FTSE Russell is an index provider and research houseunder the LSEG umbrella.They specialize in convening the best ideas on evolvingmarket trends and helping to developstrategies for global investors.In this series, we look at the evolutionof the biggest of today's trends.In order to understand any company,you need to understand the culture and the peoplethat run it.It's only after you understand them both that youcan start to predict the trajectory that the companyis on.To discuss the importance of correct managementand governance, I talked to Dr Kai Li,Professor of Finance at the Sauda School of Business.Well, Kai, thank you very much for joining us for our chattoday.We're going to be talking particularlyabout corporate culture, which I know is your areaof expertise.But before we talk about the evolutionof corporate culture, can we perhaps just define whatwe mean by corporate culture?Corporate culture is just a set of beliefs and normsthat are guiding members of an organization in allcircumstances, anticipated or unanticipated.So is corporate culture, is it somethingthat's organic to a company or is something that's setby the leaders?Great question.It is organic and typically we would say corporate culturecomes from the top.Lead by example, that's how the leaders can shape,develop organizations, implicit rules,unspoken rules of how to behave in any circumstance.So can you give us some examples of, you know,good corporate culture versus what you would considerpoor corporate culture?Good corporate culture or strong corporate culture is,I guess they're just in, because first of all, cultureis not static, it's dynamic.So it really depends on the market conditionand how the world evolves.I know the theme of this particular forumis about sustainability and also digital assets, etc.But think about five, ten years ago, those things,ESG, CSR, were not as high on peopleor corporate world mind as of today.So that's why when I studied corporate culture,the buzzword would be like innovation,quality, teamwork, integrity, etc.But I anticipate sustainability, climate change, social,economic, environmental performancewill be high on every modern corporationand their leader's mind going forward.A theme that you've looked at is the relationshipbetween corporate culture and a company's performance.Can you talk a little bit about what findings you've hadfrom looking at what effect good corporate culturehas on the performance of a company?In corporate world, everythingis co-determined at the same time,so it's very difficult to say there's a causal effect.Say strong good culture will result in good performance,but what we can say is there's a trade-off.So to build a strong culture takes time, effort,and the resources.So in the short term, you might not be outperformingyour peers, but in long term and during bad times,you really reap from your investmentin good corporate culture.So that's interesting.So, um, so during the good times,it's quite difficult to see whether the corporate cultureis good or bad because it's only under times of duress where itgets tested.Is that correct?That's right.Because in crisis time, like the most recent COVID,there's, it's an unprecedented situation.There's even the top management is at a loss.What to do.But if there's a core value management, a rank and fileemployees will pitch in, they will do more without beingasked and they also not asking for higher pay.Today, for example, that's what we observe actuallyin the real world.So specifically on that, how has the pandemic changedcorporate culture today?Pandemic really raised great awareness that a firmhas to have his core value guiding principle for employeesto outperform without asking for immediate compensation.So that just so corporate culture is almostlike insurance.In bad times, you really benefit from itbecause employees are not pressing you for higher payin order to work more, and employees will be highlymotivated to contribute, especially like innovation,customer service, product development,to help the firm overcomethe momentary major setbacks.Okay, so when I think about the moretraditional companies, the banking firms,the legal firms, I would think that the corporateculture there is probably less good perhaps than someof the more newer technology companies.Is that a fair assumption?It's a great observation.In corporate finance, or in the corporate worldin general, thereare industry-specific effects.So exactly as Jimmy Yu kind of conjectured,so that's what we see.So for high-tech companies, they will be verystrong in innovation and quality.So customer product services to develophigh-quality product services to satisfy their customers.So that's the high-tech industry.We also see during the pandemic that we are fully aware ofthe healthcare industry.It's just a huge contribution, so important to all of us in alldimensions.They actually also score very high in teamwork and integrity,which is reassuring to know.Today, I'm going to talk about ESG investing and how ithas changed over the past five years.ESG is a watershed event.Goldman was a great example, and also M&A is anothergood example that culture will be shaped, which Iuse IBM's acquisition of Red Hat.So here, with this climate change,we all live and breathe with extreme weather patterns,so there will be rising awareness about we need to dosomething.Instead, just go to the bottom line.Now we have the triple bottom line, like people, profit,planet.So ESG, Environmental SocialPerformance, diversity itself is partof the social performance.So they will definitely reinforce each other goingforward.One of the other topics I wanted to discuss with you is howcorporate culture is going to change over the next fiveyears or so.And one thing that is inevitable is the place of AIwithin companies.And I think no matter what company you are, eventhe more traditional ones like accountancyin the medical world, AI will play a part.So how is that going to affect corporate culture,and what do we need to do now to sort of prepare for it?It's a multifaceted question.I would think, like in my own work,I use actually machine learning in order to capture culture.Just like from very beginning today during the interview,you will ask me how to define culture.I need to be balked because it's something you live and breathe.My personal experience, I'm very fortunate to start ina place with a great culture, with collegiality.So culture is really something so-called intangible assets.You can only experience it, but it's not quantifiable.So that creates great, like there's so much work.It's not only in finance, in accounting,in management literature.Everybody talks about corporate culture slashorganization culture, but it's just sohard to quantify it and then to establish a relationshipbetween culture and performance.So previous work prior to mine, people just do questionnairesand a service.But that is just going to be a very small sample.You always have several related problems.So what we did is I was very fortunate to be able to workwith people with strong computer science background.Then we decided to capture culture from whatthe top management preach and practice.So we actually use textual data, which is earnings calltranscript, given your background in capitalmarket.So the earnings calls, the purpose of earnings calls,is really to talk about the firm's performance,instead of promoting culture.So that helps us not to have these cheap talk kindof concerns.Just lip service, you mean?That's right.But if the company has a strong culture,the words of the management will reveal the core valuesthey cherish, which they embrace.So that's what we do, is we score culture, use machinelearning techniques from earnings transcripts,which typically CEOs, mostly, most times it's the CEOsand the CFOs talking about past performance.So it's an unintended consequence for usto capture culture.So I actually read in one of your papers that you wentthrough as many as over 200,000 transcripts.So how do you do that?This is a machine that's going through picking out phrasesthat reflect, in your opinion, good or bad corporate culture.So what would be some of the phrasesyou would look for?So for example, like teamwork, we would be looking at synonymsto teamwork, such as cooperation,collaboration, but that's not enough.So the technique we have is called word embedding.So what we do is actually we develop our own culturedictionary from a concept in linguistics.Words of similar meaning tend to show up in the same sentence,like just neighboring words.So that's how we develop our own culture dictionary.We all know Oxford Dictionary, that's for standard English,but here we develop our own culture dictionary startingfrom basic C words, say to capture the cultureof teamwork.We service teamwork and two common seed wordsis collaboration and cooperation.Then we just go to the earnings cost transcriptsand then look at any other words show up related to teamwork,collaboration, cooperation, and we have a frequencycomplex algorithm, then we're able to identifyother set of words that all suggest talking about teamwork.And so your conclusion being that those earningscalled transcripts, which included more of theseteamwork style phrases, they have beenthe better performing companies.Yes, yeah, that's what the associationwe established that this trade-off thing.So it might take time and effort to build up culture,but once you have strong culture,it really helps you in the long run.I see.So, you know, for any investor out there who's lookingat investing in a particular company,whereas perhaps you would have originally just lookedat numbers and balance sheets and things like that,now you need to be looking at, you know, whatis the corporate culture there, which is somethingyou're measuring.So that makes a lot of sense.So going back to the issue specifically on AI,I may ask you if you have a particular view on howquickly AI will be integrated into the workplace,but also how will it change corporate culture?Because this is a cutting-edge technique.On one hand, there's an ethical issueabout privacy, right?So given I'm a Chinese national, so facial recognitionis ever-present and they never ask for approval.So I think that part we really need to pay attentionto is respect of privacy and also recent schedulesby Facebook changing name to Meta, et cetera.So there are some huge downside if you not pay attention to howto manage data for commercial useabout receiving input from the customersget like a permission.But on the other hand, it's really powerful too.So just like my own research because of AI machine learning,I was able to capture corporate culture.That would be a quite important metric for the investmentcommunity when they look at their portfolioformation.For example, if they are very high on ESGor environmental social performance,they can actually use UI to score potential portfoliofirms and then make investment decisions.So, it's definitely beneficial,helpful.So, with some of the big tech companies,I imagine it's easier to have a better corporate cultureif you're a smaller company, but as the companygets bigger and bigger, is it possible to stillmaintain a good corporate culture even when you've gotcompanies like Facebook and Amazon that are just so big?Yeah, just you raised this question, this is a good one,you also asked from the beginning,so exactly how culture has come about,so definitely from the top.So like Alphabet, Google, they still have foundersin place.So they really shape the corporate culture.The other is definitely a competition,like how your peers are practicing.And you might not want to lag in behind if you are verybad in corporate culture.You might have an implode situation as wehave seen in some other companies.So five years out, let's say 2026,what do you think the topics will be we're talkingabout in and around corporate culture?That's a great one.I think these days they're going to be also an important roleplayed by regulation.So we have already heard that SEC is lookingat a mandatory disclosure on firms ESG performancethat given firms listed on the market,they need to risk capital from investors and they alsohave to comply with the regulatory requirement.So I definitely anticipate going forward,more of ESG related values will be an important partof organization culture.It's like you just cannot just look at the bottom lineprofitability, sustainability, and equity, diversity,inclusion will be the value drivers going forward.So I guess what we're getting to is, and this is somethingwhich I think your academic work is trying to concentrate on is,will we ever be at a stage where we can have a measurablenumber which tells us like what good corporate culture is?Because I'm thinking, if you're a young companystarting out now, is there certain boxesyou should be ticking, even if you're starting outtoday?As a firm's life cycle, at different stage of a lifecycle, you're going to havedifferent priorities.From my own research, given with a measureof corporate culture from earnings calls,that's by default, you are not a startup.You are not doing your quarterly earnings calls.But I would think, look at all the successful startupfirms, those unicorns, I think cultureshould be from the very beginning, like for you to beable to grow and to be successful.But in term measurement, that's hard because beinga private firm, by definition, you have no obligation to tellpeople what you are practicing, what you believe in,and how you train your employees with your organization.So that's a data challenge.Just so I'm clear, when you talk about the comingfrom the top, corporate culture starts the top,are you talking about CEOs and CFOs?We talk about the board of directors.So the stock market, right, I think 20% is by the high techfirms and they are run by their founders.And it's a corporate governance issue,because even though we say that our board is supposedto be arms and lines to be independent, but we allknow they are handpicked by the CEO.That's right.So the top is really the founder,the entrepreneur and the CEO.Which is unfortunate, because we're supposed to havean independent board, but it's just on the book,but not in substance.So reading between the lines, you may look at a companylike Facebook or Amazon, where the founders are stillthere, and you think it's a little unhealthyfor the founder and CEO to be also involved with boardselection choices.That's why that's a joke.It's like in the Facebook case, you cannot fire the founder,so you just change the company name.That's the Goying Joke.Sustainable investing and the role of ESGin corporate culture was something that was certainlytalked about for 10 years, but it didn't reallytranslate into investment opportunities.Now, due to the rise of indices allowing more direct investmentinto ESG and sustainable themes, capital allocationsare accelerating these trends, creating opportunitiesthat are only going to get bigger and more diversein the future.If you'd like to read more on this topic,please go to footsyrussell.com forward slash researchwhere you'll find much more information.
