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Every organization – whether a business, a not-for-profit entity, or government – reflects and operates from a unique culture. It’s an inherent and essential element that brings order to the internal and external environments6 and reduces uncertainty7 among members of the group. The quality and strength of cultures explain many of the differences in organizational performance. But culture often operates below the surface of an organization, so that studying the abstraction of culture is elusive.

Organizational culture is especially important to the workings of a knowledge transfer business, such as investment management, because much of the work produced is intangible, and the environment changes so rapidly. Accordingly, culture is a critical component of any professional service firm, and we have made culture the introductory topic for this book.

Culture is a subject that has occupied management consultants and academics since the 1950s. One definition that we have found useful was put forward by Edgar Schein, an early scholar on culture and leadership, and today professor emeritus of MIT’s Sloan School of Management. He writes:

“The culture of a group can.. be defined as a pattern of shared basic assumptions learned by a group as it solved its problems of external adaptation and internal integration, which has worked well enough to be considered valid and, therefore, be taught to new members as the correct way to perceive, think and feel.8.. Culture is to a group what a personality or character is to an individual.”9

Schein adds that culture often is those principles and beliefs a founder or leadership set has imposed on a group – and which have worked out well: “[The] dynamic processes of culture creation and management are the essence of leadership, and make you realize that leadership and culture are two sides of the same coin.”10

The owners or managers of an organization might consciously work at developing a culture, or a culture may evolve on its own as the result of years of decision making, but a culture is present in any setting where people are working toward common goals. In a new organization, culture can be very strong, as it is one of its few assets, and crucial to its early efforts.

Employees have a hand in corporate culture as well. “Not all of corporate culture is created from the top down,” wrote Andrew Lo, a professor of finance at Massachusetts Institute of Technology, in a paper on corporate culture in finance. “A culture is also composed of the behavior of the people within it, from the bottom up. Corporate culture is subject to compositional effects, based on the values and the behaviors of the people it hires, even as corporate authority attempts to inculcate its preferred values and behaviors into its employees.”11 Indeed, an organization benefits from a diversity of opinions to prevent “groupthink.”

“Most companies’ culture just happens; no one plans it. That can work, but it means leaving a critical component of your success to chance,” wrote Eric Schmidt and Jonathan Rosenberg, executive chairman and adviser to the CEO, respectively, at global technology giant Google Inc.12 They observe that the right time to plan a culture is early on, because after it takes shape – consciously or not – the founding principles are likely to reinforce themselves, as like-minded people will be attracted by them to join an organization, and those with other viewpoints may not.

The values and principles of a culture permeate every aspect of a business: operating strategy; products, services, and relationships with customers; firm structure and business model; “people processes”; and governance. Culture determines relationships among authority and peers, an organization’s common language, granting rewards and status, and the measures of success.13

Thus, culture is a shared view of how to carry out day-to-day tasks, as well as dealing with unusual conditions – how the firm’s long-term principles inform short-run actions. Culture also determines how a firm treats its customers and employees, and how the employees treat each other. Accordingly, organizations fortunate enough to arrive at the right culture gain a competitive advantage that carries the firm toward its long-term goals. In this section, we will consider the different approaches firms take to building and expressing culture and, in particular, its importance to success in the investment management industry.