Does culture matter?
Tech “culture” has certainly been in the headlines recently. From concerns about a “bro culture” in Silicon Valley to diversity issues and “me too” headlines, tech culture has received much popular scrutiny of late. But to what extent should investors care? Does culture matter for performance?
We undertook a study of public sources of talent and culture data across the past few years at 29 large tech companies and found that employee perceptions of culture have a significant, measurable impact on company performance. Unlike many companies in “hard asset” sectors, tech company value is driven in large part by intangibles assets and by the talent walking in and out the door every day.
But culture is a vague term. When it comes to talent and culture what really matters? There are three critical factors that distinguish financial performance among technology firms:
(1) Growth culture (is there a strong culture of growth and innovation?)
(2) Talent quality (are they attracting the best technical and commercial talent?), and
(3) Leadership strength (How agile is the leadership team? What are their risk factors?)
To some extent, these “soft” talent factors are important in all firms, but they matter most at tech firms that are dependent on continuous innovation to survive. These firms need top technical talent to drive innovation, and need cross-functional collaboration to bring those innovations to market effectively.
OK, so these factor matter, but do they change much? It turns out that culture and talent factors can and do change on a time scale relevant to most investors. Let’s take a look at two contrasting examples of organizations undergoing changes in the past year.
Momentum at VMW
One example of an improving culture can be found at VMWare (NYSE:VMW), where improving culture indicators across the past year provide a few reasons for optimism, even with the recent rebound in stock price:
- Relative to peers, the company stands out across the board on factors like career opportunity, work environment, pay, and senior leadership approval. It’s top quartile in all of the factors (sourced from public data) we track; and top-decile in most.
- Confidence among employees in the business outlook has increased by more 20% in the past year. And data suggests employees have relatively high levels of engagement. For example, 85% of employees report being excited about their work, according to one survey.
- Improvements in employee perceptions of culture reflect increasing momentum in the business, driven by clean execution of VMW’s cloud strategy in a favorable IT-spend environment.
- This environment provides a fertile ground for the company’s top-decile R&D investments levels, which are bearing fruit with strong commercialization and use case adoption of growth products
- All of this is in the context of shifting concerns regarding the reverse merger with Dell, proving an event-related opportunity/risk.
Juniper (NYSE:JNPR) provides another, contrasting example.
A Transition at JNPR
After peaking in 2016, culture indicators at Juniper (also collected from public data) signaled an inflection point last year and continue to slide downward this year.
While the company still compares favorably to its peer group on many key dimensions (e.g., 82nd percentile for pay and 87th percentile for work/life balance), the downward trend has been clear across the past year.
Measures of employee confidence in the business have fallen by almost 30% in the past year. As a result, they are 10% less likely to recommend the firm to peers.
Like VMW, JNPR is also spending very heavily on R&D. The critical question is whether those investments are likely to be productive as confidence slides.
Beyond performance, another critical facet of the culture equation is risk.
Symantec Audit Investigation
When SYMC disclosed last week that it had initiated an audit investigation it suffered a more than 30% decline in the stock price. The stock has since rebounded somewhat this week based on additional disclosure that the company does not anticipate a material adverse impact on historical financials. However, it serves as a powerful reminder that the mere prospect of a compliance issue can have a major impact on market returns.
Understanding organizational culture can be helpful in anticipating instances of fraud and misconduct. Without opining on the SYMC situation, there are few critical cultural dimensions that are important for investors to understand if they wan to get in front compliance events.
The most important one is what we would call the “fear factor”. Organizations where there is fear of retribution or retaliation for speaking up, are more likely to experience instances of fraud and misconduct.
Counterintuitively, healthy reporting of compliance concerns, that are talked about and handled appropriately, can actually help improve perceptions of organizational justice and reduce the number of actual incidents of fraud and misconduct.
Our research suggests a few factors are important to try to understand to anticipate compliance risks:
- Fear of retribution and fear of speaking up
- Perceptions of organizational justice among employees
- Integrity and tone of leadership team
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Additional disclosure: All analysis is based on publicly-available data.