The role of constructive challenge in high-quality investment decision-making
ACT Stewardship Council member Andrew Summers urges firms to build a culture where constructive challenge is at the heart of investment decision making, and shares how he looks for this aspect in the companies he invests with.
Making the case for good corporate culture in the investment management industry often – rightly – focuses on the values, practices and priorities of a business and how they impact the risk to businesses. Some of the most egregious cases of poor corporate culture have resulted in the most lurid headlines and the most devastating consequences to the businesses involved.
There can be no let up in the relentless focus on this tail-risk and how seemingly insignificant degradations of expected behaviour can lead to the most significant of negative outcomes. However, corporate culture is not binary: It is not simply either “good” or “bad” and whilst we could probably settle on a shared view of what good corporate culture is, we might disagree on what it looks like in practice, how to evidence it and how likely it is to impact customer outcomes.
Corporate culture should be considered alongside other key pillars of investment outcomes such as investment philosophy, investment process, risk management, team skill and cost. Just as we expect relative differences in these aspects to drive commensurate relative differences in investment outcomes, so to is this the case for culture. And differences of opinion between fund selectors on these pillars should be welcomed: that’s what makes a market.
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Investment decision-making is about improving the odds of being right and one of the best ways to improve those odds is to build a culture with constructive challenge at the heart of decision-making. To hold myself to the same standard, this assertion has been thoroughly road-tested academically.
It is intuitive and should be uncontroversial, but its value actually lies in what a willingness to constructively challenge and to be constructively challenged says about the people involved. To be willing to provide high-quality challenge is a sign of confidence, maturity, depth of knowledge and conviction. Equally, willingness to be challenged is also a sign of confidence and maturity but also open-mindedness and self-awareness.
These are all essential qualities for any good decision-making, in particular investment decision-makers. Constructive challenge should happen both up and down reporting lines, and across functions. (Some of the best challenges of my career have come from people with the least technical knowledge.)
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It should also provide for plentiful “off-ramps” for proponents of an idea to pivot or change tact before they become too attached to be willing to do so. Leadership should ensure sufficient time is allowed in processes for effective constructive challenge, in particular allowing those doing the constructive challenge time to be fully read up on the decision and for the recipient to give due consideration to the challenges. But it should also include clear and transparent parameters for when to make a decision or move on.
Constructive challenge works best when combined with a collaborative culture – a sense that people are working together, continuously, not showing up only when they have the chance to be in the spotlight with some well-meaning but potentially at that point resented "feedback". It should be paired with a culture of encouraging being generous with praise when deserved as this earns you the right to provide constructive challenge when it’s required. Cultures that only ever critique end up with less challenge, not more. And having well established rules of the game helps keep things professional, and not personal.
As with many measurements of culture, identifying it in real world can be hard. Understanding decision-making processes and how constructive challenge is hard-coded into them is key. It is possible that smaller firms lack these formal mechanisms but still foster a culture of constructive challenge.
For larger firms, they are necessary but not sufficient, because these mechanisms might just be window dressing. Turnover of personnel is a quite reliable indicator: smart people who aren’t listened to, or who don’t survive proper scrutiny, tend to leave. Speak to multiple members of a team to see if a credible picture of constructive challenge emerges. Reputation – in particular of senior leadership who play such a crucial role in encouraging constructive challenge, not least of themselves – is also important. Providing and receiving positively constructive challenge should be a key KPI for all team members.
The specific concept of constructive challenge is entirely consistent with the ACT Framework — Action, Challenge and Transparency. C is for Challenge, but the three elements are important together. Challenge without transparency risks people trying to interrogate decisions without having the information needed to do so effectively. Action without challenge risks poor decision-making. And Transparency provides the evidence against which both can be tested.
We’ve all been there: people silent in meetings, who then are full of opinions at the coffee machine later in the day.
Challenge that is gratuitous, not constructive or personal. Individuals who don’t have the information necessary to provide input that is value additive but so do anyway. Not knowing when it’s time to move on.
We all have a role to play to ensure our teams and our businesses provide the environment, incentives and frameworks - and discipline - for constructive challenge to play its crucial part in delivering good customer outcomes.
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