A culture of learning and continuous improvement is critical to achieving investment excellence. The very best learning cultures exhibit organisational learning with a strong commitment to advancing the skills of the firm as a whole. One of the great learning-orientated investment firms is Hillhouse, a public and private equity firm based in China. Their culture is very much driven by their charismatic founder, Zhang Lei, but it permeates the organisation. A great example is what they have done in healthcare. They invested 7 years of time and energy to learn how to invest in healthcare before making a single investment. They are now China’s pre-eminent healthcare investors. It is easy to want a learning culture but true organisational learning cultures are hard to build. So much so, their existence is a durable competitive advantage.

Level I Learning

A strong learning organisation culture starts with the individuals. Investment firms must seek out people who are highly intellectually curious and obsessed with learning and self-betterment. Such people typically try to figure out how to do things on their own before asking for help and take accountability for their own learning and development. They say “I can figure that out” much more often than “that’s not possible”. They are constantly thinking how to do things differently and see the “status quo” as the enemy. They naturally think through problems from first principles, often think outside the box, are insatiable readers, and usually have low intellectual ego (i.e. they readily change their minds when the facts necessitate). They are passionate about their craft. I call this individual learning culture “Level I Learning”.

The latest research suggests that mindsets can be changed and nurtured. An investment firm is likely the wrong environment to hire a fixed mindset person and hope they will change with the right encouragement. However, it may be prudent to consider whether new hires have had their otherwise flourishing growth mindsets stifled by their prior firm’s culture. Equally, investment firms need to focus on their own cultures to ensure they are creating an environment where learning-mindsets can flourish. Firms must provide individuals the time, freedom, and support to learn. It also requires a culture where mistakes are seen as learning opportunities.

Investment firms often make the mistake of seeking learning-orientated individuals only for the investment team, with a more relaxed focus for other functions. However, it is impossible to create a true learning-organisation culture for only part of the firm. The culture must permeate all areas of the the firm. It is wrong to think that learning-mindsets are limited only to those with strong academic backgrounds etc. This mindset must be sought and fostered for all, from the receptionist to the CEO.

Level II Learning

“Level II Learning” is about capturing and sharing individual learnings to enable the team’s knowledge to compound faster than any individual. Level II requires strong team players who take the time to share their learnings with others, even if this is at the expense of their own immediate efficiency. Level II learners are givers not takers. They truly believe in the long-term power of team learning.

In our experience, the biggest enemy to Level II Learning is marginal thinking (first coined by Clayton Christensen). As humans, we naturally focus on the short-term marginal cost-benefit of our choices while failing to comprehend the long-term total cost-benefit. For example, if I eat this piece of cake, I will get great marginal benefit today (enjoyment) with only a small marginal cost (health reduction). We can rarely conceptualise the total cost-benefit — in this example, that one’s long-term health may be put at risk if this same decision is made too frequently. There are many aspects in life where this affects us. In the work place, it often rears its head when considering any form of change. The cost of change is often large in the short-term, while the benefit is often small in the short-term and becomes very large only in the long-term. The marginal cost-benefit of change is almost always negative, while the total cost-benefit can be massively positive. It is natural then that organisations often avoid change. Indeed, the recommended change is often judged against the unachievable (i.e. perfection) rather than against the imperfect and often inferior “status quo”. As such, status quo gets an easy ride and becomes the greatest adversary of change. In reality, change only needs to be superior to the status quo and we should judge the status quo just as harshly as we judge change. This applies to Level II Learning — taking the extra time to share individual learnings with the team to improve process has a high marginal cost (i.e. time and effort) and while the benefit is often very large, it is realised only in the long-term.

The other behavioural dynamic that impacts Level II learning is the economic “free-rider problem”. Shared learning is a public good within the firm. It costs something to contribute but the benefit is free to receive. This creates a market failure. The natural human behaviour is to start contributing less (mostly unconsciously) and to rely more on others to contribute.

There are a few ways firms can foster Level II Learning. First, the cost of sharing individual learnings can be reduced through the use of technology. Thoughtfully designed and structured research management systems can make it easier to share information and make it easier for other team members to digest. A good system also makes it easy to recall, search, filter, sort, and link information. I discuss the designing and building of research management systems here. While technology can help, it can only ever be a lubricant to friction. The real bedrock of a learning organisation is culture. Second, management can actively change the short-term marginal cost-benefit by encouraging team learning contributions and rewarding those team members who are leading the way. This can also resolve the free-rider problem mentioned above. A good system also allows the tracking of individual learning contributions. While the rules should always be “quality over quantity” here, team learning contributions should feed into formal compensation.

Level III Learning

“Level III Learning” is the systematic capture of the team's learnings to implement, change, and improve process. Level III learners require strategic thinking with long-term vision. They inspire others and build coalitions for organisational change. While the ambition should be to have all the individuals in the firm become Level I and Level II learners, the firm need not be full of Level III learners. In fact, it may even become too disruptive. However, it is critical for the firm leadership to represent a Level III mindset. Learning cultures must be fostered and inspired from the top-down with the executives leading by example when it comes to team learning contributions. After all, teams look to and emulate what the leaders are doing.

“Whisper wins and shout mistakes.” — Reed Hastings

Level III Learning firms often reflect on key organisational mistakes with the leadership being the first to highlight their own mistakes. They value and reward learning contributions even if there is little short-term benefit and, like Hillhouse, they encourage the investment of time, resources, and money into expanding the organisation’s circle of competence.

A lot of investment firms are decent at building Level I learning cultures. A good number of firms achieve or are close to achieving Level II. Firms with true Level III learning cultures are much rarer. It is really hard to build a true learning organisation culture even when focused on this from inception. It is even harder to change and adapt existing deeply embedded cultures. As such, those firms with Level III learning cultures are afforded a durable competitive advantage.