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Why asset managers need to think about corporate culture and how it affects returns

Recent corporate scandals, and their impact on share prices, have focused many minds on how to avoid recurrence. Much of the coverage has focused on the culture which allowed this to happen, yet while there is widespread agreement that culture can be pivotal to how the board and employees behave, the conversation often stops at simply acknowledging the issue. Identifying the dominant corporate culture and finding ways to change it all too often go into the ‘too difficult box’.

Asset managers can stop being victims of poor corporate culture and start to play an active part in encouraging good governance by tackling some of the key issues. Contrary to perceptions, there are a number of ways to measure culture. Until a ‘cultural audit’ is included in every annual report, asset managers should at least check one of the key corporate relationships which serves to ‘keep the board honest’– the relationship between NEDs and the Board.The NEDs’ role is as much to challenge the Board as to support it. Getting the balance right can mean the difference between an ineffective executive and a high performance team which engender a healthy culture.At one end of the spectrum, low challenge and high support defines a ‘cosy’ relationship which tends towards inertia. At the other end, high challenge and high support leads to a high performance board where significant issues are discussed openly and action is taken to make change happen.

But without a relationship of trust between the two teams, the NEDs may never hear about the issues that they need to investigate and potentially challenge.

Effective board culture includes:

  • A board which is willing to face up to tough issues
  • NEDs who know what’s going on, for example, through employee surveys and whistleblowing reports
  • Strong focus on the values and purpose of the business
  • Regular informal conversations between NEDs and the Board about business issues
  • High quality formal discussions leading to minuted decisions which deal with the issues
  • Incentives linked to the firm’s values, such as long term sustainable growth

To ensure that good corporate culture becomes a reality and not just an ideal, asset managers need to find out what is really happening at the companies in which they invest and use that information to support their investment decisions.