State Street urges boards to connect with corporate culture

Through its asset stewardship practice, State Street focuses attention on an issue that remains difficult to define but can impact long-term value, underscoring its importance

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State Street Global Advisors, one of the world's largest investment managers, is calling on boards within its portfolio to align corporate culture with long-term strategy because intangibles such as corporate culture are driving a greater share of corporate value.

This call comes at a time when many industry insiders consider the value of sound corporate culture is multiplied many times over as the challenges of change and innovation grow more acute.

A letter sent to its portfolio companies in the US, UK, Australia, France, Germany and Japan urges these firms to recognize the importance of corporate culture as a key ingredient for success in a time "of unprecedented business disruptions". The culture of a company "eats strategy for breakfast" and can be a key differentiator from competitors.

However, corporate culture is still considered by many industry figures as an intangible asset and a concept that remains difficult to define precisely what it entails.

Despite these misgivings, its importance is highlighted by the fact that State Street uncovered evidence that for UK and US companies more value is extracted from intangible assets than that derived from tangible assets. These findings explain why intangibles such as corporate culture are such an important consideration and an important contributor to investment value over the long term, and they also explain why investors and regulators are paying increasing attention to this issue.

Indeed, a flawed corporate culture can bring "excessive risk-taking" and degrade long-term performance. There is undoubtedly a strong relationship between human capital issues and financial performance but this is very often difficult to communicate, State Street says.

"We believe that the board plays an important role in assessing and monitoring corporate culture, and that senior management plays an instrumental role in defining and shaping corporate culture," says State Street in a written statement.

State Street believes few directors can adequately articulate a company's culture and demonstrate how they oversee and influence change when necessary; this is partly because corporate culture, as an intangible asset, is difficult to measure. Indeed, State Street has found that boards often fail to ensure corporate culture is probably aligned with strategy. This can be especially troublesome during periods of crisis or great change, and can even derail strategic objectives.

With this lack of knowledge in mind, State Street has developed a framework to help guide directors and senior management through this complex process. This framework entails three main components: comparative analysis, implementation, and reporting.

"We call on boards to proactively review and monitor corporate culture, evaluate its alignment with strategy, and incentivize management to take corrective action, if necessary," says the State Street statement.

State Street through its asset stewardship practice, which engages investors and companies on issues that impact value, calls on directors and senior management to discuss the management of human capital in the context of corporate culture as a driver of long-term value.

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Date

15 Jan 2019

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