Accounting for culture

Think of investment analysis and you’ll probably think of financial metrics, market trends and economic indicators. However, an increasingly important – yet often overlooked – factor is the role culture plays in shaping financial outperformance. Research has regularly linked investment outperformance to positive employee sentiment, with companies on Fortune’s 100 Best Companies to Work For® list having stock performance 3.7x the market average.

The relationship between culture and financial performance makes sense. Those companies with high standards of corporate governance and strong executive leadership tend to take care of their workforce, investing in the organisations’ greatest assets – its people. When people are invested in, they perform better and work harder, with 86% of employees at Fortune’s 100 Best Companies willing to go the extra mile. A company’s internal culture can impact everything from decision-making processes to productivity, employee behaviour and stakeholder relationships. A strong culture of transparency and accountability can reduce the likelihood of corporate scandals and fraud, in turn protecting investors’ interests.

Conversely, a culture that tolerates or even encourages unethical behaviour can lead to significant financial loss and reputational damage. Nowhere is this starker than the spectacular collapses of Enron and Lehman Brothers in the US. However, there are more immediate signals we can identify in the short term to avoid share price underperformance and seek out winners, particularly in periods of economic downturn.

Culture signals come in company-reported data points including employee engagement, staff turnover, absenteeism and diversity – and in analysis of alternate information sources such as Fortune’s 100 Best Companies. Glassdoor, an online platform hosting a database of company reviews and CEO ratings written and scored by employees, is becoming a go-to source of intelligence on company culture. The data can show trends in corporate culture and current employee sentiment, with sharp declines in Glassdoor ratings a potential red flag for investors. A consistently high Glassdoor rating, relative to one’s peer group, may signify tailwinds for recruitment and retention of top talent.

As an investor with a deeply integrated approach to ESG, Maple-Brown Abbott pays particular attention to these culture signals when we are assessing and engaging with companies. Public controversies stemming from misconduct and cultural failings in companies will, more often than not, negatively impact share price. Over the last year in the Australian market alone we have seen allegations of misconduct at a number of large listed companies, even after many years of investor and regulatory scrutiny on corporate behaviour. Some of these – such as Star Entertainment Group – have threatened the company’s ability to operate while others have been a catalyst for cultural overhaul, as was the case with Rio Tinto.

With more transparency on culture signals stemming from social platforms and other drivers – including the mandated Workforce Gender Equality Agency gender pay gap data – investors are in an increasingly strong position to identify those companies where positive culture provides a competitive advantage for both the company and its shareholders. Rather than waiting to assess a company’s response to controversy, we prefer to use the data, and our knowledge of companies gleaned from ongoing relationships with boards and management teams, to pick those companies where a positive culture will be a driver for positive shareholder returns.

Disclaimer
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