In completing phase two of the Institute’s quest to make cultural excellence an ever-present in the investment industry, we gathered considerable food for thought from the Power of Culture study participants[i]. Their questions are highly relevant to our thesis that many investment organisations need to update and synchronise their vision and strategy in light of significant industry disruption, (reinforced by the Covid-19 crisis). And that these organisations should be looking for new perspectives and new directions to help shape this reset.
Having identified the core cultural attributes in the first phase of our work, the second phase expanded the cultural edges and built on the leadership model and became central features of the five intriguing puzzles raised by study participants.
- How is leadership doing?
How has the leadership of investment organisations been getting on? We raise the question in the general context and specifically through the Covid-19 period? We are particularly interested in the quality of judgements and decision-making through very challenging times. As well as in the traits of authenticity and trust that we have found to be central to leadership success.
The key observation is that leadership has become more important at a time when the job of the leader has become a lot harder. The Covid-19 crisis has contributed to this. But the issues of increasing complexity and polarization were already influencing matters in this direction. It is more difficult to judge things when there are more issues to balance. It is more difficult to corral people when group opinions are more divergent.
The year that started with Covid-19 became even more difficult with the aftermath of the unlawful killing of George Floyd. Many leaders in our industry made strong statements of ambition around racial injustice. But will actions follow words? In the same way, leadership has made workforce safety a big current priority, but will this be maintained? We believe that in both areas it is simply too early to judge, but in both cases the stakes have truly grown larger.
Culture is intrinsically the reflection of leaders past and present. The pressure on present leaders is to make sure the best cultural features of the organisation are at least maintained if not enhanced. Culture will fade without sustained commitment, and sustained commitment is going to be even harder in these virtual operating conditions. We think the stakes here have also been raised.
To maintain good culture will take more effort than ever before.
In the leadership style challenge[ii] we are sure that dominating leadership has its time, particularly in crisis conditions. But leaders must adapt to increasingly complex contexts in which command-and-control styles may backfire because they lack the information for good decisions, the connections to build intrinsic motivations and the openness to secure alignment.
The cultural edges of inclusion and openness drew much attention from leaders in our phase two work. Other leadership attributes that are increasingly sought include serving leadership and transformational leadership. We remain convinced that serving leadership styles have more resonance for the future. In this area we see the serving leader using authenticity and trustworthiness to create a natural following in the organisation. We have been particularly encouraged to came across so many leaders that are really committed to prioritising serving attributes in their leadership mix and to serving a wider purpose of the greater good.
- How are we doing with the human elements in our organisations given Covid-19?
The new perspective here is that Covid-19 has produced a silver-lining effect at many organisations, notably greater understanding of individuals’ identity and personal needs. This appreciation can boost employee engagement and – via the principle that good culture does more than anything else to guide faster, better decisions – produce a stronger functioning organisation.
This widely quoted positive effect is not settled and needs more thinking. The issue seems to be about how much more in tune we are with individuals’ full identities given Covid-19 circumstances; including the impacts of the virtual operating model where we lose out on face-to-face interactions. How much genuine inclusion has there been? Is there potentially a saying-doing gap here?
Indeed, are cultures becoming more humanistic or is this wishful thinking? I think this varies quite widely. And it is fundamentally about good culture versus bad culture.
There is also some dissonance to deal with here. Are organisations are declaring victory too easily on the Covid-19 humanist silver lining? The semblance of better employee engagement and inclusion may not pass scrutiny at many organisations that are struggling to turn this Covid-19 dividend into a better employee experience and an employee advantage. In such cases, the corollary is that bad culture may bring greater dysfunction to organisations.
- Are we managing our cultural priorities well enough?
Our priorities are of course our stakeholders: our clients, people, communities and society, the environment and our owners. They all matter. But there has to be a balancing act, and this calls for a very special set of judgements about trade-offs. You can’t max out on all of these, that would be super-human. Organisations’ reflex responses are to say clients come first, but in all sorts of ways we find evidence that sometimes they don’t.
Again, there is dissonance. We think it is impossible to do everything that clients want. So, in practice we have the challenge of how to make certain trade-offs around culture. Culture at its core is about leadership behaviours that settle priorities. This ties up with culture not being a respecter of excess: too much of a good thing is a bad thing because it produces neglect elsewhere. So leaders need to ask: “What does it profit my organisation to be obsessive about meeting all client demands, when it can lead to the breakdown of teams that serves them?”
The dissonance here is about how cultural trade-offs need strong values and judgement to resolve them. Again, we will be researching deeper on this in phase three. For example, while three of the core cultural attributes: client-centricity, people centricity and high performance often involve trade-offs, more encouragingly the cultural edges seem to be more a set of win-wins. We saw evidence of organisations doing well with the edges of diversity & inclusion, openness, purpose and staying power at the same time. This calls for more investigation.
- Are investment organisations (and we include ourselves in that) listening carefully enough to their clients and end investors?
We have found significant evidence in our culture work of the investment industry’s focus on client-centric values and behaviours. But the question raised goes deeper. Are investment organisations – asset owners and asset managers – listening carefully enough and being properly responsive? The knee-jerk response is ‘absolutely yes’. We should recognise the attention and professionalism shown by large segments of the industry and that the best of these asset manager / asset owner relationships have a cultural bond built on strong listening, communication and trust.
But there is some dissonance here too. There is a view that it can be the ‘wrong sort of listening’ in which we hear only parts of the story. Are we a bit too focused on the short-term results, and not focused enough on the sorts of engagements in client relationships that are most meaningful but also most difficult to secure? This includes the absolute returns that are needed and the contribution to the total portfolio not just the alpha. Are asset managers providing value or are they ‘over-claiming’? Is there a saying-doing gap? Maybe we just hear what we want to hear.
What might be missing? We think the answers lie in traveling towards value creation, sustainability and fiduciary responsibility. To gauge this, we should perhaps look to the five dysfunctions of team[iii] for our guide. For freedoms from these dysfunctions we must build relationships that are results-focused, accountable, committed, conflict-capitalising and trustworthy.
We recognise some fault lines in the system that make this direction of travel difficult. The present value chain is too long and complex to make our relationship obligations and responsibilities sufficiently clear in the fiduciary sense. We should develop mandates that spell out a fuller set of expectations that all parties buy into. We believe strategic partnership relationships and sustainability and impact mandates will be part of this. We call out some phase three work to develop these concepts.
- Why is the industry having such difficulty with innovation?
A notable phase two conclusion is that the innovation culture in the industry is weak and is particularly shaky around collaborative execution. Ultimately the characteristics and success of an innovative culture will reflect at least three things:
- Incentives – the degree to which innovation is rewarded
- Time scales – whether the long time horizons attaching to innovation are recognised and honoured
- Structure – whether roles and organisational design allow creativity and collaboration to flourish
All of these areas seem at fault at investment organisations – innovation is not incentivised well, judged over a proper time horizon or put in a place where it can easily flourish. One feature is that innovation is not easy to control or attribute results too. Another notable feature is how ever-present are the silos that hinder creativity by denying the organisation the full benefits of collaborative and combinatorial power. They block an open learning environment.
We find organisations strangely prepared to confess to having silos and yet confident that they can innovate when it’s needed. The dissonance here is that organisations think they can turn the ship around on a sixpence when it’s very unlikely that they can.
The thinking is that necessity will make organisations innovative (eg the Covid-19 induced working-from-home model). But investment organisations may have done well in adapting on one dimension, as in this example, but they look decidedly under-powered when fuller scale pivoting is needed. To pivot properly a change in the vision and the strategy may become necessary. This level of innovations in transformational change does not seem possible without a massively supportive cultural edge; which we have not yet seen.
How can we build up this innovative cultural edge? Without it, I feel extremely worried about the future of many organisations. Again, this will be on the research agenda of phase three.
So what should we be doing right now?
Research shows that cognitive dissonance in common in matters where human judgements are critical and where the subject matter is essentially ‘soft’ like culture. Where dissonance is the lack of agreement on something, cognitive dissonance takes this one step further to where people and organisations cannot resolve the issue at hand. This makes them uncomfortable, or worse that they may adopt a convenient untruth, or act in a contradictory or adversarial form[iv].
We surfaced a number of areas where cognitive dissonance may be present in the culture area. Perhaps the strongest two are whether organisations are hearing what they want to hear in their client conversations and whether organisations are able to pivot quickly when under pressure when the innovation muscle is not in great shape.
We believe these issues are too important to leave as unsettled. The first response is to seek better perspective within organisations through leadership discussion. In the Institute we believe that research can off-set the destructive potential in cognitive dissonance and that we should be using our phase three work to help us with this.
Perhaps the first action to be considered is adapting the governance structures and decision-making processes that organisations appear to agree can be fine-tuned to match an inclusive and collaborative culture[v].
All issues we have discussed involve some cultural challenges. We have described in our research the multiple ways for culture to be shaped[vi]. Four particular actions stand out. First, the opportunity for leaders to shape culture to a design set out in an aspirational target and measured using a dashboard. Second, making culture an explicit part of the performance review process seems important. This use of extrinsic incentive has been observed to work in most organisations.
Third, the use of leadership and development training methods can carry culture further. While employees have been well trained in codes of conduct and other disciplines, the opportunities to onboard new joiners and deepen cultural awareness among all employees – through focused training – are significant. Finally, and probably of most significance is the ‘golden ticket’ senior leaders have to guide culture via their personal example.
Culture was, until recently, set by accident and there was a limited understanding of the actions possible to change it. We are well into the transition of setting culture by design with a real appreciation of what can be done to improve it and the benefits of doing so.
The progress is palpable and culture’s secret sauce is being sampled.
[i] Phase one of the Institute’s research work on culture was conducted from 2015 to 2018. Phase two was carried out in 2019 and 2020 and involved culture studies of 15 organisations which we have described in The Power of Culture Study: A whitepaper of key findings. Phase three is currently being planned and is due to kick off in January 2021.
[ii] See TAI article: The hour for investment leadership is now
[iii] The Five Dysfunctions of a Team: A Leadership Fable. Patrick M.Lencioni. Wiley. 2002
[iv] Cognitive dissonance occurs when a person or organisation holds contradictory beliefs, ideas, or values, and is typically experienced as psychological stress when they participate in an action that goes against one or more of them. According to this theory, when two actions or ideas are not psychologically consistent with each other, people do all in their power to change them until they become consistent. The discomfort is triggered by the person’s belief clashing with new information perceived, wherein they try to find a way to resolve the contradiction to reduce their discomfort.
[v] See TAI paper: Better decision making: a toolkit
[vi] See TAI paper: The impact of culture on institutional investors – 2019. The research shows that actions to shape culture can be grouped into top down formal systems (like using dashboards in a KPI framework), bottom-up systems (like incorporation in performance review processes) and soft informal channels (like leader behaviours).