Culture key to share price

by 29 May 2007

ORGANISATIONAL CULTURE will become a key indicator in determining a company’s future share price, a leading fund management firm has predicted.

Michael Murray, senior portfolio manager of sustainable alpha funds at AMP Capital Investors, said fund managers are increasingly looking at the value of intangible assets and indicators, such as organisational culture, in assessing company performance.

“It’s fully my expectation that companies can expect that their share price will be more and more influenced by what investors perceive the culture of the company to be,” he said.

“It’s actually one of the things that we look at in our process when we’re making investments. We’re always asking companies these questions: How important is the organisational culture to your business? What are you doing to transform your culture? Where are the weak spots in your culture?”

The value of intangible assets in companies has increased quite dramatically over the last 20 years, according to Murray, with up to 75 per cent of a company’s modern value comprised of intangibles such as intellectual capital, brand, human capital and culture.

There are a number of reasons why organisational culture and intangible assets will increasingly impact on share price, he said.

“There’s a pretty significant war for talent going on at the moment, and with generational change young people are inclined to change jobs more often. You’ve also got the ageing of the population, and all of those factors combine to make it much harder for companies to attract and retain good staff,” he said.

As such, Murray said the most progressive organisations are realising the strong competitive advantage they can develop through effective HR capability.

“It obviously puts HR much more in the spotlight.”

Murray said good companies can hold some sort of quantitative discussion around HR reporting and key performance indicators such as staff turnover, board responsibility for HR issues, succession planning, flexible work practices, management quality, reward and recognition, internal communication and mature age worker retention.

Murray gave the example of ANZ, which introduced more flexible maternity leave arrangements, leading to a 20 per cent improvement on the return from maternity leave-rate. “They saved themselves about $3 million per annum. So there’s a hard bottom line impact of culture change,” he said.

Murray gave the example of Orica, which was a serial underperformer in the late ’90s and to the beginning of 2000. When Malcolm Broomhead was appointed CEO he selected a new management team, and identified culture change and the way the company managed capital as key issues for the company.

“Orica reaped incredible financial returns from the cultural change program Broomhead instituted. That was really a key plank in his strategy.”

Investors will also look at organisational culture for key risk indicators when making investment decisions, Murray said.

“We’re actually taking a much broader view of risk than other participants in the market, by looking at factors such as culture, governance, HR management, contribution to the community and of course environmental risk,” he said.

Some CEOs were more switched-on than others when it came to culture and risk, according to Murray. “When you ask some CEOs about this, they’ll fob you off and say, ‘Oh that’s not important.’ They just don’t care about it. At the other end of the spectrum, you’ll have some CEOs who say, ‘Wow, we’ve been doing all this stuff and no-one’s ever asked us that question before’,” he said.

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