Cultural issues a financial risk

With numerous organisations having been called out for cultural issues, investment managers are reminded of the need to do due diligence in making sure the management they invest in has aligning cultural views, according to Frontier.

Sarah Cornelius, Frontier senior consultant, said increased incidences of poor culture being called out highlighted the potential for significant reputational damage and corporate value destruction.

“Recently there have been numerous public call-outs of culture related issues and we can’t assume that something mentioned in a media article is fact, but it can be a trigger for our researchers to investigate further and come to our own conclusions,” Cornelius said.

“Unfortunately, in some instances there has been substance to these claims.

“Cultural issues have clearly become a financial risk. We are also seeing examples of shareholders voting with their feet in relation to poor culture by voting against management recommendations at shareholder meetings or by reducing or exiting their holdings all together.

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“Often cultural failings occur because society shifts and the organisation does not shift with it.”

Frontier noted eight cultural principles it looked for in companies:

• Valued client partnerships;
• Proactively engage and take action;
• A strong and inclusive culture;
• A diverse culture;
• An embedded fairness and equality principle;
• Courage and a desire for continuous improvement from a cultural perspective;
• Transparency in regard to structure, disclosures and conduct;
• Free of a pattern of systemic behavioural and cultural issues.

Cornelius said the principles were predominately about how the manager treated its people, noting that culture and diversity did cover broader dimensions.

“We believe that a manager who treats people well is likely to a foster a positive culture and in turn, this will help the manager to build and retain talent,” Cornelius said.

Julia Szlakowski, the former AMP private equity specialist who accused Boe Pahari of sexual misconduct, had previously noted how AMP’s market capitalisation was negatively affected by the scandal.

Cornelius said just because you could not put a tangible number on culture did not mean that it could not be measured.

“In assessing culture there are various tangible concepts to consider,” Cornelius said.

“Sometimes it’s not the fats of the specific case that matter the most and often in the case of discrimination or sexual harassment complaints we may never know the truth.

“The key focus in those cases is in regard to how the organisation has handled the issue, the process and procedures they have in place and what they’re doing to instigate change and what they’re doing to improve.

“The organisations level of transparency throughout the review process is also a really important factor to consider.”