Flight Centre and the importance of culture

Wilson Asset Management

In recent weeks, US tech giant Uber released explosive details from an independent report into the company’s controversial and toxic culture. A four-month investigation followed claims by employees of widespread sexism, sexual harassment and bullying.

The financial and reputational costs to Uber have been significant. Commentators estimate around $10 billion has been wiped off the private company’s value, while its US market share has plunged more than 8 per cent this year as a series of company-related scandals take their toll.

The culture crisis has been a catalyst for CEO Travis Kalanick to resign, reportedly at the insistence of investors. In addition, more than 20 employees have been fired as part of Uber’s efforts to change its notorious “bro” culture.

A competitive advantage

Uber is a salient example of the positive correlation between a company’s corporate culture and its fiscal performance as reflected by a body of evidence. Most notable among the research are findings by two Harvard Business School professors showing shares in companies “with performance-enhancing cultures” increased an average of 901 per cent, while shares in companies “without performance-enhancing cultures” rose just 74 per cent over the same period.

In Australia, CLSA analyst Jan van der Schalk’s research modelling shows “culturally sound companies” outperform the broader market when using environmental, social and governance (ESG) data as a proxy measure of culture.

With these findings reflected in Wilson Asset Management’s own investing experience, our evaluation of a company’s culture forms an inherent part of our investment approach. A positive, values-driven culture creates a range of benefits and financial upsides that give companies a powerful competitive advantage relative to their peers.

A key benefit is greater levels of employee engagement. This generally leads to lower employee turnover rates and, in turn, cuts recruitment and training costs. Other advantages include increased productivity and better customer service, leading to higher sales.

A strong, values-based culture can also foster innovative thinking, improve organisational efficiencies and increase a company’s ability to respond to change effectively.

Conversely, a poor organisational culture, as reflected by low employee engagement scores, has been shown to result in poor productivity and high staff turnover. The corporate regulator, the Australian Securities and Investments Commission (ASIC), has recognised the impact of culture on corporate governance practises, given culture drives conduct, or misconduct as the case may be.

In addition to affecting trust and confidence, the regulator has noted: “Poor culture often leads to poor outcomes for investors and consumers impacts on the integrity of the Australian financial markets.”

Evaluating culture

Unlike a company’s financial performance, its culture cannot be as readily measured. Reported company information, such as annual and sustainability reports, may give some details about a company’s culture. However, the information is generally limited.

Therefore, our investment team spends considerable time and energy understanding and evaluating a business’s culture through a range of predominantly qualitative measures.

These can include observations of a business’s operations, employee turnover rates, competitor insights and net promotor scores (NPS), if reported.

The most valuable insights invariably come from meetings with company executives, as they provide the opportunity to drill down into details about how their values are implemented and employees are empowered at various levels. These face-to-face interactions and site tours can also reveal if management practises the stated culture. For example, in their interactions with staff, we look to see if they know them by name.

Valuable insights can also come from feedback on employer review websites such as glassdoor.com.

Best practice – Flight Centre

With around 20,000 employees across the world, Australia’s largest travel agent, Flight Centre Travel Group, considers its people to be its most valuable asset. It invests in its culture in a number of ways, including through various professional and personal development programs.

Flight Centre’s Brisbane headquarters embodies the company’s culture and the value placed on having fun.

The office is replete with bus, tram and plane-shaped meeting rooms, a multi-storey internal slide for staff to move from floor to floor, a fully equipped gym with wellbeing programs on offer, a fun breakout area to foster collaborative teamwork and a company history museum that covers the walls over multiple floors.

Walking through the office provides a clear sense that staff, at all levels of the business, have a genuine commitment to living the company’s values-based, purpose-driven ethos.

Flight Centre’s consistently low level of staff turnover is a measure of management’s commitment to achieving its successful culture, which it has maintained over more than three decades and throughout its global expansion.

Investment implications

With a company’s long-term sustainability and financial success largely dependent on management’s success in developing and enhancing its culture, it is essential investors evaluate this factor.

Considering a range of largely qualitative aspects, an assessment of company culture should complement a more traditional approach to stock analysis, including a company’s earnings per share and price-to-earnings ratio.

For the millennial generation, workplace culture and alignment of personal and organisational values is important to their job satisfaction. With this generation predicted to remain the largest portion of Australia’s workforce for the next decade, creating a positive culture must be a priority for companies.

For investors, understanding how effective companies are at achieving this will remain imperative to successful investing.


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Emma Davidson

Great article, could not agree more that culture will play more and more of a role in the future of successful companies. Thanks Kate.

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