Does corporate culture matter?
Bust of Socrates by Lysippos at the Louvre. Source: Wikipedia
The short answer is yes. A culture centered on client service and financial accountability will produce higher financial returns; by contrast, a culture with outsized rewards for managers who treat the firm like a personal piggy bank will generate lower returns. But how do we measure corporate culture? One way is by reading the company’s annual report, especially the CEO’s letter to shareholders. This document is an unstructured, free-flowing description of what the chief thinks is important. There’s no SEC-mandated boilerplate or caveats. By examining what is said—and not said—we get a chance to look inside his or her head.
Sometimes, the results are contradictory. For example, in Enron’s 2000 shareholder letter, the CEO claims that net income reached $1.3 billion. But the income statement only shows $979 million in profit. The difference is in a footnote. Jeff Skilling chose to ignore an investment write-down in his text, an indicator of his general attitude. By contrast, Warren Buffett’s annual shareholder letter frequently describes—sometimes in painful detail—his worst investment mistakes of the year. His belief is that honesty benefits everyone, managers and shareholders alike.
It’s hard to measure candor, but by studying the annual letter for three things—operating performance and accountability, vision and leadership, and stakeholder relations—customers, communities, employees, and investors—we can divine whether management is interested leading or just receiving a fat paycheck. If you don’t see open and honest communication in these areas, watch out. A fish rots from the head down. Our words reveal the integrity of our leadership.
It can take some guts to address these issues, especially when things aren’t going well. But Tolstoy notes, “Life without moral strength is sleep.” And sleeping companies are rarely profitable companies.
Douglas R. Tengdin, CFA
Chief Investment Officer
Leave a comment if you have any questions—I read them all!