In the posting “Creating a Culture: The Case of Credit Suisse,” Marc Rubinstein of Net Interest recounts some of the history of the investment bank and its struggles to build a cohesive organization. That serves as a backdrop for him to consider recent “catastrophic events” for the firm (including Greensill and Archegos, cornerstones of its annus horribilus) — and issues of culture.
To provide some context within which to evaluate Credit Suisse, Rubinstein quotes from a 1985 Sloan Management Review article by David Maister about “one-firm firms”:
The characteristics of the one-firm firm system are institutional loyalty and group effort. In contrast to many of their (often successful) competitors who emphasize individual entrepreneurialism, autonomous profit centers, internal competition and/or highly decentralized, independent activities, one-firm firms place great emphasis on firmwide coordination of decision making, group identity, cooperative teamwork, and institutional commitment.
The individual-collective dynamic is a core consideration — probably the most important consideration — in the cultural analysis of an organization. To dig deeper using Maister’s principles, let’s narrow the focus to asset managers, even though a similar approach could be applied to other kinds of entities as well.
In doing so, the issue of scale comes into play, since it is easier to imagine a smallish, focused boutique having a common, collaborative culture than a global, multi-asset, multi-product firm having one. But all along the size continuum, organizations face questions of structure, process, incentives, power relationships, etc. that revolve around beliefs about collectivism and individualism.
One-firm firm characteristics
Maister’s article outlined the pillars of the “system” that he saw at the heart of one-firm firms: loyalty, downplaying stardom, teamwork and conformity, long hours and hard work, a sense of mission, and client service. There are asset management firms that appear to match that simple summary (and Maister’s further exposition of the elements of it), but would you consider those characteristics to be the norm within the industry? Most people would probably answer, “No.”
Which raises the questions: Would those characteristics tend to produce asset management organizations that do a superior job of delivering performance (and fulfilling other client needs) over long periods of time? Or is there something about the craft of asset management that makes an emphasis on the collective an inferior approach? Is the industry culture of individualism borne of thoughtful design, resulting in better outcomes, or is it just a vestige of tradition that’s very hard to undo (and which forestalls needed improvements)?
Finding the sweet spot for a particular firm’s culture should be a matter of careful consideration, not just copying what has been done before. A bedrock belief as to the right balance of collectivism and individualism forms the foundation for myriad other organizational decisions and behaviors (and attempts to avoid the hard debates related to it will only intensify over time if they are not clearly addressed).
Sustaining the culture
Maister identified a number of actions that he saw as standard practice for a one-firm firm seeking to sustain its culture; each is shown indented below. Whether or not you buy into his overall philosophy, these items can serve as a scorecard for where your organization is now — or as a list of topics to revisit as part of your improvement efforts. (The comments that follow each are in regards to the investment decision makers at asset management firms, not the broader employee base.)
Entrance requirements into the group are extremely difficult.
What are your requirements? One of the firms cited in the article looked for SWANs: “people who are Smart, Work hard, are Ambitious, and Nice.” The last attribute sticks out as unusual, although some organizations do emphasize such personal qualities far more than others.
Perceptions of performance are extremely important in the hiring process at most firms, even though those perceptions can be distorted in all of the same ways as they are when outsiders try to judge an asset manager — there is a lot of noise involved and much misinterpretation, but the numbers often overrule considerations of organizational fit as candidates are being evaluated.
It’s worth noting that one risk of “extremely difficult” selection requirements arises when the attributes of a model employee are drawn too narrowly, resulting in a relatively uniform pool of talent and experience. That can lead to strong results in environments that reward those dimensions but impede adaptability overall.
Acceptance into the group is followed by intensive job-related training, followed by team training.
This is an example of stark differences between the subjects of Maister’s piece and the typical asset management organization, where there is very little training. What does occur happens in a haphazard fashion, a sort of training by osmosis. If you’re lucky, you get exposed to people who are a) interested in providing needed training and b) able to do it well — but that combination is unusual.
And when it comes to “team training” or anything away from learning about a new investment something or other, it’s even more rare. Areas like decision making, collaboration, and communication, which are critical to success, always seem less important to pursue than investment ideas.
Challenging and high-risk team assignments are given early in the individual’s career.
This varies quite a bit by firm, but often people who make it into the business can get significant responsibility pretty quickly, although in individualistic cultures they aren’t really “team assignments” per se. But given the modest hit ratio on investment ideas, failure comes early and often. How does the organization respond when a significant failure or pattern of failures occurs? That’s a tell.
Individuals are constantly tested to ensure that they measure up to the elite standards of the unit.
Again, the noisy nature of asset management returns leads to flawed evaluations, but they are still the predominant measurement tool. As a result, individuals are not pushed to expand their capabilities — and therefore aren’t “tested” in new ways.
Individuals and groups are given the autonomy to take risks normally not permissible at other firms.
Having the autonomy to make decisions is a key part of the individualistic approach, so many firms score well on this item, although “normally not permissible at other firms” is a very high — and perhaps ill-advised — bar. What constitutes an undue risk?
Training is viewed as continuous and related to assignments.
As indicated earlier, this is an area of weakness. Generally, training is spotty and lacks purpose. (Having a large budget to attend conferences is not “training.”)
Individual rewards are tied directly to collective results.
This gets to the heart of the matter.
Tying compensation to collective results can cause great internal friction, as those who had a great year while the organization overall stunk it up feel like they’ve been shortchanged (even though they benefit when the tables are turned).
At the other end of the spectrum, rewarding individuals without any connection to the organization’s success can lead to active (and potentially destructive) competition that restricts the flow of information, resources, and ideas. When that occurs, you really don’t have an organization at all.
Therefore, firms often use a combination of organization and individual performance to determine incentive compensation. There are many different ways to do so; what’s most important is being clear about why the structure is what it is — and how it delivers benefits for clients and fosters the desired firm culture.
Such clarity will lead professionals to make active decisions about whether to join, stay, or leave your firm, reinforcing not just the compensation scheme itself but the culture you are trying to create.
Managers are seen as experts, pacesetters, and mentors (rather than as administrators).
Generally this is true in the industry, as a common goal is to minimize “bureaucracy,” but it raises questions. In a business that prizes performance and devalues training, successful investors are often promoted into roles for which they aren’t prepared. They might be “experts” at their corner of investing, but may not see much beyond it. As to being “pacesetters,” they often haven’t been involved in organizational initiatives, so their pacesetting may have consisted of some smart investment selections over time. And their ability to capably serve as “mentors” varies widely.
This brings up important questions about cultivating leadership talent from within the investment ranks versus outside of them, a topic on which there are often strong opinions. “What it takes to be a leader here” should be well understood by all concerned.
Putting clients first
In his article, Maister pointed to five examples of his ideal: “investment bankers Goldman Sachs, management consultants McKinsey, accountants Arthur Andersen, compensation and benefits consultants Hewitt Associates, and lawyers Latham & Watkins.”
Almost four decades later, things have changed quite a bit. All five were private partnerships at the time. Latham & Watkins is still an independent entity, as is McKinsey, but Hewitt went public twenty years ago and was then acquired by Aon. Goldman Sachs also became a public company and has expanded into many new business areas that were off limits historically. Arthur Andersen collapsed after its work for Enron and WorldCom came to light.
One aspect of Maister’s analysis deserves comment in light of past events. “The client comes first” and similarly-themed passages appear throughout the article. But consider the messes that felled Arthur Andersen, and the ones that Goldman Sachs and McKinsey have found themselves mired in over the last two decades. Putting clients ahead of ethics, sound due diligence, prudent risk management, and thoughtful growth have tarnished the reputations that Maister extolled.
The desire to do what the client wants can be problematic in asset management too. Pressure from individual clients regarding underperforming holdings (or cheerleading regarding winning ones) can distort perceptions of risk and return — and affect decision processes, as can the procyclical inflows and outflows of capital from those clients. They can also request one-off strategies or special access that wouldn’t otherwise be considered. It’s not always smart to put the client first, even though it’s generally a sound rule.
Who makes those kinds of choices (and how they are made) should reflect a firm’s preferences for individual and collective action. As is also true for the other matters mentioned above (and more), finding the sweet spot is important cultural work.
Published: July 7, 2022
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