Why it’s time for shareholders to focus on the transformative value of investing in culture by Annabel Gillard

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Members of the Institute of Business Ethics are well-versed in the benefits of good governance, values-led culture, and purposeful business. But that understanding is not always widely understood by the Boards overseeing member firms, the investors who own them or the wider market. Typically, governance and culture only attract attention when something goes wrong – with culture specialists often only called in after a major scandal. This positions culture and conduct as risk mitigation, rather than as a source of value.

Yet the behaviour of people in an organisation is not only a source of potential danger but critical to its success. Anyone lucky enough to work in an empowering, purposeful, values-led culture, doing work that inspires pride, has experienced its impact on performance. Step out of the corporate rat race, into a purposeful organisation, and see how employees bloom. Yet why should corporates miss out on this obvious answer to the productivity crisis?

The evidence is accumulating – the motivational effect of purpose is being increasingly understood and there is growing recognition of psychological safety as a driver of innovation and an appreciation that human capital is an asset to be managed. It is perceived as a principal risk to both sustainability and transformation agendas. Yet surveys consistently show that CEOs do not feel they can spend sufficient time or money on culture.

Why is that? If culture is a source of huge value, a critical component of effective delivery of strategic priorities and a major risk factor – why is it underserved by Boards and C-suites? This gap appears both nonsensical and wasteful.

Part of the answer must be down to the priorities of shareholders – to whom the decision-makers are accountable and who approve incentives. There are several reasons why shareholders have been slow to recognise that they can harness the value of culture to deliver better returns. Most have received no education on how to evaluate organisational culture and believe it can’t be done. A focus on financial analysis has driven success in the last few decades, leading to confirmation bias and availability bias. An increasing short-termism hasn’t helped either.

Yet the moment has arrived for a rethink. The financial analysis and complex calculations that have formed the basis of investment analysis are increasingly being performed at great speed and accuracy by AI, freeing up capacity in investment teams. New technologies are making cultural insights possible as never before. The investment industry has previously benefited from incorporating insights from new fields, with behavioural finance now mainstream.

And the prize is significant with Research suggesting annualised outperformance of >2%. Such gains can help meet the challenges of growth and innovation in a challenging economic environment suppressed by climate and geopolitical crises as well as a productivity slump. Corporates have become deluged in increasing amounts of data and complexity as a way of measuring and managing their ESG and DE&I exposure. Yet focusing on culture, with a values-based framework, can help cut through the noise and navigate the trade-offs with integrity and alignment to strategic objectives.

We offer some practical steps to close this gap in a research report due to be published, based on extensive evidence, harnessing insights from cultural experts and supported by fellow governance organisations. We call on investment analysts and asset owners to take a close look at the benefits for them and their stakeholders if they bridge this gap.

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