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Guest Viewpoint: Jason Hsu - Research Affiliates

“A  public hanging is a good thing now and then.” These are the words of an  anonymous CEO whose sentiment would indicate, based on research I did with Jim Ware and Chuck Heisinger, that the firm he led was probably struggling to meet the service and performance expectations of its clients. This insight into the inner psyche of an investment organisation emerges from our analysis of an annual survey conducted by Focus Consulting Group (FCG) from 2010 to 2013. The survey captures the views of 3,245 individuals across 70 investment organisations about their respective firm’s cultural values. The firms had assets under management ranging from $200m (€184m) to $124bn, with an average of $17bn. 

Jason Hsu, Research Affiliates

Recent research across various industries indicates that a firm’s culture is considered a major driver in achieving its mission but, interestingly, culture does not seem to play a big role in the investment industry. Consultants do not emphasise culture in manager selection, nor do investors. But maybe this should change. 

Taking a cue from earlier cross-discipline research in organisational behaviour, we noted that blame – frequently used as a tool by those in positions of power – could be a commonly exhibited behaviour in investment organisations. This research has shown that blaming can have harmful consequences at all stakeholder levels. In investment organisations this would encompass financial analysts and portfolio managers responsible for setting and implementing investment strategy and thus for the resulting performance, as well as the firm’s investors – and ultimately to the firm itself. 

In particular, we were interested in determining the impact of ‘unjustified’ blame on the stakeholders in investment firms. Unjustified blame is the assignment of blame as a result of an uncontrollable outcome. The potential for unjustified blame is rife in the investment industry with its obsession on short-term performance, a largely random outcome, but one with great impact on a firm’s profits and its investment professionals’ career success and compensation. In many ways, an investment firm is the perfect Petri dish to test the destructive power of unjustified blame in organisational culture.

Our research, based on both quantitative and qualitative data from the FCG survey, shows that a culture of blame inhibits honesty, risk-taking, and the willingness to improve, while engendering fear, defensiveness, and low morale. The impact at the firm level is sub-par long-term performance, poor client satisfaction, and low employee engagement. For asset managers, this is a recipe for inferior long-term investment results. Based on our analysis, only 12% of participating firms would be classified as having a healthy, functioning culture in which blaming does not play a role. A significant number of the remaining firms have cultures riddled with blame. 

The FCG data are composed of both objective and subjective responses. Objective data include firm characteristics such as headcount, number of respondents, and assets under management. The subjective data are respondents’ views on their respective firm’s cultural attributes. Respondents were asked to select 10 attributes from a list of 65, comprising positive, negative, and neutral choices. 

Positive attributes included collaboration/teamwork, openness to new ideas, passion, and innovation. Several negative attributes were blame, gossip, entitlement, and manipulation. Disciplined, efficient, and independent were examples of neutral attributes. We grouped the 65 attributes into six categories, or macro attributes: blame, creativity/innovation, team/collaboration, entrepreneurial/risk taking, excellence and sludge ex-blame (other negative cultural characteristics). The attributes categorised together under a macro attribute are related in the sentiment they convey. For example, the sludge ex-blame category includes disrespect, politics, reactive and risk aversion. Excellence includes commitment, continual improvement, and quality/precision.  .

A cross-sectional correlation of the six macro attributes reveals what we might intuitively believe would be the relationship between them. Good examples are the high positive correlation (0.81) of blame with sludge ex blame, and the negative correlations of blame with team/collaboration (-0.53) and sludge ex blame with excellence (-0.54). In other words, firms that exhibit a strong blame culture are also dealing with employee behaviours of territoriality, disrespect, entitlement, gossip, and manipulation. Likewise, these firms’ employees engage much less frequently in the positive behaviours of discipline, commitment, creativity/innovation, curiosity, and respect.    

The data do not allow us to directly link long-term alpha production to blame because the participating firms do not report returns relative to their performance benchmarks. We were, however, able to draw conclusions indirectly from the qualitative assessments of peer-relative performance provided by the respondents as well as from firm variables that would likely be associated with alpha generation. These variables include employee loyalty, ability to attract talent, and employee engagement.    

We generated these variables, or firm attributes, from respondents’ ratings on a battery of statements of possible firm outcomes. Examples of statements are “the firm has an ability to attract top talent” and “employees have an ownership mentality”. Using a series of cross-sectional regressions, we looked at the relationships between both the strength of a firm’s blame culture and its success with its outcomes. We found that blame’s impact on firm performance is more pervasive, and negatively so, than the potentially countervailing impact of success, which can mask multiple ills. The single dimension of success lacks the power to overcome the toxicity of an entrenched organisational culture of blame.     

Qualitative data from in-depth interviews that were part of the FCG survey, as well as interviews that we initiated, provided some useful colour to our analysis. Our interviews were conducted with the leaders of firms classified as ‘elite’ or ‘high performance’ organisations. These classifications were made from the firms’ self-reported scores on the firm attributes related to long-term stakeholder success. Although we did not personally interview CEOs of low-performing firms, we did review their transcribed interviews from the survey and the free responses of their employees. A difference between high and low-performing firms is the low self-awareness of leaders in the latter category and the themes of fear and low morale among employees.

The good news is that blame cultures are not intentional. Evidence indicates that blame is often a byproduct of trying to improve accountability and responsibility. But in an environment that begins to encourage finger pointing rather than open, honest inquiry, balance can be lost and the pendulum can swing too far towards blame and fault finding. The importance of being right subsumes the value of learning and improving. 

Our recommendation is that, to the extent it can be measured, the presence of a blame culture should be a serious consideration, even an inhibiting factor, when deciding to hire an asset manager. Our research demonstrates that firms incubating a culture of blame have a high probability of producing below-average investment performance for clients.  

A longer version of this article appeared in the Spring 2015 edition of The Journal of Portfolio Management

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