Invest in companies with good corporate cultures (and an unlikely example to get you started)

Note: This episode was taped on Monday 28 October 2024.

Investing is, in some ways, like a job hunt. In a job hunt, evaluating whether a future employer’s corporate culture fits with your own culture is a very important part of the process. In investing, finding companies that have happy team members who feel fulfilled in their work and have positive things to say about their employment experience can be great fundamental indicators for businesses that can add alpha to your portfolio. 

One person who certainly subscribes to this view is Ryan Quinn, Client Portfolio Manager at WCM Investment Management. Quinn works at an organisation that not only claims to practice a good corporate culture in the office but extends that to include a team dedicated to eyeing companies with good corporate cultures of their own.

Yes, you read that right. WCM Investment Management has a team of analysts who conduct surveys of current employees, interview current board members, and even talk to former managers to get a sense of the working environment at the companies behind potential and current portfolio holdings. Then, they use that qualitative feedback as part of their investment process to decide if they will invest in a company or not. 

And while a "corporate culture" team might sound unusual (even odd) to some investors, it is a key part of a process that has returned more than 14% since its inception in 2008. Given what markets have been through in the last 16 years, that is no small feat.

In this edition of The Pitch, we ask Quinn to identify what makes a good corporate culture, some examples of corporate culture red flags, and an example of a company that demonstrates strong corporate culture. And I'm willing to bet you won't be able to guess what sector this company is in!

EDITED TRANSCRIPT

Quinn: I think those are two tough questions that we wrestled with when we first started this endeavour. The answer is it depends because if you own a railroad, or if you own a high-tech business, or you own a life science business, or you own a materials company, you can't say that you should use this good culture and it'll work. Because these are different businesses. 

What we learned very early on is that creating a framework to use when analysing a corporate culture was the most important thing. We did work on understanding how a company's culture can correlate to business outcomes. 

The things that we fell upon that we decided were most important is that the company's culture is aligned with its competitive advantage because the company's culture will define employee behaviour. Employee behaviour defines business outcomes. That alignment is key. 

The second piece is its strength. It has to be strong and broad across the entire firm. It can't just be understood by the CEO, the chief compliance officer, and the chief operating officer. It has to be everyone from the front door all the way to the top floor. 

The last piece is adaptability. We are owning businesses for a long time. They're going to grow. That'll create internal threats. Typically, if they're doing a good job, competitors will enter the space. Those are external threats. So we want to be able to find cultures that are well-aligned, strong, and adaptable. 

Why is it important for WCM to have a specific team looking at corporate culture?