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Using culture to reshape capitalism

Using culture to reshape capitalism

21 April 2021

Starting a day’s work on a cheap door was just part of the daily grind for Amazon’s early employees. The company famously used doors as desks to create a constant reminder to focus on cost cutting that can be passed on to customers.

In stark contrast to Amazon’s early days, Apple’s spectacular US$5bn Infinite Loop headquarters was built to foster a culture that would create beautifully-designed high end products1.

These two distinctly different cultural decisions have both had their successes. Hard to define, the intangible strength of corporate culture can make or break a business. Through design, corporate culture defines how employees make decisions when no one’s watching. When successful, it gives purpose to what a company’s trying to achieve, permeating through every level of the organisation.

A strong culture can attract talent and pull people together to achieve great things. Or, it can stifle ambition, embed unwanted risks and destroy a business.

In fact, a highly engaged organisation can have 18% higher revenue per employee compared to the average business2. Meanwhile, 86% of potential employees wouldn’t apply or continue working for a company3 with a bad reputation with previous employees or the public .

Culture impacts all aspects of how a company carries out business, from customer acquisition strategies and after-sales service models, to brand positioning, R&D focus and employee remuneration. It’s the net effect of these many subtle differences that can make the total difference between two competitive companies very large.

While a strong corporate culture can be the secret sauce that defines successful businesses, it’s increasingly a powerful engine for defining purpose in the new world. In last year’s report, we argued that business is at the centre of our transition to decarbonise the world and restore it to its former sustainable self.

Those companies that have recognised this are not only often better positioned to navigate the risks that this journey will unpredictably present, but should also enjoy the opportunities that will arise. Increasingly, a new breed of company is gaining success4 – one which embeds a long-term culture that responsibly assesses the impact of every decision on the world around us, seeking to maximise outcomes for all stakeholders.

Unless otherwise stated, companies referenced in this report were companies held by our Sustainable Total Return Strategy as of 31 December 2020 and may no longer form part of our portfolios. Reference to specific companies in this report is not an opinion as to their present or future value and should not be considered investment advice or a personal recommendation. They’re included in this report to demonstrate the positive impact companies can have.

Seeing sustainability as an opportunity

Croda, a specialty UK chemicals company, took the decision to embed sustainability into its culture years ago. The company provides value-add ingredients to end markets which include personal care, healthcare and agriculture. Products include the active ingredient in sun screen, bio-based detergents or excipients for vaccines.

It recognised that its customers would increasingly want ways to enhance the sustainability credentials of their own products, so focussed on ingredients that would be climate, land and people positive. With a culture underpinned by a social purpose, Croda has even taken the extraordinary steps of exiting profitable business lines that aren’t net positive for the world, solely because this is the right thing to do.

Similarly, Nike - whose history is rooted in using innovation to progress sport - now recognises that it faces the broader challenge of protecting the future of sport itself. It does this by promoting a culture of diversity, sustainability and equitable access to sport. While Nike was somewhat tarnished by the supply chain challenges it faced in the 1990s when it was still a young company, its actions are now defined by this new purpose.

Its aspiration to be a leader in diversity and inclusion can be seen through its ‘Until We All Win’ campaign. Nike is prominent across several social injustice causes, including Black Lives Matter5, investing heavily to promote equality in the communities in which it operates. Nike also maintains 1:1 gender pay6 and has been named the best place to work for LGBTQ+ equality by the Human Right Campaign Foundation for 19 years in a row7.

Across its complex supply chain, the company has moved to improve transparency by becoming the first company in its industry to disclose its entire third-party manufacturing facility footprint8. At the same time, it’s widely-used anonymous supply chain worker survey sees over 270,000 workers annually give insight into working conditions – leading to greater facility oversight9. With a supply chain of over 500 third-party factories10 this is a great challenge, however these actions help to improve visibility and allow for greater independent observation.

Its ‘Move to Zero’ programme reflects its journey to zero carbon and zero waste. Nike is the industry's largest user of recycled polyester11, while technologies such as Flyknit12 – a durable and flexible fabric - minimise material wastage. Designers are encouraged to promote sustainable product innovation through their Materials Sustainability Index; which scores 57,000 materials on their sustainability credentials13. This is all underpinned by a culture of driving sporting excellence, which attracts some of the world’s top sporting talent.

Colgate-Palmolive: polishing its green credentials

Corporate culture starts with the leadership of a business. To embed sustainability into a company’s purpose and drive environmental and social change, you first need effective governance. This includes long-term commitment to incentivise executives based on their management of sustainability criteria.

Colgate-Palmolive, which has been one of our portfolio holdings, is an example of this. For nearly ten years, management compensation has included Environmental, Social and Governance (ESG) performance as a factor14. This has helped embed the environmental and social impact of their actions into decision making.

It’s not a coincidence that the company launched the world’s first fully recyclable toothpaste tube in January 202015. This is no small task. Toothpaste tubes - made from a combination of aluminium and plastic - were previously thought to be impossible to recycle. Every year, 20 billion toothpaste tubes are thrown away, having a detrimental impact on the environment16. Colgate-Palmolive further demonstrated their commitment to sustainability by making the designs publicly available to drive global change.

Of course, instilling a culture in a large company is anything but straight-forward. The larger the business is, the harder this can be to achieve as organisations often have very different subcultures within individual managing teams or office floors. For example, at Amazon, the practices of senior management and software developers may seem far-flung from the logistics centres.

Colgate-Palmolive took steps to ensure that sustainability didn’t just apply to flagship products, but was a way of life throughout the business. The organisation focused on designing and constructing environmentally-friendly manufacturing and technology hubs, warehouses and offices.

They were awarded the world’s first LEED Zero certification for their New Jersey manufacturing facility for net zero carbon, energy, water and waste17. Colgate-Palmolive has more TRUE Zero Waste certified projects on more continents than any other company in the world. In short, embedding sustainability into their culture presents Colgate-Palmolive with several opportunities which have seen it being recognised widely for its efforts18.

Evolution and revolution

As companies grow and their objectives change, so too must their culture. Failing to keep a culture relevant can see negative traits become entrenched to the detriment of company performance. This was an issue that Microsoft faced before being completely turned around in one of the most successful cultural transformations in corporate history.

In the years running up to Microsoft’s appointment of Satya Nadella as CEO in 2014, the company had developed a siloed and uncollaborative reputation. In his first message to employees, Nadella made his intentions clear. He would break down these silos, replacing them instead with a culture focussed on collaboration, empathy, diversity and inclusion19.

Combined with the advent of artificial intelligence (AI), which democratised technology, this cultural revolution allowed people across the organisation with no engineering experience to come up with new ideas, be encouraged to discuss them with colleagues, and bring them to fruition. This led to an explosion of innovation.

By placing a cultural emphasis on empathy, teams were encouraged to collaborate and make each other successful. The creation of a more diverse and inclusive workforce also brought about diversity in thought. People with disabilities were encouraged to view it as a strength20. This drove innovation in accessibility tools for the 900 million users of Windows 1021.

Innovations include AI-driven subtitles in Teams, video call background blurring for deaf lip readers, and the ‘Accessibility Checker’ (next to the Spell Check button in the software)22. It makes sure that content is easy to read and edit for the 180 million people of all abilities who use Office 36523.

There are over one billion people in the world who have a disability24. By promoting a culture of diversity and inclusion, Microsoft has been able to identify accessibility challenges and build transformative innovation to promote a more inclusive society.

Building back better

The pandemic has allowed us to pause and reflect on the type of world we want to live in as a society. Both customers and employees are becoming more discerning about the companies they wish to be associated with. This will create both risks and opportunities for businesses. Throughout the pandemic, many companies responded to the crisis by doing what they could to help. This focus on greater stakeholder awareness is beginning to reshape capitalism.

Those companies that are redefining their culture and purpose to reflect this new world – to maximise value for all stakeholders – should be better positioned to mitigate risk, attract better talent and capitalise on the incredible opportunity sustainability presents.

Investments can fall as well as rise in value. Your capital or the income generated from your investment may be at risk.

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