Why Culture is So Important to Long-Term Business Success

To truly comprehend what underlies great companies, those that create material value over multiple generations, we contend that we need to understand the people behind them: what they stand for, the way they organise themselves, the values and principles they embed in their workforce and the methods they employ as they strive for competitive success.

Our latest piece, authored by Matthew Kates, Why Culture is So Important to Long Term Business Success, discusses the ‘what, why, and how’ of good culture.

Corporate culture defines how a firm interacts with employees, customers, suppliers, competitors, shareholders and all stakeholders. Put another way, it is the character of an organisation, the glue that binds it together and provides the impetus to deliver on its goals.

Culture is critical to enduring financial performance.  If return on capital employed (ROCE) can be thought of as the quantitative determination of a company’s moat or competitive advantage, then culture can be thought of as the qualitative determination of the durability of that moat. Companies with the right culture in place tend to display a remarkable resilience, an ability to persevere through adverse conditions, largely because they have a natural tendency to do the right thing, regardless of cost. They are able to adapt to a changing environment on any number of levels: customer needs, employee & community interests and shareholder requirements.  Great companies do not chase profits, they chase the vision. 

A good starting point to finding a great culture is by avoiding a bad one: as an investor focused on culture, not only do you improve the chances of identifying a great company but, flipping the problem on its head, you also materially increase the probability of avoiding a losing one. Culture serves as a practical filter as it helps to uncover Warren Buffett’s ‘ABCs of business decay’: Arrogance, Bureaucracy and Complacency. Experience has taught me that when any of these are recurrently identifiable, steer as wide a course around the business as possible, as the odds on having identified a toxic culture increase exponentially.

As to what constitutes a great culture, the clue is in the name…CULTure. In reality, the strongest cultures tend to have a cult-like status, just not in the usual pejorative sense of the word. The roots typically form from a founder-led ideology that becomes indoctrinated into its followers, who find real meaning in the philosophy. What that does not translate into, however, is a culture synonymous with a cosy, comfortable, stress-free environment. The characteristics that we all desire from our companies: willingness to experiment, tolerance for failure, empowerment and collaboration have a quid pro quo. They must be managed by strong leaders throughout the business who set the tone through their own behaviour: set the bar high, provide candid feedback and constant challenge. 

Whilst no two cultures are alike, our research suggests some common traits amongst strong cultures include:  Trust, Humility & Authenticity, Curiosity & Passion, Communication and Diversity & Independence. The ingredients to a good culture are somewhat straightforward yet mixing them into the right formula and applying consistently over time is hard, particularly after a period of success. Leaders may lose focus and succumb to arrogance and complacency. It is far easier to fall into in the short-term traps of immediate gratification, intuitive thinking and decision-making instead of longer-term deeper, critical thought and reasoning.

However, the reality is that long-term success is there for the taking. Great companies have done nothing that cannot be replicated in at least some shape or form, they have simply worked hard and consistently over time, adhering to the highest standards of personal and collective behaviour and bound together by a strong, common cause. We believe that the critical component that stands the winners apart is the concept of culture.  Hard to define maybe, but self-evident to anyone who spends time with the company’s people and, ultimately, uses its products & services. 

Read the full piece here.