More and more investment organisations have begun to embrace the distinctly important role of a strong culture and actively build one. So what is culture?
Think genetic code in DNA. It is a set of rules that define the development and function of living organisms. Similarly, culture is the written and unwritten organisational “code” that defines “the way we do things around here”. It is the collective influence from shared values and beliefs on the way the organisation thinks and behaves.
For an investment organisation striving to be a long-horizon investor, what kind of organisational culture should they build?
Let’s not lose sight of the fact that culture is unique to individual organisations. There is no such thing as the best culture model. That being said, I am hoping to offer a few ideas for long-horizon investors to adopt as part of their own “genetic code”.
Let’s start with hiring the right people. The foundation of a strong long-horizon culture is to employ people who genuinely believe in long-horizon investing and act accordingly. Extrinsic (monetary) incentive design can influence behaviour. But it is my belief that intrinsic characteristics – innate to an individual’s values, perspectives, knowledge, experiences and way of thinking – is more powerful for achieving alignment and producing desirable outcomes. The tendency to “do the right thing” (as opposed to just “doing things right”) should be a prominent criteria in hiring. For example, this includes the willingness and ability to challenge the consensus position.
Once the right people are hired, the organisation needs to demonstrate long-term commitment to their growth and development. One of the challenges in practice is that the tenure of some long-horizon investments can be a lot longer than the tenure of the individuals involved in the initial decision to invest. That mismatch can be, at least partially, addressed by encouraging longer tenures. When it comes to assessing people, the key is to reward long-term thinking and behaviours instead of short-term investment performance, which is inherently noisy.
Given the right people, it is important to think carefully about how to put them together in a team. The goal, in my view, is to build cognitive diversity through team composition and process. Institutional investing is all about group decision-making. Under most circumstances cognitive diversity helps improve investment decision-making.
A long-term investment journey is bound to be bumpy. When adverse performance inevitably comes, a team rich in cognitive diversity supports an environment where non-consensus views are actively solicited and the willingness to “go against the crowd” is encouraged. It can also lead to information-processing advantages and greater cognitive resources (skills, perspectives, knowledge, and information). All these benefits facilitate a more accurate assessment whether the investment thesis is still valid. If the answer is still yes, then staying on course becomes a straightforward decision. If the assessment indeed results in a higher chance of value trap, the organisation should not blindly stay put.
However, it is worth noting that diversity is not completed without inclusion and integration. There is a balance to be found between promoting cultural unity and avoiding everyone thinking and acting the same. Highly diverse teams, without good integration, can indeed lead to more dissenters when times get tough, causing distractions and value-destroying decisions. Patterns of working together within a team should be set early on, and good integration can be fostered by introducing appropriate behavioural checklists.
Leaders are hugely influential in the creation and evolution of culture. Good leaders recognise that left to its own devices culture declines overtime and therefore actively work to maintain its level. They lead by examples they set, what they choose to focus on, and what they are not willing to tolerate. They seek a deliberate alignment of culture to long-term strategy and take every opportunity to advocate the importance of a long-term approach. They engage in building peer-to-peer relationships and mutual respect with the board. In times of underperformance, this relationship ought to provide a buffer and enhance understanding.
They strive to build an environment where career risk is low. They have the willingness to “look wrong” and reward genuine progress towards long-term objectives. They make sure the entire organisation is in sync regarding the benefits of investing for the long run and the expectation of a bumpy ride.
And they communicate clearly and regularly. Lim Chow Kiat, CEO of GIC, Singapore’s sovereign-wealth fund, spoke about how they are very careful about the exact words they use when they communicate. They prefer “sustainable results” to “consistent results”. They correct anyone who uses or likes the phase “the long term is but a series of short terms”. In his view, the wrong words can corrode or even corrupt the process.
Long-horizon investing is rewarding and yet challenging. But if there is such a thing as a “secret sauce”, it is about building a long-horizon culture as a competitive edge.