Investment Firm Culture Change: Five Keys to Success

Culture provides a competitive advantage.

That’s the judgment of 97% of investment professionals, according to FCG data.

“Our firm should allocate time and resources to improving our culture.”

More than 95% of staff members in firms that have taken and reviewed the results of FCG’s culture survey answered “yes” to that question.

Clearly, creating a strong, healthy culture is seen as a worthy goal.

Why then have so few investment firms — only 10% by our estimates — succeeded in creating one?

Five Keys to Success

Our analysis of firms that have succeeded indicates that they have five essential factors in common:

1. Commitment from the Senior Team.
2. Proper diagnosis of the existing and preferred culture, resulting in a plan.
3. Buy-in from employees plus a critical mass of “True Believers.”
4. Execution of the plan / change management skills.
5. Ongoing measurement of progress, via pulse surveys.

The factors above are not tricky to understand, though they may require subject-matter experts (SMEs) to help design and carry them out.

So why the high failure rate? A simple analogy may explain it. Consider New Year’s Eve and the physical fitness resolution: “I will join a health club, hire a trainer, get fit, and lose weight.”

Of course, we know the punch line of this story: Very few succeed. Likewise, with investment firms. Senior Teams get themselves lathered up about the benefits of culture, make a pseudo-commitment, and hold some meetings. But by February, they are back on the couch watching TV and eating chips.

A Culture Change Case Study

What follows is a culture success story. A European asset manager we’ll call Alpha took the five steps above and saw its culture improve dramatically over one year.

Defining Success

Success for Alpha consisted of two major culture goals:

1. Increase collaboration within teams and across
   the various functions.
2. Change the mindset of staff members from a
   family office to a competitive manager of third-party money.

After reviewing the diagnostic survey, they added a third goal: general improvement in the culture.

The table below shows the before and after scores for the critical culture benchmarks. Alpha demonstrated strong improvement in all these areas:

In addition to doing better across these factors, Alpha also reduced the level of “sludge” — or negative behaviors like blaming, disrespect, and gossip — from 25% to 15%, with a goal of eventually moving below 10%.

On their collaboration goal, Alpha improved significantly. In the 2019 culture survey, collaboration did not register as a top 10 value experienced at Alpha. Staff members felt that individuals were mostly out for themselves. A new management team and a new business model — third-party business — had created uncertainty in their mindset.

Yet the culture diagnostic revealed that staff members very much wanted collaboration. They just weren’t getting it. So over the next year, Alpha’s leadership and staff went to work and raised collaboration from virtually non-existent to the second-ranked value in the firm. When asked in the 2019 survey, “What values do you experience at work?” the staff did not choose “collaboration.” By 2020, they considered it a core value at Alpha.

On the strategy shift from family office to third-party manager, Alpha’s leadership was pleased to see that the mindset of the staff members was shifting. The above Culture Factors would help them address the new challenges of gathering and managing “outside” money. In particular, Alpha’s CEO liked the big jump in the “Ownership Mentality” score. To succeed in the competitive world of acquiring investment clients, he believes staff members must see themselves as “entrepreneurs” rather than “employees.” They also should feel like they are “playing for a winner.”

Over the course of the transition year, leadership devised a sound strategy to achieve what staff believed was a compelling purpose. Leadership communicated the strategy well — hence the rise in the communication score. So confidence grew. Of course, some people self-selected out of the firm because they didn’t feel aligned with the firm’s new direction or required mindset. That is to be expected with serious culture change. Culture is not about creating a place where everybody fits in.

With the portrait of success painted above, the question is: How? How did this firm achieve such change over a year? It goes back to the five keys.

1. Commitment from the Senior Team

Commitment might be the simplest but trickiest change factor. Simple because it just requires a one-word answer: “yes.” Tricky because all the dynamics point to this “correct” answer. Responding “no” to the commitment question is like saying no to Mom, apple pie, and patriotism.

CEOs must possess strong emotional intelligence (EQ) to effectively ask the question and read the answer. Senior team members must hear it as legitimate question, not a rhetorical one. A good preliminary question is, “What are the negatives about changing our culture?”

Team members can then voice their concerns. These concerns should then be addressed in a way that builds buy-in and then the positives discussed. The ideal upshot of this conversation is unanimity. All should agree that culture change will benefit the firm. The exact nature of the change is still up for discussion at this point, but team members have agreed that there is an upside.

Once a culture plan is developed, a second round of commitment will be necessary. CEOs will have to use their EQ skills to test for real commitment to the actual plan. Without strong commitment from the senior team on the specifics of the preferred culture, the execution will fail. Candor and courage are required.

A CEO in Canada thought his team was fully committed. But then found out the following week that one member was leaving for a new job. Surprises like this don’t happen at the best firms. Such firms practice full transparency and the departing team member would have leveled with the CEO about their plans ahead of time. (I know. Many readers will say, “BS, that doesn’t happen.” But at the best firms, it does.)

2. Proper Diagnosis and a Plan

The second step may appear obvious, but many CEOs launch into culture change without the facts or a plan based on the facts.

Some leadership teams conduct focus group interviews to form a “current status” view of culture. While these are useful, a more robust assessment is required, one that includes the views of all staff members and gives the senior team a comprehensive picture.

Data, like those from Alpha show which aspects of culture change the firm should address. Alpha’s whole-firm assessment pinpointed that collaboration was weak but highly desired in the preferred future. So it became a core focus of culture change.

Another benefit of the whole-firm assessment: It builds buy-in. Alpha’s staff indicated that collaboration needed to improve. It wasn’t a push-down from the top. Staff identified the deficit and leadership responded: “Here’s what you told us, here’s how we are acting on it.” Sold.

The plan evolves from the culture diagnosis. Firms that succeed in culture change formulate a logical and simple plan. Simple does not mean easy. The plan should fit on one sheet of paper. Firms call this one-pager their culture statement. It identifies the following attributes of the firm:

• Mission: Why They Exist
• Vision of Success: Where They Are Going
• Strategy: How They Will Get There
• Core Values: Who They Are as a Firm, Their Principles

Many firms embark on a culture journey without formalizing their culture statement. Think about it. Would a sports team enter a competition without a game plan? Of course not. The culture statement is the game plan. And all staff members should operate from it.

3. Buy-In

The importance of buy-in is hard to overstate. The whole firm assessment gives staff members a voice in designing the new culture. That’s an essential first step.

But a second crucial step is disseminating the results of the assessment. Town Halls work well. The senior team prepares by agreeing on what data to highlight and what message to deliver. Audience members — the staff — will want to know:

• Why do we need to change our culture?
• What do the survey results indicate?
• What is expected of me?
• What’s next?

Done well, the Town Hall presentation can create over 90% buy-in from the staff — according to real-time voting results following presentations during which staff members state their level of buy-in.

An important second level of buy-in is a “critical mass” of “Culture Champions.” The staff nominates these Culture Champions because they represent the desired culture. The senior team reviews the nominations and chooses a group that represents at least 10% of the total staff.

These champions along with firm leaders form the engine that will drive culture change. Leaders are anyone who manages a team. Good cultures are made up of healthy teams, each of which is like an organ in the body. Each must function effectively for the whole to thrive. A poor team leader creates a toxic team that can sabotage the health of the firm.

4. Execution

Many firms make it through the first three steps and still fail to change their culture. They can’t make the shift from theory to practice. That’s understandable. The outlined steps are mostly cerebral: equal parts analysis and planning.

The tricky part of culture change is behavior change. Change management is an enormous and complicated discipline. But firm leaders naively assume they can pull it off by designing and communicating a good plan.

Alpha did not fall into this trap. They rolled up their pant legs and strolled into the waters of “culture change management.” The leaders and champions spent a full week on three separate occasions in “learn, practice, influence” training. They learned about the best practices of investment firms that had built strong cultures, mindsets, and behaviors that aligned with their firm’s core values. They also developed influencing skills to help bring staff members along on the journey.

This phase of culture change often creates resistance. It’s hard work and not always fun. Commitment is required. Without it, momentum can falter and the change effort evaporate. That’s why the fifth step is especially crucial.

5. Measurement

Measurement begins — and eventually ends — with the comprehensive culture survey discussed above. Senior leaders review the results and decide on culture changes that will help the firm accomplish their mission and vision.

Leaders must also decide what benchmarks they will monitor each month during the culture change process. In the case of Alpha, they chose to monitor several culture elements as they marched forward. These benchmarks and their progress are shown below. (Note: this firm, like many investment firms, consists of tough graders, so anything over a 4.5 score was considered a success!)

There are several critical points:

1. The Commitment score moved from 5.47 up to 5.56. Commitment is required in this process and Alpha had it throughout. It was their top score at the beginning and the end of the process.
2. The Collaboration score went way up, achieving a major goal — and a major win — for Alpha.
3. Some scores were above 4.5 and stayed there without improving much. Leaders considered that a win.
4. Every month team leaders received scores on their team’s benchmarks, so they could address any metric that was flagging. The steady improvement that team leaders and firm leaders saw kept momentum strong even during the harder phases.

The final measurement step is a re-do of the original culture survey. By following the five steps, Alpha earned a clear culture victory.

Culture change is achievable.

Culture change is possible. Many attempts fail. But our formula is straightforward and within any firm’s reach, if the commitment is sincere. In every case we know of where culture change failed, the decisive factor was lack of commitment.

The timeless expression, “Where there is a will, there’s a way,” is true for culture change. That said, move over and hand me the chips. 😊

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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.

Image credit: ©Getty Images / Martin Barth / EyeEm

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Jim Ware, CFA

James Ware, CFA, is the founder of Focus Consulting Group, a firm dedicated to helping investment leaders leverage their talent. Ware is the author of “Investment Leadership: Building a Winning Culture for Long-Term Success,” and “High Performing Investment Teams,” both of which discuss those elements of leadership and teamwork that lead to sustainable success for investment firms. Ware has 20 years’ experience as a research analyst, portfolio manager, and director of buy-side investment operations. He has been a guest lecturer on the topic of investment firm management at the Kellogg Graduate School of Management, Northwestern University. Ware has a Masters in Business from the University of Chicago and a degree in philosophy from Williams College, where he graduated Phi Beta Kappa.