Practical analysis for investment professionals
17 November 2020

Culture Checklist: One Firm, Eight Boxes, 10 Successful Years

Building and maintaining a healthy culture over the long term is a difficult task that few investment firms manage to pull off. But one North American firm that we’ll call Alpha Investment Management has, and its story is worth telling.

The obvious starting point is Alpha’s commercial success. If the Alpha team had built a strong, healthy culture while losing clients, assets, and profits, their tale would be less than compelling. But from 2010 to the present, a difficult period for many active managers, Alpha’s assets grew by a factor of seven, and the size of its workforce more than tripled, from 74 to 218. The number of owners within the privately held firm expanded from 20 to 60 staff members.

Imitation is the highest form of flattery, and we heard from many of Alpha’s competitors who said that Alpha was one firm they wanted to emulate.

So what explains this enviable record?

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Alpha’s origins and make-up have a lot to do with it. The firm was founded in the 1970s, but its current president traces the real culture story back to 2004.

The impetus for the defining shift was friction between the firm’s second and third generations. The former had taken the original risks and built the ongoing enterprise. But the “young Turks,” as they called themselves, were now the ones working the long hours and establishing a strong track record for investment performance, asset growth, and client satisfaction.

Alpha was struggling with the classic dilemma that many private firms encounter as they grow: The old guard and the next generation were butting heads and wrestling over fairness, decision authority, succession, and ownership.

As the tension grew, two junior partners — young Turks — reached out to us at Focus Consulting Group (FCG) to see if we could help. A series of facilitated meetings — negotiations really — took place during which the two sides debated and resolved tough issues. When the dust settled, they reached an agreement and the younger generation began assuming a leadership role at Alpha.

This was a key first step in Alpha’s culture journey. The young Turks agreed that as they took over the stewardship of Alpha, they would make culture a top priority. They continued to work with FCG on defining that culture, gaining buy-in from the staff, and practicing the values and behaviors that defined Alpha’s mindset.

Alpha made such progress that it earned our “Focus Elite” designation, which recognizes firms with uniquely strong cultures as measured by our culture diagnostic. Alpha joined eight other select firms that together represent roughly 5% of the FCG database.

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What were the key steps in Alpha’s successful cultural evolution? We identified eight elements, all of which Alpha addressed.

The following table lists these culture checklist items and the percentage of firms that have accomplished them. To be sure, the sample may be somewhat skewed since respondents were all from “culture-friendly” firms that work with FCG.

Chart depicting Firm Culture Checklist Results
Source: Focus Consulting Group (FCG)

Even among these “culture-friendly” investment leaders, as measured by the top factor, “Senior Team that is committed to good culture,” there is a significant shortfall in the achievement of checklist items. Only 38% of the firms have a culture plan to execute, for example. Alpha was diligent in enlisting outside help: Its team did not assume it had the internal expertise to implement culture change management.

So what drove Alpha’s progress on culture from 2010 to 2020? Four factors and how Alpha addressed them tell the story:

1. Core Values and Key Behaviors

In line with its culture measuring practices, Alpha has conducted a culture survey on a regular basis since 2010. The results for their values and behaviors, depicted in the following chart, show the steady improvement over time in both core values and key behaviors:

Behaviors and Values: Yearly Comparison

Chart depicting Values and Behaviors: Yearly Comparison
Source: Focus Consulting Group (FCG)

How did the Alpha team strengthen the practice of these values and behaviors? They shined a big spotlight on them. Staff created a book called “Values in Action” to bring their values and behaviors to life. In the book, employees from across the firm recount key moments in the firm’s history that demonstrate the power of the values and reinforce that they are much more than words on a page. They also had FCG produce 20 short videos for each new staff member to watch that describe the key behaviors that Alpha encourages its employees to practice.

Perhaps most important of all, Alpha tied cultural behavior to rewards. Embracing the culture and being a good corporate citizen came with a payoff. Too many investment firms promote culture but do not tie it to an incentive. That goes against human nature. We respond to incentives.

The backsliding in the 2018 sample resulted from a strategic review of ownership options at Alpha. As the firm was debating those options internally, word leaked out and created understandable uncertainty among staff members. Thus, the value “Think long-term” took a hit as employees wondered whether management was practicing it.

How did leadership respond? With immediate openness and transparency. They also declined an acquisition offer since staff and leadership valued the firm’s independence, client feedback, and strong culture, all of which can be diluted in acquisitions.

2. Success Factors

While Alpha’s values and behaviors scores had been high at the start of the 10-year period under review, their success factors lagged. And as the following table shows, the firm made considerable progress in these areas over the last decade.

Success Factors: Yearly Comparison

Chart depicting polling results for Success Factors: Yearly Comparison
Source: Focus Consulting Group (FCG)

Alpha’s commitment to continuous improvement helps explain much of this turnaround. In 2010, for example, only 39% of Alpha staff agreed with the statement that “We have an ownership mentality.”

Not satisfied with such a low score, Alpha’s leadership worked on broadening ownership to where it is today, or three times its 2010 level. Such measures helped raise the rating in this area from 39% to 85%, one of the highest in the industry.

The ownership score fell dramatically during the acquisition period in 2019 as staff members wondered whether they were indeed going to continue to own Alpha. But Alpha’s town hall meeting addressed this falloff as leadership openly discussed its decision not to be acquired. Reassured, staff members brought the ownership factor back up to 85%. According to Alpha’s leadership, this chain of events helped initiate “Alpha 4.0.” They had decided to grow the firm independently “in the right way.”

Alpha also focused on plan execution. By taking steps to improve decision making and operations, as well as bringing on an experienced COO in 2017, Alpha saw ratings of this factor improve from 50% to 80%. Plan execution continues to be a key focus for Alpha.  

Communication is also an area that Alpha has bolstered in the last 10 years. In 2010, only 43% of the staff said they experienced open and transparent communication. When the COVID-19 pandemic broke out, Alpha turned on a dime and introduced new communication tools and channels. Today, Alpha has an almost perfect score of 98%.

The leadership team’s emphasis on candor explains much of these results. Outside teams have come in on multiple occasions to instruct staff in what might be called respectful candor, and the firm has embraced both the spirit and tools. Phrases like “fact vs. story” and “hold your story lightly” have become part of Alpha’s vocabulary.

Relationship Alpha tile

3. Toxic Behavior

All firms experience some amount of what we call sludge — gossip, blame, disrespect, and the like. But the goal is to minimize such behaviors. In Alpha’s case, the journey has had its ups and downs. The firm’s sludge scores have jumped back and forth from 6% to 11%

Chart showing Sludge Analysis Yearly Comparison
Source: Focus Consulting Group (FCG)

To Alpha’s credit, each time sludge creeped up, the team would isolate the behavior or department and address the issue. For example, one year a team’s toxic behavior score had spiked to 25%. The cause was a role change that wasn’t working. Alpha took the necessary steps and the toxic behavior score returned to a minimal level.

The major sludge concern at Alpha and for much of the industry is “Slow Moving / Reactive.” Regulatory and compliance issues have affected the speed at which decisions and execution can take place. Again, to Alpha’s credit, the team tackled the issue by changing the governance structure. They examined the various levels at which decisions are made and opted to delegate many decisions lower down in the organization and pulled some up to the senior level. The pandemic added further impetus to the reform of their decision-making processes. The upshot: The Slow Moving / Reactive score fell from 26% in 2019 to 12% in 2020.

Two factors run through all these successes: Alpha’s willingness to track its culture closely and to take steps to counter issues as soon as they arise. Like caring for a garden, the work of sustaining a strong firm culture is never done. It requires the equivalent of watering, weeding, and pruning. It’s a continuous process for which vigilance is required.

4. Leadership Development and Mentoring (LDM)

What’s next? Healthy cultures require leaders to always be on top of that question.

In the investment world today, Leadership Development and Mentoring is the biggest incoming ask from staff members. All investment firms are fielding such requests and Alpha is no different. Employees, younger workers in particular, want opportunities for career pathing, ongoing learning, coaching, and the like. Alpha has a sizable gap between the staff’s current assessment of LDM and what it aspires to.

The difference between what they have and what they want is 7% to 32%. To fill this 25%, Alpha brought in a teams and development expert whose job is to understand and address this new need and examine all aspects of the career journey at Alpha. This work has lead the firm to begin the development of a comprehensive program to help all team members achieve career success through self-reflection, clear roles and goals, effective planning, and continual feedback.

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Although Alpha’s culture shows many signs of strength, its president is cautious about claiming any final victory. Instead, he warns, “We are concerned about complacency — we need to always be improving.”

Fortunately, the most recent culture survey shows that the top-rated value for both Alpha’s existing and aspirational culture is “Excellence / Continuous Improvement.” So it doesn’t look like complacency will set in at Alpha any time soon.

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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 / jayk7

About the Author(s)
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.

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