One Firm’s Elusive Quest to Quantify Investing’s Culture

Illustration by II

Illustration by II

A hedge fund manager screams at his analysts. Can a model capture that?

It takes about an hour for Nimisha Srivastava to break down an asset management CEO’s defenses.

Srivastava, the global head of credit for Willis Towers Watson, meets with legions of asset managers every year, trying to determine who’s worthy of WTW’s clientele. The global consulting and outsourced-CIO firm is the gatekeeper for $2.3 trillion in institutional money, and directly hires managers for assets measuring $107 billion. To get a slice of that, asset managers have to go through Srivastava and her colleagues first. And their scorecard has changed.

“We’ve noticed, over the years, that we began to attribute more and more of managers’ success or failure to culture,” Srivastava says in a phone interview. “It’s always been a part of our research process, but it’s been more informal: talking about long-term stability, or turnover of the team.” No longer. Drawing on decades of study by WTW consulting guru Roger Urwin, the company has built a 20-plus-factor framework to make culture concrete. In practice, it means interrogating organizations the same way consultants have always interrogated track records.

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“We now spend more time interviewing people across levels,” Srivastava says. “In many conversations with leadership, investment managers may have prepared remarks on their culture, but usually that’s about 30 minutes’ worth of content. Once you get beyond an hour, you can usually break down [defenses] and have more candid conversations.”

This technique of disarming and delving in conversation applies with investment firm employees at every level. In normal due diligence, a consultant or asset owner might meet with an analyst to go over risk metrics or a back test, Srivastava notes. “But never with the target aim of asking a junior employee, ‘What keeps you here? What do you imagine doing in three to five years?’ Those are typically questions an analyst is not prepared to answer, but you get to more candid topics that way,” she adds.

Not all inputs for WTW’s culture framework are qualitative. The firm has come up a set of metrics that indicate cultural health (or toxicity), which in turn helps predict future performance. Turnover is a key area of interest, and WTW looks at not only overall retention statistics, but also turnover by gender. “Many firms don’t ever have these stats,” Srivastava says. “But once they’re produced, we will track the male-to-female ratio over time.”

The model does not reward gender diversity for its own sake, but because WTW research shows that strong value propositions for all employees — regardless of demographics — correlates with long-term viability of investment strategies. In a recent paper detailing its framework, WTW illustrates this link with an unnamed small investment shop, which failed.

“The founder was the chief investment officer and lead portfolio manager (PM),” the paper states. “He built a team whose investment style and background mirrored his own (similar education and so on). One senior woman on the investment team brought a complementary investment style (more market-technicals-focused versus the PM’s fundamental and often contrarian approach).” Then she left.

The firm lost critical thought diversity, and the one person willing to play devil’s advocate to the founder. Performance suffered as the founder “began to resent staff who disagreed with him, leading to further turnover,” according to the case study. “His dialogue with clients became more strained as he sought to push his views as opposed to listening to concerns. He increased risk taking with less appreciation for market technicals, causing the company to underperform and ultimately led to the company’s closure.”

In this example, an investor tracking turnover statistics would have gotten a red flag, whereas those relying on, say, key man clauses, would not have.

WTW is not the only firm to have recognized the value — and inherent difficulty — of quantifying culture.

One of the country’s largest asset managers was casting about for alternative data applications, and looked to Glassdoor reviews, according to an insider. Was there a link between these anonymous reviews of public companies and the quality of their leadership? There was, the insider says. Corporations with positive Glassdoor ratings tended to meaningfully outperform those with grievance-laden reviews.

Investment executives may have been able to skate on cultural issues for a long time, but the market is — very slowly — developing mechanisms to hold them to account.

“In an environment where the markets are doing really well, it’s easy to disguise poor culture, because frankly it’s easy for managers to make money,” Srivastava says. “In the last couple of years with more volatility, we’ve seen that managers’ cultures can make all the difference.” After studying the matter for decades, WTW moved to formalize its model, she says, “because of where we are in the cycle. The downside scenario is not that unrealistic: it happens.”