Business Class Culture
When I was 21, I moved to Hong Kong for my first ever job, which was with Barclays Capital (then the investment banking arm of Barclays Bank). It was an excellent first job, I was given a lot of PnL responsibility, learned a lot, and found that the trading floor has a way of hardening you for the future. However, I couldn’t help but notice the company was quite free and easy with its expense budget. When I travelled for work, I was picked up from the office/home in black limos, I was handed business class ticket, and put up in 5 star hotels. Now remember, I was 21, and this was an entry level job. There was no need for this kind of luxury (let alone for a 40 minute flight from Singapore to Kuala Lumpur!). I remember it making me wonder about the future of the company, and I never did end up buying any stock. Now, we know what you’re thinking, isn’t this all a bit dramatic and does business class travel really mean much about the company? On its own, no not really, but it does hint at a culture of excess. Excesses in deal making (ie Barclays’ failed ventures in SEA and Africa), excesses with regards to regulation (Libor fixing scandal, exchange-rate rigging, gold price manipulation.. etc), and excesses with regards to fundraising (Qatar Scandal). Now one doesn’t have to look at Barclays’ stock price to know that a poor culture could not have helped the company (in case you’re wondering it’s down ~85% from its peak).
The reason we bring this story up is we read two interesting pieces this week about company culture. The first was an must-read interview with Savneet Singh, the CEO of Par Technologies[1], a company in the PoS space for the QSR industry and the second, a white paper on company culture written by Roi Lipovetzky, an intern for Guy Spier. Company culture is something we spend quite a bit of time on when doing our single-stock analysis. While strong company culture is not enough of a reason to buy into a company (business models are more important there), a company culture is what can drive above market returns over long-periods of time. As Lipovetzky puts it
“Company culture research is highly important for investors with a multi-year horizon. The longer your time horizon in investing, the more important culture research is.”
Below, we’ll go through what we believe to be important aspects of company culture to look out for, use examples referencing the two pieces frequently, and try to give you some tips on how we go about assessing the culture.
A Culture of Cost Management:
During the sell-off in March many companies ran to preserve cash and CEOs were often quoted saying they were “cutting discretionary spend,” to which an astute Twitter user replied “Umm if it’s discretionary, can we like, not spend it [sic].” This tweet hit the nail on the head when discussing a culture of cost-management. Companies that keep a tight control of their expenses don’t wake up one day saying “okay let’s cut expenses today” but rather start from a position of a very lean expense structure. When Savneet took over as CEO of the company he immediately wanted to adopt a culture of cost-management and implemented a unique program. He explains:
“So just to give you an idea of some of the cultural things we did, I used to pay employees $1,000 for finding a recurring meeting to cancel on the calendar. If you found a dollar of savings at PAR, you were paid 10% of those savings. I remember somebody saved like $200,000 on UPS and FedEx for us. They got a $20,000 bonus.”
Now, this isn’t the same thing as penny-pinching. It’s very important to spend on talent, R&D, basic employee benefits (like good health insurance), but more of a question of why spend $10 when you can get the same result spending $5. But to put excesses into perspective, read the book “Barbarians at the Gate” which illustrates the fall of RJR Nabisco. In it, you’ll find a bloated company that was cash-rich but spent it on an entire fleet of corporate planes, huge executive bonuses, and every perk you can think of (Cars, country club memberships, etc). This made the company lazy, inept, and prime for an aggressive takeover (which is what happened).
When doing our own research we look for a couple things to show us if a company is cost-conscious. One is executive compensation, is the structure going to enrich the company (and thus the shareholders), or just pad the wallets of the C-Suite? Do employees stay because of the pay/perks or because of the job itself (done via employee interviews)? How does the owner/founder spend their money – do they buy mansions or live on the company’s campus (ie Azim Premji[2]).
A Culture of De-centralization/Ownership:
Some of my favourite working experiences were companies where I was given a task/role/responsibility, support when I needed it, but on the whole left alone to execute. After my MBA I had an opportunity to work for a startup called Commonbond, which operates in the student loan space. It was a small (less than 100 people) but growing company, that had very mediocre pay, and few perks to speak off, but I loved that job. My boss gave me a goal/target, and then left me alone to complete it. I got help when I asked but other than that was free to make my own decisions. While unfortunately I had to leave the job after just a few months due to visa issues, I remembered thinking; the next company I start will have this kind of a culture.
To build a successful and large company it’s important to have a culture where decisions are decentralized and employees act as owners. As Savneet puts it
I’m Indian, right. Indian immigrants tend to be either doctors, engineers, or small business owners. I used to always wonder why all these small business owners that my parents know, why aren’t they building big companies? I remember observing that there was this great pride in that they owned every little decision. When I did my two year stint in investment banking, I remember the big observation I had looking at these great companies was how they built these amazing teams of just such high horsepower people. I think that’s why there are certain entrepreneurs that are great at building that small-hustle business. And then there are those that are great at creating big businesses. It just stuck with me that you can’t be the one that is deep in the weeds because you’re going to prevent that excellence
Great, long-standing businesses that grow to scale need to be decentralized. You cannot have a CEO/Management team that is involved in everything, as that’s going to slow progress and frustrate employees. The greatest Silicon Valley companies have a saying, “move fast, and break things,” and this cannot be done if you’re going to management for every little approval.
A great way to tell if a company is willing to decentralize and let employees act as owners is to see the age of some of the people in the management team or senior leadership. The youth of those employees can tell you a thing or two about company management. It’s nothing against older or more experienced people, but a management willing to trust young people to do important jobs is a good sign of an ownership/de-centralized culture.
A Culture of Honesty:
Honesty (inclusive of transparency) is a hugely important aspect of a company culture; Honesty to customers, honesty between employees and management, honesty to shareholders. Can the management team admit its mistakes? Can employees speak freely? Can investor’s feedback be well received or will the company try to fight/obfuscate.
Bridgewater Associates, Ray Dalio’s hedge fund, has a unique culture of unfettered and honest feedback. Dalio proudly released some sharp and brutal feedback he received from one of his employees;
Ray - you deserve a “D-” for your performance today in the meeting... you did not prepare at all because there is no way you could have and been that disorganized. In the future, I/we would ask you to take some time and prepare and maybe even I should come up and start talking to you to get you warmed up or something but we can’t let this happen again. If you in any way think my view is wrong, please ask the others or we can talk about it.
Now, not everyone can take this kind of honesty, but its unique culture has helped Bridgewater build itself into one of the world’s largest hedge funds, and has persisted for over 45 years (the average life of a hedge fund is 5 years).
One of our favourite examples of a culture of honesty and transparency, was from an unlikely source; the Alcoa corporation (one of the world’s largest aluminium producers). When in 1987, Paul O’Neill (yes, the former US Treasury Secretary) became CEO of the industrial giant, he took on a strategy that caused conflicts with investors and board members. His single focus was worker safety and no matter what event/meeting/presentation, that’s all he spoke about. People thought he had lost his mind, but over-time the company started to transform. With fewer worker safety issues, the company could produce more, could lower costs, could engage employees better, and become a lean/mean aluminium producing machine. O’Neill made it illegal under corporate law to not report an issue of worker safety. When one senior exec failed to report a small incident, he pretty much fired himself, as he knew honesty and transparency about worker safety was paramount in the company, and any deviation from it was a cardinal sin. This culture produced amazing results, and by the time O’Neill left as CEO, the company value increased from $3bn to over $27bn, with Net Income increasing 7x[3].
One key way to measure honesty and transparency of a company is through its disclosures, and through the earnings reports. Will the management admit when they went wrong? How much do they disclose? Does their 10K leave you scratching your head? One example is on Wirecard, as when we read the annual report we were confused about how little they disclosed about their business, and while that did not immediately tell us it was a fraud, it did make us move on. This transparency is super important when it comes to investor relations as well, and as the PAR CEO says:
I’m not promotional and we had an opportunity to go on Jim Cramer. It’s just not for me. I’m not going to be great in that environment. My belief is that you treat shareholders well by being transparent and honest. We answer questions honestly. We make an effort to share what we’ve learned. We spent a lot of time disclosing a lot more information. If you look at our investor presentations and our MD&A (management’s discussion and analysis) now versus two years ago, they are drastically different. We’ve made an effort to be really transparent.
In Conclusion:
There is no one size fit all culture, and each company will have its own uniqueness. Cultures also go through changes as a small company in a competitive market needs a different culture than a large company in mature market. However that being said, we do find that the three tenets we look for to be pretty uniform over the companies we invest in, and constantly revaluate as cultures can degrade. Lastly, companies that have bad cultures to begin are very hard to turnaround, and so if you are invested in one of those, you have to be very patient. As Lipovetsky quotes in his writeup
"I think it's a lot easier to build a new organization around a culture than it is to change the culture of an existing organization. It is really tough. And I like that fact, in the sense of Berkshire. I mean, it would be very tough to change the culture of Berkshire. It's so ingrained in all our managers, our owners. Everything about the place is designed, in effect, to reinforce a culture. And for anybody to come in and try and change it very much, I think the culture would basically reject it." Warren Buffett
We hope this has been helpful in helping you identify good company culture (and distracted you just a bit from the US elections!). Happy investing all!