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Culture really matters
When ants search for food, most follow the pheromone trails of those before them. Over time, these pheromone trails become increasingly reinforced because ants leaving the nest tend to follow the trails they know will lead to food.
But not every ant. Others will take less established paths. And a few ants break out in search of ant glory. We can call these ants the stewards, followers and explorers.
But we could say the same of companies.
The stewards are about protecting and maintaining their existing operations. The followers are about trying new things but not necessarily being the first to do so. And the explorers are the wanderers, the dreamers, the ‘oh, what if we did that’ kind of company.
Ultimately, though the companies and ants are deploying different tactics, they all have the same objective: to survive and thrive.
The role of culture in organisational success
Surviving and thriving are key to any successful investment. And the company’s culture, the unwritten rules and behaviours that shape its operations, can significantly drive long-term success.
All three company types – the stewards, followers and explorers – can be good investments, but they must be managed differently, which is why understanding culture matters. Nobody wants an explorer chief executive such as Elon Musk running a steward-style company such as Hèrmes.
What problem a company looks to solve and how it does that, how it develops its competitive advantage, allocates capital, and incentivises its employees, all come down to culture.
It is the foundation upon which a company builds its strategies and operations. It influences how employees interact, decisions are made and how the company adapts to changes in the market.
A strong culture can foster innovation, creativity and resilience, enabling a company to adapt and thrive long-term.
Adaptability: The key to long-term success
Returning to a concept we discuss in more detail in The long view: lessons from evolutionary biology, geneticist Sewall Wright speaks of a ‘fitness landscape,’ which shows the likelihood of genetic variants continuing to survive and reproduce.
A company's fitness is relative to the industry in which it operates. Incumbents and new entrants mean the environment constantly changes, and companies must adapt to survive and thrive.
That leads to the core foundation of any great company culture and thus of the company itself, whether it is a steward, follower, or explorer: adaptability.
As companies mature, their growth rates can slow. To maintain consistent growth, companies must attend to their existing business while considering how to adapt and grow for the future.
Management consultancy McKinsey's ‘Three Horizons of Growth’ framework helps conceptualise adaptability.
Horizon 1 focuses on the existing core business that currently delivers the most significant profitability or free cash flow levels and seeks to improve it and maximise its remaining value.
A classic example of this would be Amazon. From its origins as an online bookseller, it’s first jump was expanding its produce range and geographies within ecommerce.
Horizon 2 involves new business opportunities that leverage the existing business but usually require more time or significant investment to succeed.
Amazon’s next leap was the huge investments it made in logistics, its Prime delivery service and the introduction of white-label goods (Amazon-branded goods manufactured by third parties).
Horizon 3 is the long jumps that plant the seeds for businesses that don’t exist yet.
In Amazon’s case, this has taken it in new directions, including Amazon Web Services (AWS), Prime Video and advertising, among others. These services have taken a long time to build out and we are only in the early stages of revenue generation.
The McKinsey study demonstrated that successful growth companies invest in strategies spanning all three horizons, balancing short-term moves with long-term ambitions.
This makes sense. If you only ever make the same-sized leap, you lose the foundation of any great company: an adaptable culture nimble enough to make any-sized leap.
Scaffolding
Borrowing from another biological concept, companies need the right ‘scaffolding’ to foster adaptability and enable them to flex their jump size.
Scaffolding refers to the core processes that support an organism, or in this case, an organisation, in trying new things while ensuring it retains its core purpose.
Management teams are responsible for choosing and maintaining this scaffolding, which defines what the company can and cannot do.
So, how does scaffolding relate to a company’s culture? It is scaffolding that gives me insight into a business’s cultural DNA and how it may deal with situations or make decisions in the future.
Therefore, I’m interested in the company’s vision. This is the overarching ‘foundational culture’, which develops over time from its chief executive or founder's deeply held beliefs and life experiences.
The second aspect of culture defines the problem you seek to solve, how you approach it, and how the big decisions are made within the organisation. This is the ‘created culture’.
While the company’s foundational culture influences this, it is more specific to the task or time. Created culture is how you come together as a team, incentivise your employees, and, most importantly, how employees act when a management team is not directly supervising them.
While the foundational culture is slow to change, the created culture is much nimbler. It adapts and evolves to help a company unlock its long-run ambitions.
Much as a management team might like to, it cannot directly control how the culture manifests. Instead, it must establish the scaffolding and cultural guiderails that ensure what it believes are the core tenants permeate the organisation.
Cultural foundations
Netflix is known for its high-performance scaffolding. It describes itself as a sports team, not a family, emphasising the importance of having ‘the right person in the right role at the right time.’
Managers regularly use a ‘keeper test’ to evaluate employees – “If anyone in my team were to say they were leaving tomorrow, how hard would I fight to keep them?” – and adequate performance results in a generous severance package.
This high-performance culture distils into the company’s created culture. Staff give one another regular and frank feedback.
Because the cultural guiderails are well understood, the company has been able to adopt a context-over-controls approach. For example, Netflix does not track employees' vacation days, and employees can take unlimited vacation time.
Closer to home, Baillie Gifford’s foundational culture is centred on long-termism.
We emphasise the importance of long-term thinking, from our partnership structure to our investment strategies. This culture enables us to make investments that may not pay off immediately but have the potential for significant long-term returns.
Evaluating culture in investment decisions
When evaluating a company's culture, investors should consider its effectiveness. A simple formula can help: alignment of motivation, the timescale of ambition and its ability to execute.
Intrinsic motivation, where the management team is driven to solve long-term problems, creates alignment with investors' time horizons.
The scale of ambition indicates whether the management team wants to build a big business, and the ability to execute reflects the chief executive's and their team's skill set.
Culture is a critical factor in investment decisions. It shapes how a company operates, adapts and grows.
By understanding and evaluating a company's culture, investors can gain valuable insights and make more informed decisions. Culture matters, and it can be a significant source of competitive advantage.
Risk factors
The Funds are distributed by Baillie Gifford Funds Services LLC. Baillie Gifford Funds Services LLC is registered as a broker-dealer with the SEC, a member of FINRA and is an affiliate of Baillie Gifford Overseas Limited. All information is sourced from Baillie Gifford & Co unless otherwise stated.
As with all mutual funds, the value of an investment in the Fund could decline, so you could lose money. International investing involves special risks, which include changes in currency rates, foreign taxation and differences in auditing standards and securities regulations, political uncertainty and greater volatility. These risks are even greater when investing in emerging markets. Security prices in emerging markets can be significantly more volatile than in the more developed nations of the world, reflecting the greater uncertainties of investing in less established markets and economies. Currency risk includes the risk that the foreign currencies in which a Fund’s investments are traded, in which a Fund receives income, or in which a Fund has taken a position, will decline in value relative to the U.S. dollar. Hedging against a decline in the value of currency does not eliminate fluctuations in the prices of portfolio securities or prevent losses if the prices of such securities decline. In addition, hedging a foreign currency can have a negative effect on performance if the U.S. dollar declines in value relative to that currency, or if the currency hedging is otherwise ineffective.
For more information about these and other risks of an investment in the Funds, see "Principal Investment Risks" and "Additional Investment Strategies" in the prospectus. There can be no assurance that the Funds will achieve their investment objectives.
This communication was produced and approved in March 2025 and has not been updated subsequently. It represents views held at the time of writing and may not reflect current thinking.
This communication contains information on investments which does not constitute independent research. Accordingly, it is not subject to the protections afforded to independent research and Baillie Gifford and its staff may have dealt in the investments concerned.
As at March, 2025, Baillie Gifford held Apple, Amazon, Duolingo and Netflix. A full list of holdings is available on request and is subject to change.
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