Don’t ignore culture in trying to solve the investment puzzle

Better internal investment integration and co-ordination will underpin long-term returns for two of the world’s largest investors, but they’re also closely focused on how cultural issues – including diversity and team-building – affect whole-enterprise performance.

When the Canada Pension Plan Investment Board was initially endowed with C$200 billion (then around US$146 billion) in 1997, it did what it had to do: it went out and built an investment capability, across asset classes, and across geographies.
But as the fund turns its attention to how it’s going to operate as potentially a C$1 trillion ($730 billion) fund, CPP chief investment strategist Geoff Rubin says a siloed structure won’t work.

Now, the fund is examining how it can integrate and foster better communications across its investment and administration operations, not only to reduce costs but to also improve investment performance. But CPP is contemplating more than just a structural reinvention; it’s also thinking hard about how cultural factors affect team success.

“The solution to the problem was very clear 15 years ago: go build active investment capabilities to transition that passive liquid portfolio into active investments that can generate superior returns at the same level of risk,” Rubin says.

“That was it: go build it. Go build a real estate investing team and capability and go build private equity, and credit and hedge funds, go build these teams – oh, and go build a risk department and an HR department and all of these enabling functions.”

Now, Rubin says, as CPP Investments plans for the day it reaches C$1 trillion in assets it’s facing a different challenge.

“It’s about orchestrating those active capabilities in the most effective ways,” Rubin says.

“And it’s about building connections among them to help develop and sharpen some of the edges [of competitive advantage] that we talked about earlier.

“This is a really important evolution for our organisation, because for about 10 years, we were an organization [that] could do it all, because we had this huge liquid passive portfolio to draw upon. Now we’re in a land of constraints.

“This need to prioritise is increasingly becoming a demanding challenge for us as we transition from this organisation that has been building capabilities to one that’s orchestrating them in the most effective ways.”

It’s about more than investing

The operational and logistical issues that come with connecting the organisation’s disparate internal elements into a coherent whole are significant. But Rubin says “you can throw all that stuff on the fire and burn it if you don’t have the culture that people are really indexed to and enthusiastic about the overall organisational mission”.

“When we were in silos, people felt identity and fidelity to their group or their team as much or even more so than the total organisation,” he says.

“We would do these annual offsites where the teams get together, and they would just kind of glower at each other from different corners of the room. There was something culturally missing around a real excitement to not just connect, just for kind of baseline reasons, but [also] to connect in order to make ourselves better investors, in order for us to be the most effective private credit investor in the world, to have those people really hungry to connect with their colleagues in ways that they can draw upon their relationships or their insights or their techniques and use that in their investing area.”

Rubin says CPP’s rebuilding will be “a combination of some of these structural elements of how we allocate capital and how we evaluate the portfolio, but it’s really going to rely on this cultural piece of making sure that that people’s identity in this organisation is CPPIB”.

Diversity is crucial

An appreciation of cultural issues has also informed how the $307 billion CalSTRS has rethought its approach to investing. The fund’s chief investment officer Chris Ailman says diversity within an organisation is critical to support better decision-making and producing better outcomes for fund members.

“The best way I can put it is, if your entire staff was all hired from one university or one business school, you actually probably would be a little bit worried,” Ailman says.

“And then on top of that, they’re all the same. Let’s say they’re all from one part of Australia. It’s not very diverse. It wouldn’t even matter if they were different ethnic backgrounds. You would look at that and say, ‘well, it’s kind of close to groupthink and I’m a bit worried about that’.

“And that’s really the way we tried to approach this is from an investment standpoint, which is, diversity brings out better diversification, better thought.

“There’s a reason it was called Lehman Brothers, rather than Lehman Sisters or Lehman Family. I often say to people, just think of your families. Things are usually debated heavily before decisions are made. And that’s what you want in an investment process.

“You want somebody who can look at things from all different sides and really debate it out. We know from biology and human psychology that people think in different patterns. And that’s a good thing.

“So instead of having everybody, you know, look like me – pale, male and stale – and think in a little A-B-C-D-1-2-3 kind of linear pattern, I want people who are different, come from different backgrounds, different schools and think about it totally differently.

“And boy, we have that. And it leads to lively debates, which are good because I think it yields better investment decisions. It doesn’t mean we avoid all the risks, but you certainly know when you get people with different backgrounds, they just look at the issues in different ways.”

You get what you pay for

Rubin says CPP aims to align remuneration and compensation structures with the concept of being a single investment entity, but this has some clear challenges. It’s not always obvious how a single individual’s effort contributes to the whole-enterprise result. Some will resist the idea that their compensation might be dependent on the performance of others in the organisation as much as their own. Sometimes non-monetary rewards can produce the required outcomes.

“Historically, folks have expressed limited ability to impact and have line of sight to exactly how their efforts are driving the total fund,” he says.

“In a big organisation it can be difficult [to define] this line of sight, this conductivity of incentive and alignment, and drive to what you’re trying to achieve at the total I think is that is vitally important. Comp is a piece of it.

“It’s not going to be the whole, and some of it is reward beyond compensation – it can just be what culturally people really prize internally; or the success stories; or the congratulation emails; or are the promotions centred around those who are making the organisation a better investor, or is it around people who are just focused on their narrow P&L to the exclusion of what’s happening elsewhere?

“I think we need to work through all of that and comp is going to be a big piece of it.”