Boeing Stock price – Culture splits good stocks from bad
Both Credit Suisse and Boeing had previously boasted in their annual reports of their adherence to exceptional, collegiate cultures.
Boeing stressed its staff commitment to “integrity, trust and respect”, and Credit Suisse said it empowered employees “to take accountability for identifying and escalating risks and for challenging inappropriate actions”.
That’s really what culture is – it’s what people do when bosses are not looking.
— Mike Trigg, WCM Global
Peter Deans, the founder of risk consultancy 52 Risks, says both companies were facing potentially huge risks that could easily have been quantified by running scenario analyses of what would have happened if things went wrong.
Deans wonders about the culture within both companies. Were risks downplayed? Were risks ignored? Did bad news not travel upwards?
These questions revive memories of what happened at the Commonwealth Bank of Australia and Westpac Banking Corporation in relation to the management of anti-money laundering risks.
Inquiries into these costly mistakes uncovered cultural failings that were not obvious to those buying the banks’ shares in the years leading up to the disasters. In the end shareholders of both banks were hit hard, with fines of $700 million for C(BA) and $1.3 billion for Westpac.
The C(BA) and Westpac cases have parallels with the Credit Suisse and Boeing cases. In each case there was a gap between the stated culture of the organisation and the reality of the day-to-day operations.
Cutting through the hype
The question then arises: how can an investor cut through the hype published by companies and determine whether a firm really does have a winning culture?
One fund manager that has concentrated on solving this problem over the past 20 years and found a way to profit from its cultural analysis is WCM Global.
It offers several funds in Australia, including the WCM Quality Global Growth Fund, which is up 27 per cent over the past 12 months, and the listed investment company WCM Global Growth, which is up 35 per cent over the past year and trades at a 3.6 per cent discount to net assets.
Mike Trigg, a portfolio manager based in the firm’s Colorado head office, this week explained to Chanticleer the firm’s investment philosophy and why culture is the key to unlocking returns over the long term.
Trigg says when he turns up at investor briefings with companies and starts asking questions about culture, other analysts in the room roll their eyes.
WCM Global actually has a two-pronged approach to investment. It looks at a company’s strategy and competitive advantage, also known as the economic moat.
He says moats are not static. They ebb and flow, and it’s the direction of the moat or moat trajectory that drives stock returns.
The cultural analysis looks for an effective culture, because WCM Global takes the view that this can serve to extend the duration of a moat expansion for many years.
Trigg says a company with an effective culture and an expanding moat can be in the WCM Global portfolio for more than a decade.
The simple definition of culture used by WCM global is as follows: it is the set of shared values and norms that guide behaviour within an organisation.
Culture isn’t just a set of aspirational values – it’s how people actually behave and make decisions in a company, according to WCM Global’s white paper on culture.
To illustrate the investment philosophy at work, Trigg points to the largest investment in the fundie’s portfolio, Shopify – which provides a cloud-based e-commerce platform.
WCM owns $US2.4 billion worth of shares in Shopify, which has risen in price from $US180 a share to $US1214 a share over the past three years.
Its success has, to a large extent, come at the expense of the world’s biggest retailer, Amazon. When COVID-19 hit, many retailers realised that Amazon had prioritised sales by its own private label operations over those by third-party sellers.
This led to a wave of demand from small retailers wanting to build their own websites. Shopify was able to step in and help businesses sell their products online in a cost-efficient manner.
Asking the right questions
Trigg says portfolio managers at WCM Global use a set of proprietary questions when interviewing management teams, former employees of companies, partners and customers about culture.
“We try to build a mosaic of what the company’s culture is,” he says.
Trigg says the first part of the WCM Global framework for examining culture is called the culture strategy alignment. The goal is to understand the behaviours of staff, the values the company regards as the most important, and how they want people to act when no one is looking.
“That’s really what culture is – it’s what people do when bosses are not looking,” he says.
A typical question used to determine how managers think about culture is: What are the three pieces of advice you’re going to give a new employee about how they can successful in your business?
Trigg says the idea is to get people to articulate how they want people to act, as opposed to a lot of buzz words such as the ones used by the US energy trading company Enron.
It blew up in 2001 and some of its executives went to jail soon after company published an annual report that laid out its values, including its commitment to “work with customers and prospects openly, honestly, and sincerely”.
“Enron had core values, right, they all made sense – but nobody acted that way,” Trigg says.
The second part of the culture framework used by WCM Global is called adaptability.
“Companies are no different than anything else in that they’re living, breathing organisms,” he says
“They’re getting stronger and weaker and changing every single day. It’s not just that the industries are changing. The world around them is changing.
“And if you really want to try to find these companies that can sustain returns for a really, really long period of time, you know, they need to be adaptable.”
The tests used to determine whether a company is adaptable include questions such as: How much of a learning orientation do they have? Do they study their mistakes? Do they study their competition? Do they steal best practices from other great businesses, even those outside their industry?
Trigg says the third pillar of the framework for assessing culture is analysing cultural strength.
“When you talk to 10 or 15 or 20 people, when you read a bunch of stuff written by the company, when you listen to a podcast with people all up and down the ladder of the organisation and they’re all kind of saying the same thing, then you know that there’s a high degree of cultural strength,” he says.