quantifying corporate culture - finity.com.au...colleagues: companies with a good corporate culture...

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Quantifying Corporate Culture

June 2016

Jan van der Schalk Head of Insurance and Diversified Financials Research

CLSA

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Why?


What?

“Culture” has been a buzzword in the corporate world for several years, but what does it mean and why is it important? Entrepreneur.com defines company culture as “a blend of the values, beliefs, taboos, symbols, rituals and myths all companies develop over time”. In other words, company culture is the personality of an organization from the employee perspective, and includes the company’s mission, expectations, and work atmosphere. Whether it’s written down, symbolized in the business logo, or simply an unspoken but understood definition, culture determines a company’s environment.

http://jobsearch.about.com/od/jobsearchglossary/g/glossary-definition.htm

http://jobsearch.about.com/od/jobsearchglossary/g/glossary-definition.htm


Why?

Fortune’s 100 Best Companies exceed the expected risk-adjusted return

by 3.5% a year. Studies show great places to work also make for great

investments.

Our modelling (using ESG data as a proxy) indicates that for the ASX200

(for the period Dec10– Dec15) culturally sound companies performed as

follows:

ASX200 – 40%

Top20: 79.0% (avg 10.7%, min -15.3%, max 30.0%)

25th percentile: 75.3% (avg 6.7%, min -56.4%, max 45.4%)

50th percentile: 54.6% (avg 2.9%, min -56.4%, max 45.4%)


- Increasingly, non-financial measures such as brand, reputation, human capital, R&D and culture are key to the evaluation of a company

- These risks sit outside of the balance sheet, but are critical to the financial well-being of the company

Why? The components of “value” have changed

Source: Ocean Tomo, LLC January 1,2015


Why?


Why? Opportunity in changing investor interests

Asset owners increasingly believe more can be achieved from their investments than just a rate of return.

Source: 2015 U.S. TRUST INSIGHTS ON WEALTH AND WORTH®

There are 1,821,745 households in the U.S. with $3 million or more in assets. In the US Trust 2015 Insights on Wealth and Worth survey, of 640 individuals with at least $3 million in investable assets. These wealthy individuals represented four distinct generations: • Millennials or Generation Y (age 18–34):

16% • Generation X (age 35–50): 23% • Baby Boomers (age 51–69): 47% • Mature (70+): 13%

8 CLSA Hard copy distribution only during presentation. All hard copies to be returned at the end of the presentation.

Why? Because it works!

Scripps went from making operating losses > $20m in

Year 2000 to making the “100 Best Companies” list for the first time in Year

2008 and maintaining this benchmark for six

consecutive years to Year 2012.


Why? It works….

*Portfolio 1 – a portfolio of companies with leading scores on employee indicators Portfolio 2 – a portfolio of companies with weaker scores on employee indicators


What are the quantifying elements of Company Culture?

Purpose: companies pursuing a larger purpose. When employees are all pursuing a mission they believe in, relationships get stronger.

Colleagues: companies with a good corporate culture have low employee turn-over and can also hire the cream of the crop, creating a self-reinforcing cycle; the best people want to go where the best people are.

Trust: show people that you consider them trustworthy, and they’ll generally prove you right. Many of the best companies let employees work whenever they want, and they work far more than if they were punching a clock. Caring: every company says it values employees. The best show it. For some this is where those celebrated perks do count. A true culture of caring goes beyond perks and includes daily behaviour


How? Can Company Culture be measured?

Purpose - clear statements about the company’s contribution to society, on the

environment or how it treats it’s suppliers, customers & employees

Colleagues - employee turn-over, - absenteeism, - diversity as part of the overall work-force, and - at various levels of management: age-ism, gender pay gap Trust - flexible working practices, - the ability to speak out, - the seeking of input from all employees, - attitudes on tax, political gifting

Caring: paternity leave, superannuation obligations, governance etc.


What? Women on Boards

Why is it positive to culture? - Research shows that organisations can improve operational

performance by respecting & valuing the diversity brought by both women and men

- The purest point is it brings “diversity of opinion”. A portfolio run just by females wouldn’t be as good, the focus is on balance and risk-taking that happens naturally when diverse opinions are brought to the table.

Methodology: Market-cap weighted basis vs. relative benchmark (annualised) Timeline: Dec2010 to Dec2015 Excess returns: Source: Bloomberg


What? Employment policies: health&safety, ethics, equal opportunities

Why is it positive to culture? - These companies will have a more sustainable corporate culture - Companies that take care of their peoples’ physical, social and

professional needs tend to have a happier and hence more productive workforce

Methodology: Equal weighted basis vs. relative benchmark (annualised) Timeline: Dec2010 to Dec2015 Excess returns: Source: Bloomberg


What? Top quartile ESG disclosure

Why is it positive to culture? - Companies that provide the most data are the most transparent and

open with a clearer vision, a key characteristic of companies with positive culture

Methodology: Equal weighted basis vs. relative benchmark (annualised) Timeline: Dec2010 to Dec2015 Excess returns: Source: Bloomberg data adjusted for industry & country


What? Companies with CSR/Sustainability Committees

Why is it positive to culture? - Companies with CSR / Sustainability committees are more ESG

conscious - This caring & conscious thought process tends to transcend to other

areas of the business: people, product, performance

Methodology: Equal weighted basis vs. relative benchmark (annualised) Timeline: Dec2010 to Dec2015 Excess returns: Source: Bloomberg


What? By age of youngest Board Director

Why is it positive to culture? - Embodies a merit/talent based culture, not tenure based - Diversity of view points and connection to younger customers, newer

technologies, and changing social norms Methodology: Equal weighted basis vs. relative benchmark (annualised) Timeline: Dec2010 to Dec2015 Excess returns: Source: Bloomberg


What? Use of words “vision” and “culture” in annual Reports

Why is it positive to culture? - A company’s culture, vision and values cannot be distilled down into

numbers, but still convey a tremendous amount of information. s

- In the absence of numeric data, language is of considerable importance, in identifying companies that at least give voice to these concepts . s

- One of the best ways to understand whether or not a positive culture is important to a company, is whether and how often they talk about it. If they don't think it is important, it is unlikely to be discussed.

Methodology: Equal weighted basis vs. relative benchmark (annualised) Timeline: FY10 to FY15 Excess returns: Source: Company Annual Reports


How? Build a Screen

Culture Pillar Factor Source

Use in

Dirty BT

#1? Raw data to collect Derivation

PURPOSE

mission statement Culture in corporate statement Company filings Y

Frequency of terms "vision" and

"culture" in annual report RANK (Count of terms / # of words in company report)

long-term perspective Clawback Provision for Exec Comp BBG data Y Yes/No Flag

long-term perspective Tenure of CEO BBG data Y # of years RANK (Raw data)

transparency CSR committee BBG data Y Yes/No Flag

COLLEAGUES

honesty/integrity Ethical Business Policy BBG data Y Yes/No Flag

cultural sensitivity Equal Opportunity Policy BBG data Y Yes/No Flag

team-oriented CEO pay vs EBIT BBG data Y CEO Total compensation in $, EBIT RANK( CEO Comp/EBIT )

team-oriented Macquarie Engagement Score Macquarie Y Composite score Use cos with score >1

team-oriented Employee turnover BBG data Y TBD TBD

Fairness/merit based Gender pay gap ??? N TBD TBD

Inclusiveness Gender split% employees BBG data N TBD TBD

TRUST

transparency ESG disclosure BBG data Y Raw data Use top quartile only

gender equality % Women on the board BBG data Y % of women on board Use cos with > 25%

independent thinking Youngest director age BBG data Y Age in years Use cos with age < 45

engagement Employee engagement survey Company filings Y Yes/No Flag

engagement Say-On-Pay Provision Company filings Y Yes/No Flag

long-term perspective Price Volatility near earnings releases BBG data N TBD TBD

CARING

Social Community spending BBG data Y Yes/No Flag

Work Worker safety policy BBG data Y Yes/No Flag

Environment Emissions Reduction Initiatives BBG data N Yes/No Flag

Environment Energy Efficiency Policy BBG data N Yes/No Flag

Environment Climate Change Policy BBG data N Yes/No Flag

Work Rising productivity measure BBG data N TBD TBD

Work Rising wages measure BBG data N TBD TBD


How? Analyse variables and pick weightings

Distribution & Weighting of variables

Clawback

Provision

for Exec

Comp

Tenure

of CEO

CSR

committ

ee

% Female

executives

EE

score

ESG

disclosur

e

%

Women

on the

board

Younges

t

director

age

Communit

y

spending

Emissions

Reduction

Initiatives

na 0 na -1.0 na 0 na -1.0 na -1.0 na -1.0 na -1.0 na -1.0 na -1.0 na 0

Y 1 0.00 -1.0 Y 1 0.00% -1.0 -2.00 -1.0 0 -1.0 0.00% -1.0 0.00 -1.0 0.00% 0.0 Y 1

N 0 3.01 0.0 N 0 20.01% 0.0 0.00 0.0 20 0.0 20.01% 0.0 30.01 0.0 0.50% 0.0 N 0

7.01 1.0 30.01% 1.0 1.01 1.0 35 1.0 30.01% 1.0 40.01 1.0 1.01% 1.0

15.01 0.0 50.01% 0.0 3.01 1.0 60 1.0 50.01% 0.0 50.01 0.0 2.01% 1.0

20.01 -1.0 70.01% -1.0 70.01% -1.0 60.01 -1.0

Weight 1.5 2.0 3.0 3.0 3.0 1.5 3.0 2.0 3.0 1.0

Frequency charts

PURPOSE TRUST CARINGCOLLEAGUES

0.0

1.0

2.0

3.0

4.0

5.0

6.0

0.2

0

0.6

0

1.0

0

1.3

0

1.8

0

2.3

0

3.0

0

3.6

0

4.0

0

4.4

0

4.7

0

5.3

0

5.8

0

6.3

0

6.7

0

7.7

0

8.2

0

9.8

0

11.1

0

12.3

0

13.9

0

16.9

0

22.5

0

CEO tenure - frequency chart

0

2

4

6

8

10

0.0

%

8.0

%

9.0

%

10.0

%

11.0

%

12.0

%

13.0

%

14.0

%

15.0

%

17.0

%

18.0

%

20.0

%

22.0

%

23.0

%

25.0

%

27.0

%

29.0

%

30.0

%

33.0

%

36.0

%

40.0

%

55.0

%

% Female executives

0

1

2

3

4

5

6

7

8

9

13.0

15.0

17.0

19.0

21.0

23.0

25.0

27.0

29.0

31.0

33.0

36.0

38.0

40.0

42.0

44.0

46.0

49.0

52.0

ESG discloure scores


How? Apply modifiers

1. SIZE 2. QUANTITY & QUALITY

market cap

$mQ & Q

0 5.0 0.00 1.0

2,001 4.0 2.01 2.0

6,001 3.0 4.01 3.0

10,001 2.0 6.01 4.0

50,001 1.0 8.01 5.0

100,000 1.0 10.01 5.0

150,000 1.0

market cap

$mcount Q&Q count

1,000 1 0 1

2,000 12 6 3

3,000 9 7 8

4,000 9 8 38

5,000 8 9 32

6,000 7 10 18

7,000 5

0

2

4

6

8

10

12

14

1,0

00

3,0

00

5,0

00

7,0

00

9,0

00

11,0

00

13,0

00

15,0

00

17,0

00

20,0

00

23,0

00

25,0

00

46,0

00

60,0

00

69,0

00

100,0

00

Market cap ($m) - frequency chart

0

5

10

15

20

25

30

35

40

0 6 7 8 9 10

Q&Q - frequency chart


How? Run #1

Linked to sheet "Scoring" Ranked from largest to smallest Top 20 Stock return %

Bloomberg ticker

Market cap (A$m)

Weighted score

Bloomberg

ticker Market cap

(A$m) Weighted

score

Bloomberg ticker

Market cap (A$m)

Weighted score

##### #####

5-yr stock return

(Jun2011 to Jun2016)

1 CBA AU Equity 129,476 1.5 QAN AU Equity 6,187 13.5 QAN AU Equity 6,187 13.5 2.01 3.00 49%

2 WBC AU Equity 99,906 8.5 WPL AU Equity 22,746 10.5 WPL AU Equity 22,746 10.5 43.55 27.00 -38%

3 ANZ AU Equity 70,868 1.5 WBC AU Equity 99,906 8.5 WBC AU Equity 99,906 8.5 21.73 29.95 38%

4 NAB AU Equity 68,961 2.5 TLS AU Equity 66,752 8.0 TLS AU Equity 66,752 8.0 3.01 5.46 81%

5 TLS AU Equity 66,752 8.0 IAG AU Equity 14,029 6.5 IAG AU Equity 14,029 6.5 3.56 5.77 62%

6 BHP AU Equity 60,380 -1.0 WES AU Equity 46,081 5.0 WES AU Equity 46,081 5.0 32.71 40.92 25%

7 CSL AU Equity 52,653 2.0 SYD AU Equity 15,829 3.5 SYD AU Equity 15,829 3.5 3.21 7.10 121%

8 WES AU Equity 46,081 5.0 MGR AU Equity 7,385 3.5 MGR AU Equity 7,385 3.5 1.29 2.00 55%

9 WOW AU Equity 27,544 0.5 TAH AU Equity 3,658 3.5 TAH AU Equity 3,658 3.5 3.22 4.40 37%

10 SCG AU Equity 25,024 -12.0 MQG AU Equity 24,997 3.0 MQG AU Equity 24,997 3.0 31.50 73.45 133%

11 MQG AU Equity 24,997 3.0 GPT AU Equity 9,745 3.0 GPT AU Equity 9,745 3.0 3.11 5.42 74%

12 TCL AU Equity 24,202 -3.0 NAB AU Equity 68,961 2.5 NAB AU Equity 68,961 2.5 23.08 26.07 13%

13 WPL AU Equity 22,746 10.5 CWN AU Equity 8,486 2.5 CWN AU Equity 8,486 2.5 8.46 11.65 38%

14 WFD AU Equity 22,069 -8.5 BLD AU Equity 4,841 2.5 BLD AU Equity 4,841 2.5 4.44 6.51 47%

15 BXB AU Equity 19,936 1.0 HGG AU Equity 3,229 2.5 HGG AU Equity 3,229 2.5 2.19 4.99 128%

16 RIO AU Equity 18,698 -4.0 CSL AU Equity 52,653 2.0 CSL AU Equity 52,653 2.0 32.92 115.07 250%

17 NCM AU Equity 17,093 -0.5 DXS AU Equity 8,634 2.0 DXS AU Equity 8,634 2.0 5.40 8.92 65%

18 AMC AU Equity 16,793 0.0 CBA AU Equity 129,476 1.5 CBA AU Equity 129,476 1.5 49.38 75.49 53%

19 QBE AU Equity 16,387 -4.0 ANZ AU Equity 70,868 1.5 ANZ AU Equity 70,868 1.5 21.53 24.29 13%

20 AMP AU Equity 16,061 -4.5 LLC AU Equity 7,879 1.5 LLC AU Equity 7,879 1.5 8.85 13.53 53%

21 SUN AU Equity 16,044 -0.5 SGR AU Equity 4,731 1.5 AS25 Index 3,723 4,384 18%

22 SYD AU Equity 15,829 3.5 BXB AU Equity 19,936 1.0

23 RHC AU Equity 14,762 -10.0 WOW AU Equity 27,544 0.5 Portfolio

5yr cagr % 10.5%

24 IAG AU Equity 14,029 6.5 BSL AU Equity 3,668 0.5 ASX100 5yr cagr

% 3.3%

25 VCX AU Equity 13,103 -5.5 AMC AU Equity 16,793 0.0

26 GMG AU Equity 12,911 -12.5 SGP AU Equity 11,219 0.0


How? Run #2

Top 20% by sector return %

Bloomberg

ticker10-Jun-11 10-Jun-16

5-yr stock

return

(Jun2011

to

Jun2016)

TAH AU Equity Consumer DiscretionaryHotels Restaurants & Leisure 3.22 4.4 37%

CWN AU Equity Consumer DiscretionaryHotels Restaurants & Leisure 8.46 11.65 38%

WES AU Equity Consumer Staples Food & Staples Retailing 32.71 40.92 25%

WPL AU Equity Energy Oil, Gas & Consumable Fuels43.55 27 -38%

WBC AU Equity Financials Banks 21.73 29.95 38%

IAG AU Equity Financials Insurance 3.56 5.77 62%

MGR AU Equity Financials Real Estate Investment Trusts1.29 1.995 55%

MQG AU Equity Financials Capital Markets 31.50 73.45 133%

GPT AU Equity Financials Real Estate Investment Trusts3.11 5.42 74%

CSL AU Equity Health Care Biotechnology 32.92 115.07 250%

COH AU Equity Health Care Health Care Equipment & Suppli73.70 122.16 66%

QAN AU Equity Industrials Airlines 2.01 3 49%

SYD AU Equity Industrials Transportation Infrastructure 3.21 7.1 121%

BXB AU Equity Industrials Commercial Services & Supplies6.52 12.57 93%

CAR AU Equity Information TechnologyInternet Software & Services 4.67 12.47 167%

BLD AU Equity Materials Construction Materials 4.44 6.51 47%

BSL AU Equity Materials Metals & Mining 1.08 6.42 494%

AMC AU Equity Materials Containers & Packaging 6.28 14.5 131%

NCM AU Equity Materials Metals & Mining 37.45 22.3 -40%

TLS AU Equity Telecommunication ServicesDiversified Telecommunication3.01 5.46 81%

AGL AU Equity Utilities Multi-Utilities 13.22 19.07 44%

Portfolio 5yr cagr % 14.2%

ASX100 5yr cagr % 3.3%


Why?

Culture is also a form of capital, just like financial and economic capital

By identifying a healthy & positive corporate culture, we identify companies with a greater chance to succeed and, provide better long-term returns for shareholders. These companies will not only provide better growth over the long-term, but their resiliency, adaptability and creativity will, protect them in times of economic and industry disruption, allowing for better risk-adjusts returns. In turn, they provide, • a more rewarding work environment for their employees, • better products and services for their customers, and • are a positive influence on their local communities and the environment

In effect, these companies are additive to society & make the world a better place.

Leading companies choose to embrace their corporate culture as financial capital. Building a strong, positive, and engaging culture generates long-term sustainable earnings growth in excess of their industry peers.

quantifying corporate culture - finity.com.au...colleagues: companies with a good corporate culture...

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