When we meet with a company’s executives to assess their business as an investment proposition, we always ask “what can you tell us about your culture?”. It is one of a number of ways we build our understanding of a business’s organisational values, beliefs and behaviours.

Our evaluation of a company’s culture forms a critical aspect of our investment approach due to the inherent impacts of culture on financial performance.

Based on our investing experience, we believe a positive culture gives a company a powerful competitive advantage relative to its peers. This view is underpinned by research demonstrating a strong correlation between a company’s culture and its bottom line.

Numerous studies provide compelling evidence that companies with a positive organisational culture have better financial outcomes, including stronger share price performance.

For example, research by Harvard Business School professors James L Heskett and John Kotter found companies with “performance-enhancing cultures” had average revenue growth four times higher than firms with poor culture.

In Australia, CLSA analyst Jan van der Schalk recently developed a quantitative approach for measuring corporate culture (including employee engagement and gender balance) and linked this metric to tangible financial outcomes. Using environmental social and governance (ESG) data as a proxy, his research model shows that the share price performance of “culturally sound companies” outperformed the broader market.

Financial upsides

Creating and fostering a positive values-driven culture delivers companies a multitude of benefits that generate financial upsides.

A key benefit is higher levels of employee engagement, which typically leads to lower turnover rates (reducing recruitment and training costs), greater productivity and better customer service, resulting in higher sales. A positive workplace culture can also encourage innovative thinking, organisational efficiencies and increase a company’s capacity to respond positively to change.

Conversely, organisations with poor workplace culture reflected by low employee engagement scores experience higher levels of absenteeism, lower productivity and higher staff turnover.

Creating and developing a positive workplace culture is particularly important to attracting and retaining millennial workers. This cohort now makes up the largest proportion of the working population and places great weight on workplace culture when rating job satisfaction.

Evaluating culture

As a general rule, reported information (such as an annual report) provides very limited insight into corporate culture. We spend considerable time gathering insights through numerous other sources in our effort to understand and rate a company’s culture.

Face-to-face meetings give us the opportunity to ask for details about how the company’s leaders (as well as second and third layers of management) cultivate a positive corporate culture and empower their employees. Meetings also give us the chance to ask about employee turnover rates. This metric can often be a particularly potent indicator of a company’s culture.

Visiting a business’s operations allows us to gather small, yet often highly insightful, details to evaluate its culture. For example, during site tours we can observe if managers know employees by name and how they interact with staff at all levels. We can also see how stated organisational values, such as safety, are practiced.

Through personal networks (including family and friends), it is often possible to get an unfettered view of a company’s culture from its employees. Online reviews can provide further perspectives from employees with websites such as glassdoor.com and seek.com.au allowing them to comment on and rate employer businesses.

A company’s net promoter score (NPS), which effectively measures how likely a customer would be to recommend a brand to friends or family, can also help gauge its culture. The NPS offers a useful overall customer satisfaction rating which can be reflective of culture, particularly for businesses with a significant proportion of customer-facing staff. Not all companies measure their NPS and only some will report it.

Who we rate well

Among the companies we rate highly for a positive corporate culture is Corporate Travel Management. Managing Director Jamie Pherous has a great rapport with employees and the company has high levels of employee engagement evidenced by low staff turnover. To management’s credit, as Corporate Travel has grown it has successfully maintained its high quality organisational culture. Since listing in December 2010, the company’s shares have surged from $1 each to almost $19 at the time of writing.

With more 400 staff across three countries, we also have the greatest regard for the corporate culture of Silver Chef Limited. The leadership team of the hospitality equipment funder recognises that the company’s success is contingent on customer and staff engagement. Silver Chef is focused on acquiring staff aligned with the business’s core values and purpose, noting this “builds value for shareholders”. The values include work-life balance, health and happiness. Since its share market debut at $1.65 a share more than a decade ago, Silver Chef shares have climbed to trade north of $12 at the peak.

Since culture can greatly impact companies’ financial performance, it is a critical factor for investors to consider when assessing a company as an investment. To complement traditional methods of stock analysis, investors should consider a range of largely qualitative indicators that measure management’s success in cultivating a positive culture.