Value investing is about buying a stock at a price significantly below your estimate of the intrinsic value of the business, which in turn is the present value of cashflows to perpetuity or atleast a long enough period. Hence, this requires making a judgement on the longevity of moats that can sustain a healthy cashflow growth. The longevity of the moat depends on amongst other things the culture of the firm. Put another way, the culture can be an intangible asset which drives the value of the firm. “Culture eats strategy for breakfast” as the legendary Peter Drucker once said. But is there any way to measure culture? And if yes, is there any evidence that culture drives superior investment outcomes? This blog attempts to answer both.
First, it establishes what we mean by culture: “Strong culture has the advantage of reducing the need for explicitly defined rules and corporate bloat. Culture is the “first principle” that guides decision-making. Employees can use principles to guide the hundreds of micro-decisions they must make daily. Similarly, culture helps to promote uniformity within an organization. Firms seek to avoid employees or teams rowing in opposing directions, which can happen when they are not aligned on the same set of ideas. A strong culture is especially beneficial in complicated, dynamic, and ambiguous workplaces where fully monitoring and guiding employee behavior is impossible. It is also extremely useful in times of crisis when there is no time to develop a new playbook. Another way to look at culture is as a force multiplier for an underlying pool of ability.”
Then it gives a proxy to measure culture: “The most common way how a company’s culture can be measured from outside is through employee surveys. If you want to know the inside workings of a company, ask the employees. Too many investors focus on market commentary that’s coming from the outside. Chit-chat about the company from market pundits that have no skin in the game is useless, you want your information to come directly from the source.
…A fair, caring, and supportive culture strengthens businesses because employees feel trusted and empowered to do their best work, whatever the external factors may be. A wealth of evidence supports the idea that happy employees move successful businesses forward. A company culture based on trust, openness, and care provides individuals with clarity and a sense of purpose, which leads to more employee engagement, better customer service, greater creativity, and superior business success. But how much business success do companies with high employee satisfaction have?”
He goes on to show that companies that do well in credible employee surveys such as Glassdoor and Great Place to Work tend to outperform the market consistently over long periods of time. The results are fascinating – the 100 best companies to work from Great Place to Work outperformed the Russel 3000 Index by a measure of 3.23x for the period 1998 to 2020. “What gets my attention besides the outperformance is the performance after a crisis. Just take a closer look at the speed of the recovery after ‘02/03; ‘09 and the after the lockdown 2020. There you clearly see the impact of a good company culture that helps to emerge stronger after a storm.”
Similar results based on Glassdoor’s survey: “…an Employees’ Choice Award for Best Places to Work that ranks companies based solely on feedback from employees. The award is unique because it was created with a database of anonymous reviews, or opinions, with no bias.
…A simple investment strategy of buying an equally weighted portfolio of stocks from each year’s U.S. large Best Places to Work winners has outperformed the S&P 500 index in nine out of eleven years. On average, stocks of Best Places to Work winners earned 20.3 percent per year between 2009 and 2019, compared to 12.9 percent for the S&P 500.”

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Note: the above material is neither investment research, nor financial advice. Marcellus does not seek payment for or business from this publication in any shape or form. Marcellus Investment Managers is regulated by the Securities and Exchange Board of India as a provider of Portfolio Management Services. Marcellus Investment Managers is also regulated in the United States as an Investment Advisor.

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