A previous posting reviewed Aswath Damodaran’s book, The Corporate Life Cycle. It dealt with the intertwined financial and strategic issues faced by companies (and their investors) across time.
This piece also considers life cycle issues of a sort, this time specifically in regards to investment organizations, and coming from a cultural standpoint rather than a financial one. While the focus is on asset management firms, many of the ideas apply equally well to other kinds of entities.
Path dependence and change
No matter the kind of organization, knowing something of its origin story can give you clues to its current state. Investment philosophy, structure, incentives, process, and culture all can change over time, but beliefs and narratives are often sticky. Long-ago decisions can loom large, and if those present at the creation are still around things can be slow to change.
As Damodaran referenced, there is also a “clientele effect” to consider. If existing clients (especially important ones) have certain expectations, they can be hard to buck.
Therefore, a key cultural assessment is the willingness to change, to be adaptable. Frequent readers will know our position on that: In a complex adaptive system, clinging to the status quo might work for a time, but in the end a growth mindset beats a fixed mindset. And not just in regards to investment matters, but in terms of all aspects of organizational design and behavior. Entropy in an organization can only be staved off by an ethos of continuous improvement.
Maintaining the ship of culture
You may have heard of the Theseus Paradox, in which these questions are asked: If you replace all of the parts of a ship over time, is it still the same ship? If not, at what point does it cease to be what it was?
Unlike a ship, an organization is not made up of material but of people and ideas, so change is not at all like swapping out a deck board. Thus, an important question, posed in a Theseus-themed posting from Gapingvoid Culture Design Group: “How do you replace people without changing the core culture?”
One simple summation of culture is “who you hire, fire, and promote.” The perpetuation of a culture — or the destruction of one — is a direct result of individual decisions made about people.
Scale and complexity
Many asset management firms start relatively small, with a handful of people; often they have worked together at another firm. Their immediate concerns are getting the legal and operational foundation put in place, managing the initial assets, and raising additional capital. Culture isn’t typically on the list (other than maybe a no-bureaucracy pledge if they came from a big organization).
But even with a few people, a culture develops by default if not by design, based upon the personalities and range of capabilities of the parties involved, especially the founder. Often the leader has a track record as an investor but little expertise or interest in the broader elements required for success, thinking that if you produce the numbers, the business will work.
There is a certain logic to that approach and some firms thrive (at least for a time) taking just that path. But many more falter because they don’t prioritize building an organization and a culture that will be resilient in a variety of environments.
The great benefit of a small firm is the ability to focus. There is usually only one strategy; everything is oriented to it and everyone is dependent on its success. There is a common purpose that can’t be avoided.
Invariably, if that hoped-for success does come about, the firm will start to add people on the investment team and in other areas. Ideally, in doing so you would want to fill in the gaps in the founders’ capabilities and to identify hires that over time have the potential to have an impact beyond their initial duties. Instead, it is common to hire specialists who fit an immediate need and are a close match to the existing team, reinforcing the narrowness of the human capital already in place. (Homophily — the “love of sameness” — is an easily identifiable characteristic of many investment organizations. See this earlier piece.)
If growth continues, the next step for many mid-sized firms is the addition of new strategies, products, and teams — leading to a buildup of staff in investment, operations, administration, distribution, and leadership roles. That transition brings about new cultural considerations that stem from the increased complexity.
A look at the biggest asset management firms sharpens the point. Pick one with which you are familiar. How would you describe its culture?
That’s a difficult exercise, because it can be hard to pin down a culture in a large organization. In effect there are multiple subcultures at work, in functional areas — investment, operations, distribution — as well as by asset class, strategy, etc.
To further complicate things, an individual team might be relatively isolated from the larger organization (geographically and/or in practice) or it could be enmeshed in the broader investment function of a firm. The cultural analysis is quite different from the first situation to the second.
Cultural inflections and disruptions
If culture is a function of those hiring, firing, and promotion decisions, then each new person coming in the door should make sense in the culture you are trying to create (while avoiding the trap of homophily and diversifying the capabilities already in place). The resulting mix of people constantly changes, and the introduction of a few bad apples — even one — can cause havoc in the best of cultures.
Focus Consulting Group has written about the Red X:
We define the Red X as the brilliant investment professional, who clearly adds value, but lives outside of some, or most, of the core values of the firm. In simple terms, the Red X is disruptive and can be toxic to the firm’s culture.
Great leaders know that they need to be the carriers and spreaders of cultural values, but many of those in charge are focused on the investment side of things and impatient with the demands of the organization. In the worst cases, the leader is the Red X.
Status is a factor in every cultural realm and the differences in status among those within an investment organization — people who interact with each other every day — can be gargantuan. How those of high status treat those without it is a very good indicator of cultural resilience in any organization.
Money can be a uniter in the early years and a divider later on. If the foundations of a thoughtful and transparent incentive structure aren’t in place, an organization can fracture. On what basis are individuals evaluated and compensated? Conflicts over compensation can become poisonous, and are a warning sign that the extrinsic and intrinsic rewards are out of balance, a hard thing to get back under control.
Then there are other disruptions: reorganizations, lift-outs, lift-ins, mergers, changes in ownership structure, etc. To say nothing of the loss of key people (even ones that aren’t marquee names) due to retirement or other reasons.
Oh, and periods of bad performance. A deterioration in culture is often overlooked by leaders and clients as long as performance holds up. When things turn the other way, as they inevitably do, what looked like small tears in the cultural fabric become big rips that are obvious to all. Mending them is hard and unfamiliar work for leaders. The clients often choose to walk away.
As with most everything, there are cycles of culture; it waxes and wanes. Organizations are inherently messy and things can get off track. Leaders must be sensitive to the dips and work to avoid prolonged deterioration — and be willing to make needed changes whether things are going poorly or well.
Even firms that have had prolonged success are at risk, as a we-have-everything-figured-out mentality can take over. If new ideas aren’t being considered or if people pushing for change are shut out, the organization will ossify. If there is no edgework, there will be no edge.
A free-for-all environment where everyone loudly pushes their views but no one does much listening isn’t good, but the real killer is a culture of organizational silence, when people are afraid to address important issues or are just tired of trying.
The cultural life cycle
The cultural life cycle is harder to plot than the financial one that Damodaran so effectively analyzed. A heap of issues can start to pollute the atmosphere that led to success, even as results remain positive for a time, making it hard for capital allocators to anticipate the declines ahead.
Ultimately, the competitive advantages that come from culture are most dependent on the leadership of the firm. Those in charge don’t necessarily need to be investment experts themselves, but if they lack organizational prowess the cultural center will not hold.
Published: June 23, 2025
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