As a value investor who has spent most of his career dealing
with emerging markets, I have always felt that the role of culture in risk
assessment has consistently been underestimated.
This is so because national cultures evolve very slowly; George Kennan famously observed that
Custine’s Letters from Russia,
written in the 1800s, were the best guide to Stalin’s Soviet Union and still
quite relevant to Brezhnev’s.
Another example of this phenomenon is how the culture of conquered
nations, over time, prevailed over that of its invaders. Think of Gaul and the Roman armies, or Mexico
Finally, when assessing sovereign credit risks, it is the
willingness as much as the ability to pay that defines which country defaults
and which doesn’t. Some countries, like Argentina and Greece
But culture is also what defines corporations, for better or
for worst. In a sense, it is like the
dark matter in the universe, you can’t see it but you can feel its influence.
I thought about that when the Fed disclosed the results of
its stress tests on the top 19 banks in the US
I would put at least as much weight in corporate culture as
I would on the test results. Why? Because good culture is the ultimate safety
net. CEOs can say whatever they want,
put out “bibles”, codes of conducts and the like, but they can’t vet every
employee’s decision, or lack thereof.
Down in the trenches, a strong culture will stop (or limit) wrongdoings,
let an employee ask for help or quickly admit to a mistake.
Strong banks exhibit discipline in lending, respect for
credit analysis; they also foster a culture of spending restraint, and they
pass along their values as much informally (meaning face to face) as they do
through formal seminars and written materials.
In banking, financial liabilities in banking are 10 to 15
times as large as capital; that compares with zero to 1 time in industry and
commerce. Consequently, the margin of
error is far smaller in banks vs. industrials, and the importance of corporate
culture that much greater, in my view.
Warren Buffett likes to tell that he looks to invest in
companies that enjoy wide moats, meaning by that companies whose competitive
position is well defended. I think of
good culture as a wide moat too, against threats from inside, and sometimes, too a lesser extent, from outside.
But good culture, professional reputation and honor if you
will, is easily lost. As Marcel Pagnol’s
character, César, famously said[1], “honor is like matches, you can only use it
once”.
