The Folly Of Blame: Why Investors Should Care About Their Managers’ Culture

The Folly of Blame: Why Investors Should Care About Their Managers’ Culture by The Journal of Portfolio Management

Jason Hsu, Jim Ware, and Chuck Heisinger

Many industry observers would agree with Charles Ellis’s assertion that, when it comes to achieving long-term success for an investment organization, culture and organizational values are “the only truly enduring factors” (Ellis [2004]). However, only a handful of managers have emphasized culture as an important attribute. Investment consultants do not appear to systematically assess managers,1 nor do investors appear to make hiring or firing decisions based on the managers’ culture. The business school finance curriculum does not mention culture as a key organizational attribute deserving the attention of firm leaders and manager selection analysts. These facts suggest that, by and large, the industry and academia do not believe culture matters in a useful way.

The investment industry’s lack of emphasis on culture contrasts interestingly with developments in other industries. According to a 2013 survey conducted by the Katzenbach Center (, 84% of 2,200 respondents from various industries report that “culture is critically important to success,” and 60% believe that “culture is more important to success than strategy and business model,” (Aguirre et al. [2013]). Lyons et al. [2007] find that culture meaningfully influences innovation and client service. Kets de Vries et al. [2009] argue that, even when change is necessary to a firm’s survival, organizational renewal is impeded by a dysfunctional culture and a lack of senior level self-awareness. This contributes to the high failure rate for change initiatives (Beer and Nohria, [2000]) as well as for mergers involving firms with conflicting cultures (Camerer and Weber [2001]). Killingsworth [2012] maintains that corporate culture has greater influence than do explicit rules and policies on ethical behavior and legal compliance.

In this article, we adopt two standard operational definitions of culture.2 The first views culture as a manifest pattern of cross-individual behavioral consistency (CIBC), or the coherent way in which employees perform tasks, solve problems, resolve conflicts, and treat customers and colleagues. The second, complementary definition views culture as a set of informal values, norms, and beliefs that underlie the observed CIBC. Both definitions are useful for understanding the survey responses and the empirical results of our study.

In our context, a strong corporate culture means a high level of consistency—that is, most employees can clearly articulate “how we do things around here.” A good corporate culture is one in which the members’ values and behavioral consistency are conducive to achieving the firm’s stated objectives. For example, a firm might be deemed to have a strong culture of blame if most people point fingers at others and expect colleagues to do the same when problems occur. This culture of blame would be deemed “bad” if the firm’s objective is to foster an environment of shared accountability focused on solving problems and improving results. In some situations, a strong culture of blame might be deemed “good” if the firm’s objective is to screen out thin-skinned individuals unskilled at assigning blame to others and deflecting it from themselves.

Why Did We Choose To Examine “Blame” In Investment Organizations?

For this study we are specifically interested in examining blame as a cultural behavior in investment organizations, exploring the beliefs which drive it, and identifying the beliefs and behaviors it might induce. Ultimately, we are most interested in discerning links to firm-level outcomes, which matter to owners, as well as to current and prospective employees and clients. Our findings may additionally encourage investment consultants to rethink how they evaluate investment managers.

A number of research efforts preceded ours. Dethmer et al. [2015] argue that blame, a powerful human motivator, is often the tool of choice for individuals in a position of power. This raises the question whether blame, despite its negative connotations, might actually be an effective tool for creating (short-term?) success for investment organizations. If not, why is blame as widely used as our investment industry data indicate?

In an experimental study, Gurdal et al. [2013] find that people regularly assign “unjustified” blame to others for uncontrollable outcomes. In other words, they blame others for what amounts to flipping “tails” in a game of coin toss. Unjustified blame is particularly unproductive, because it cannot modify behaviors in a useful way, but has toxic consequences. This tendency intensifies when there is a meaningful stake attached to the random outcome. In the investment industry, where short-term performance is largely random, yet has significant impact on firm profits and compensation (Goyal and Wahal [2008] and Penfold [2012]), unjustified blame might be particularly prevalent.



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