Culture and Character: How Blackwattle Assesses What Matters

At Blackwattle we talk about culture and character a lot… and I truly mean, a lot. 

A business’s culture is powerful. It can attract and retain outstanding people, build trust in times of challenge and adversity, and fundamentally it creates better investors. 

The well-known adage “culture eats strategy for breakfast” credited to Peter Drucker is simple and strikingly accurate. Financial performance and strategy are undoubtedly important, but it’s the character of people, and the culture of an organisation, that determine if plans succeed or fail. 

This isn’t philosophical musing. 

As Warren Buffett put it, when evaluating people, “you look for three qualities: integrity, intelligence, and energy. And if you don’t have the first, the other two will kill you.” 

At Blackwattle, we’d also add humility - but we’ll get to that shortly. 

Culture and Performance: What the Evidence Tells Us 

Does culture really drive financial performance? A growing body of research says yes. 

A landmark 11-year study of 207 companies by Harvard professors John Kotter and James Heskett found firms who actively managed their cultures grew revenues more than four times faster than those that didn’t. Their stock prices rose Up 901% vs just 74%.  

Culture wasn’t just a “nice to have”, it was the key differentiator. 

Investment performance studies reinforce this thesis. Companies that appear on “Best Places to Work” lists consistently outperform the broader market. Analyses of employee satisfaction and equity returns show that firms with more engaged employees deliver cumulative returns well above the S&P 500.  

Meanwhile, companies with the lowest employee satisfaction often underperform. 

From Posters to Practice: The Execution of Culture 

There’s a clear recognition gap between knowing culture matters, and actually executing on it. 

In a 2015 longitudinal study, John R. Graham et al found that a strong culture boosts performance, yet performance doesn’t create a strong culture.  Furthermore, in a survey of nearly 2,000 global CEOs and CFOs, 90% said culture was critical to their firms, and more than half said it directly influenced productivity and growth. Yet only 15% believed their own culture was where it needed to be. 

Clearly, many businesses struggle with execution. 

For too long, culture was reduced to bad 1990’s posters of ‘teamwork’ on office walls, and vague mission statements no one could, or can, recite.  Culture isn’t words on a page - it’s what a company consistently does. 

Atlassian is well recognised for its culture. Its culture is embedded through transparency, rituals that reward collaboration over ego, and systems that reinforce its values at scale.  Patagonia offers another example. Patagonia’s supply chain decisions, product design, and environmental activism, all reflect its mission to protect the planet. 

These companies show that culture comes to life in how people are treated, how decisions are made, and through our behaviours. When done well, it is a competitive advantage. 

Simply put, strong cultures are more innovative, attract and retain better talent, adapt faster to change, and ultimately deliver better shareholder outcomes. 

When Culture Fails: Lessons to Learn  

On the flip side, toxic culture can be almost fatal, even in companies with brilliant strategies or strong business models. 

A classic case study is the failing of Enron, the once Wall Street darling.  Enron was viewed as innovative, fast-growing, and widely admired. But internally, it fostered a culture of arrogance, secrecy, and aggressive risk-taking. Its “rank and yank” performance system punished dissent and rewarded short-term wins - regardless of ethics. The result: one of the most spectacular corporate failures in history. 

Volkswagen’s emissions scandal and Wells Fargo’s fake accounts crisis followed similar patterns. Poor subcultures emerged under pressure to meet aggressive targets, and leadership either failed to notice or turned a blind eye.  

In these cases, the short-term numbers looked fine – until they didn’t.  

Closer to home in Australia, the 2018 Royal Commission into the banking sector revealed widespread cultural failures. As APRA bluntly stated “success dulled the senses.” What followed were mis-selling scandals, compliance breakdowns, reputational damage, and billions in lost shareholder value. 

Culture is often invisible, until it breaks. 

As Investors, How Do We Assess Culture? 

If culture is so important, why is it often overlooked in investment analysis? 

Part of the problem is quantification. Culture doesn’t show up in a discounted cash flow model. You can’t screen for “integrity” or download an ESG score that really tells the story. 

But culture can be assessed. 

At Blackwattle, we believe evaluating culture can provide an advantage. We assess it by: 

• Talking with executives, and also with managers and frontline staff. 
• Visiting company offices, when possible. 
• Reviewing third-party insights (e.g. Glassdoor, engagement scores). 
• Tracking and measuring attrition rates. 
• Speaking with past employees, often. 
• Assessing alignment between stated values and behaviour. 
• Observing how a company handles failure and scrutiny. 
• Examining short and long-term incentives, in detail. 

Culture is best judged through actions, not words.  

Humility: An Investor’s Strength 

Understanding culture requires not just analytical skill, but personal humility - and that applies just as much to us as investors as it does to the companies we assess.  Humility is one of the most underrated traits of successful investors. We believe that: 

“The best investors know they could be wrong.”

Humility helps us test assumptions, stay curious, and continuously learn - especially in an environment where information is imperfect, and change is constant.  The converse also holds true, in that:   

“Investors who think they’re always right, are often the most dangerous.”

 Humility also plays a critical role in assessing culture. You can’t evaluate an organisation’s values or internal dynamics from a spreadsheet or a slide deck.   You need to listen. You need to ask thoughtful, sometimes uncomfortable, questions. And you need to be open to answers that challenge your original view. 

Humility doesn’t weaken conviction, it sharpens it.  

The Takeaway: Culture is King 

We argue that rather than cash, culture is king. 

Whether you’re building a company or investing in one, the message is the same: culture and character critically matter.  They’re strategic differentiators. 

Companies with aligned, resilient cultures tend to attract better people, make better decisions, and sustain better performance.  We firmly believe that investors who cultivate their own humility are far more likely to identify long-term winners and avoid untrue yet attractive company narratives. 

In a world full of data and increasing noise, culture and character are still among the most powerful leading indicators of future performance.  

You just have to look - and listen - a little more closely. 

Kind regards,

Michael Skinner, Managing Director, CIO and Partner And the Entire Blackwattle Team

This document is issued by Blackwattle Investment Partners Pty Limited (ABN 24 663 839 094) (BIP) corporate authorised representative of Blackwattle Licensing Pty Limited (ACN 665 711 839 AFSL 547 617) (corporate authorised representative no. 001304362) the investment manager of the Blackwattle Funds. Equity Trustees Limited (ABN 46 004 031 298, AFSL No. 240975) (EQT) is the responsible entity of the Fund. Equity Trustees is a subsidiary of EQT Holdings Limited (ABN 22 607 797 615), a publicly listed company on the Australian Securities Exchange (ASX: EQT). This document is intended to provide general information only and is subject to change. It does not constitute an offer to subscribe for units in the Fund. The information does not consider the investment objectives, financial situation, or particular needs of any individual. You should seek advice from your licensed financial adviser and read the product disclosure statement (PDS) before making an investment decision. The PDS and target market determination (TMD) for the Fund can be obtained for free by visiting our website www.blackwattlepartners.com. A TMD describes who this financial product is likely to be appropriate for (i.e. The target market), and any conditions around how the product can be distributed to investors.  It also describes the events or circumstances where the Target Market Determination for this financial product may need to be reviewed. Neither BIP, EQT or their related body corporates guarantee repayment of capital or any particular rate of return. An investment may achieve a lower-than-expected return and investors risk losing some or all of their principal investment. BIP has obtained information from sources it considers to be reliable but does not represent that such information is accurate or complete, or that it should be relied upon. Neither BIP nor EQT make any representations or warranties, express or implied, as to the accuracy or completeness of the information it provides and to the maximum extent permitted by law, neither BIP, EQT nor its directors, employees or agents accept any liability for any loss caused by using this information.