Culture and Investment: Winning Platform or Ship Wreck?

watsons bayI had the pleasure of seeing Biz Stone, co-founder of Twitter, at a recent conference in Las Vegas. While he and I are wired quite differently (maybe a reason his net worth has a ‘B’ in it), he noted several compelling tenets and principles he used to drive the cultural development of Twitter. And we should make no mistake; an organization will form a culture, perhaps even a strong one, whether it is consciously developed or ad hoc. From a perspective of leveraged buyouts, truly exceptional investment firms realize culture can be a great asset or a minefield. Culture can be fertile ground for innovation that drives sustainable, profitable growth over an investment horizon — or it can be a morass of banal thinking from people who make a living attending meetings and undermining change. Culture that seems phlegmatic ex ante may be exposed ex post as an intransigent, resource-sucking sinkhole.

Compared to brilliant start-ups like Twitter, my efforts in strategy consulting and middle market private capital formation might be less glamorous, but we find clear examples of vigorous, value-enhancing cultures and of sclerotic, value-destroying bureaucracies regardless of firm size. I consistently advise that a rigorous approach to cultural assessment should be included in any serious due diligence effort supporting investment in middle market opportunities. Moreover, I would submit this should be a major part of deal screening early in the process. Just saying a culture is ‘strong’ does not cut it – strong, crappy cultures are difficult to change in the best of circumstances, take much longer to change than one thinks, and significantly increase execution risk of an otherwise sound investment thesis.

I was fortunate enough to work for a top-tier global strategy consulting firm – a firm that has a culture so strong that even sleep deprived at 4am, focus on delivering fact-based, actionable advice for clients was manifest across the case team. Principles such as “zero defect” and “what should the client do Monday morning at 8AM” were deeply ingrained into our efforts. The culture was so strong that not all people, regardless of raw intellect, were able to adapt to it. But the firm understood what a strong, focused culture would mean to its clients – so those that could not adapt would move on to other (even great) things.

Conversely, I also worked with a company that ostensibly had a benign cultural disposition for ‘consensus’. But as many organizational behavior specialists have written, there are real dangers of consensus-driven cultures devolving into groupthink, gridlock, and mediocrity. I would completely agree. In these environments, there is a highly elevated risk having decisions removed from people with the relevant specific knowledge needed to make effective decisions – only to be handled by some dysfunctional committee (or a committees that plans committees). By definition, specific knowledge is difficult to move to those without it (see Jensen and Meckling, 1992) so in dynamic, competitive environments these organizations are already destined to be slow to adapt. Even worse, actors that are self-interested and obstructionist by nature, too often hijack decisions in these organizations. At best, these investments are mired – and at worst they are slow motion ship wrecks. There are likely to be huge opportunity costs when, faced with major opportunities to hit a home run or triple, the organization can only muster bunts and foul tips. Tellingly, talented human capital that might be the source of innovation and profitable growth is more likely to exit such an organization rather than be smothered under a dogmatic bureaucracy. Obviously, this is not a game plan for a great investment.

As a positive example, I have had the pleasure of racing sailboats with incredible teams in glorious locales such as Chicago, Annapolis, and Sydney (Australia). There is usually no doubt who is in charge of the boat as there is precious little time for committee meetings in the heat of a race. Here, strategies must be adapted quickly to changing conditions (storms, wind speed, competitors’ tactics, etc.). Time and again races are won by input and decisions made by crew members with specific knowledge – a key headsail change, wind shifts, boat overlap, and the like. Like a winning sailboat, a culture attractive to investment in one that is conducive to decisions made by appropriate, accountable individuals who tap into an efficient and effective flow of information from relevant sources, regardless of rank. “The Cross-Functional Bi-Weekly Standing Committee on Sailing Maneuvers” will not win many races – and is more likely to wind up on the rocks. To be clear, this is not to suggest that winning skippers are meek Captain Kangaroos – I have been walloped by more than one deck shoe hurled from the helm – after all, decisive decisions require decisive actions (and alacrity is in the eye of the skipper).

Due to the nature of many businesses undergoing transformational change in my world, I place odds on the organizations that are designed to encourage and to transmit information from those with specific information to capable, accountable decision makers. The resources required changing a sclerotic culture – time, money, opportunity cost – rarely bearing attractive returns.

Knowing the deleterious effects culture can have on an investment, it is far better to understand what you are looking at before getting in the boat – else one may embark on a ship of fools.

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