Addressing the Culture Gap

An enduring question:  To what degree do ideas, theories, and principles regarding organizations apply to investment organizations?

Granted, there are many different kinds of investment organizations, but any leader ought to be able to address the question in a thoughtful manner.  (As should those charged with evaluating organizations from the outside.)

The common factor for the disparate entities in the ecosystem is the nature of investing — an uncertain and noisy endeavor that regularly leads to results that can be misinterpreted even by people with years of experience.  Assessments of organizational attributes like culture are heavily skewed by historical performance.  The general rule:

We see performance and infer __________ (fill in the blank).

As with other topics, seeking explanatory depth regarding organizational culture involves exploring a range of perspectives about it beyond the investment realm — and then comparing those ideas to the conventional wisdom, common practice, and unique conditions within the industry.  That first part, getting an outside view of the concepts, is usually overlooked.

The Culture Code

In 2018, Daniel Coyle published The Culture Code, a book with the subtitle, “The Secrets of Highly Successful Groups.”  He came to believe that the cultures of those groups were based upon three main skills.  They are building safety, to “generate bonds of belonging and identity”; sharing vulnerability, because “habits of mutual risk drive trusting cooperation”; and establishing purpose by creating “shared goals and values.”

How much does that sound like a stereotypical investment organization?  Some would read the description and say that those skills aren’t what makes a difference in generating investment performance — and some would even say that an emphasis on them would be counterproductive — while others think that those characteristics do lead to high-performing, sustainable organizations.  Coyle’s simple premise provides a quick litmus test for beliefs, as well as a guide to explore individual cultures more deeply.

Early in the book, Coyle discusses the use of sociometers by researchers to track the patterns of interactions in a wide variety of work environments:

In each study, they discovered the same pattern:  It’s possible to predict performance by ignoring all the informational content in the exchange and focusing on a handful of belonging cues.

Again, that seems unlikely to apply to a bunch of investment professionals, doesn’t it?  Another conclusion comes from an analysis of a large number of technology start-ups, which found three basic models at work:

The star model focused on finding and hiring the brightest people.  The professional model focused on building the group around specific skill sets.  The commitment model, on the other hand, focused on developing a group with shared values and strong emotional bonds.

While that’s still not a direct match, we begin to see connections to the investment world.  When it comes to hiring investment talent, the star and professional models rule the day.  But, in this study at least, “the commitment model consistently led to the highest rates of success.”  By undervaluing the traits and acts that lead to cohesion, is it possible that we are limiting the capabilities of those in our organizations in ways that contribute to underperformance?

Real courage

Too soft for you?  Try the chapter on SEAL Team Six, where the story of that unit’s success is told mostly through the experiences of Dave Cooper.  The chapter ends this way:

“When we talk about courage, we think it’s going against an enemy with a machine gun,” Cooper says.  “The real courage is seeing the truth and speaking the truth to each other.  People never want to be the person who says, ‘Wait a second, what’s really going on here?’  But inside the squadron, that is the culture, and that’s why we’re successful.”

Yes, there are plenty of investment people who are willing to say what they think at the drop of a hat.  That’s not the “real courage” being described here, which includes the willingness to not only say what you think but to devote yourself to helping to make the change happen, first with yourself.  That involves being vulnerable, admitting your shortcomings, and putting the team above yourself.  To live and die for each other.

Elements of culture

A culture is made of many pieces.  Simple statements and compelling stories about purpose matter, but actions speak much louder than words.  In building a culture, Coyle says, “you must first have a target,” and your in-group relationships should be at the top of your prioritization list:

This reflects the truth that many successful organizations realize:  Their greatest project is building and sustaining the group itself.  If they get their own relationships right, everything else will follow.

This needs to be done in the context of “the type of skills you want your group to perform”:

High-proficiency environments help a group deliver a well-defined, reliable performance, while high-creativity environments help a group create something new.  This distinction is important because it highlights the two basic challenges facing any group:  consistency and innovation.

Thus we come to a critical juncture.  The majority of investment organizations are out of whack across these dimensions, favoring proficiency and (apparent) consistency over creativity in methods and a commitment to organizational innovation.  That imbalance leads to a deterioration of performance over time.  (More on that further down.)

New ways of work

Coyle’s book will be revisited in an upcoming series on virtual, hybrid, and other models of work in the investment world.  Reading about the power of in-person interactions in its pages when it was published must have triggered different ideas than it does today (in the wake of our forced experiment regarding remote work and the changes in employees preferences that have resulted).

An asset manager’s perspective

“Why Do Money Managers Fail?” is the title of a July 2022 paper by Paul Black of WCM Investment Management.  It has deservedly received quite a bit of attention.

There are two ways that it can be viewed.  First, it serves as a part of the firm’s narrative about its history and culture.  Plus, since it attacks the notion that asset growth harms the ability of a manager to produce returns, the paper sets up a defense against those who would express that concern about WCM.

More importantly, Black gets to the heart of some important issues.  For example, here’s the beginning of a sidebar titled “An Industry That Penalizes Change”:

Our industry too often worships at the alter of process, process, process.  “Don’t change the process!”  I find it bizarre:  money management may be the only business where changing your process or belief system — because you’ve learned from your mistakes and want to get better — is frowned upon.  Where else are you penalized for growing your knowledge base and making necessary improvements?

Bravo!  Black calls out the most intractable fallacy about the business, which is trumpeted by asset managers and allocators alike.

The main topic is culture.  “One of the great mysteries of my life is the fact that culture plays such an underappreciated role in the durability of one of the world’s most people-driven businesses,” especially since, when managers fail, “the primary culprit almost always relates to people and culture.”

He refers to “the silent killers” of institutional bureaucracy, cynical factions, ulterior motives, and “the failure to create a second generation.”  The essence of Black’s prescription:

I believe that all these unhealthy culture issues can be alleviated through focus on three big actions:  (1) make sure your people know they matter, (2) make sure your people know that you, as leaders, care about them, and (3) foster an environment where your people care about each other.

It could have come straight out of Coyle’s book.  Black admits, “It’s easy to talk a good game about caring and candor, but the reality is that doing it well is exhausting.”

And most organizations don’t put in that effort:

Sadly, this type of people work is exceedingly rare in the industry, largely because there are horrendous starting conditions.  Most of the individuals attracted to investment management are exceptionally intelligent, have achieved a great deal academically, and (when successful) are highly compensated.  Naturally, this bolsters the human ego, which makes it difficult for people to exhibit vulnerability about their mistakes and areas in which they need to improve.  There is also a lack of trust in most firms.  People worry that exposing their own shortcomings will alter their career trajectories.  And they have a hard time separating themselves from their ideas.  Any challenge against a recommendation can be perceived as a personal attack.

Road maps

Organizational improvement has to start from where you are.  Changing a culture can be slow and torturous work, especially if there are difficult people involved, but staying put is a recipe for failure.

(One of the advantages available to a new firm is the ability to create a culture from a blank slate, although almost all are too busy with other things to prioritize it, so they just replicate environments they’ve known before.)

Evaluating your own culture is hard, but understanding that of others is even more challenging, because you can’t see most of what you’d need to see to do the work.  Still, due diligence analysts frequently make statements about an organization’s culture that aren’t based upon any real insights; the conclusions are summaries of the narratives that have been offered to them.

As an industry, we are mostly in the dark ages on topics related to culture.  It’s time to seek outside perspectives, to ask the hard questions, and to make bold choices.

 

The Advanced Due Diligence and Manager Selection online course includes a module that addresses additional ideas for allocators about culture and how to analyze it in an asset management firm.