facts’. But culture is fuzzy and virtually impossible to quantify.
Together these problems mean culture garners much less attention than it deserves.
It needn’t be this way.
Assessing a firm’s culture isn’t always easy, but nor is it impossible, especially if you know where to look.
Employee reviews on websites like Glassdoor can often be enlightening. Simply studying annual reports and seeing whether a company’s words align with their actions can also provide valuable cultural insights.
Nevertheless, I can’t see investors suddenly putting culture front and centre of their investing strategies. Human nature – such as short-termism and a desire to try and quantify the unquantifiable – is too ingrained.
This means assessing culture will probably always take a back seat to trying to guess the next quarter’s earnings.
It’s a shame. If investors cared more about culture then management teams would too. And better business cultures would be good news for everyone from employees to the taxman.
Still, there is good news. The cultural blindness of the crowd means there are rich rewards on offer for investors who can buck the trend. Where investing’s concerned, culture pays.
Charlie Huggins is manager of the Quality Shares Portfolio at Wealth Club.