Cultures centered on business results
The typical investment firm has a strong focus on business results. In part, this focus is positive for clients, when the firm uses good results to strengthen its capabilities and better performance occurs too. But issues may arise if a focus on short-term results takes precedence over longer-term factors.
- Cultural strength is commonly observed in an ethos that focuses on results, wherein performance management and reward systems support and encourage behaviors consistent with a firm’s business model and results. The most common compensation structures among investment firms are linked to short-term business results. Leaders, particularly the chief executive, by and large embody the desired results-oriented culture, and boards see their own responsibility as acting where leaders do not deliver the results expected.
- In this narrative, firms find themselves caught in the jaws of a dilemma—to pursue business results at a potential cost to their clients, or to pursue their clients’ outcomes at potential cost to their own results. Investment firms often argue that the two priorities align, but clearly there is often a trade-off.
- Openness and accountability in the face of this dilemma are important at every level. Good governance means putting a focus on these qualities throughout the firm, guided by the mantra of “clients come first”, along with “doing the right things” in complex and conflicted situations. An example is moving investors in legacy higher-price share classes into new lower-cost share classes.
- On a broader point, investment firms have an overarching responsibility to promote the organization’s success for owners while considering a range of stakeholders, including clients, employees, suppliers, communities, and environments. A successfully managed business considers each constituency. Inevitably, conflicts arise between the interests of different sets of stakeholders. But where there is a broad alignment between their objectives—on how business is conducted and how stakeholders are treated—value creation is mutually reinforced for all parties.
- In Future State of the Investment Profession, investors’ “license to operate” was a central theme. In return for living up to society’s expectations, investment institutions receive from society an implicit license to operate—tacit approval to exist and function. Revocation is possible (through mass redemptions or statutory intervention) if investment organizations do not act responsibly and professionally. This understanding must form a part of the organization’s cultural identity.
- Leaders in thinking through these issues are challenged in multiple ways with such a subjective area. The issues involve assessing the culture, judging gaps from desired culture, and identifying actions to bridge the gap. The next 5–10 years will likely bring opportunities to use new technologies connected to big data (or, more specifically, to use soft data) to codify and address cultural issues.