Institutional investors can do this by spending time with management, interviewing customers and suppliers and comparing their analyses with their target’s competitors. What often blinds these technicians however, is the organisational culture of their potential investees.
This is an important topic because a business’ culture determines how they view their role in society and how they will behave, especially under pressure. Understand a company’s culture and you can form a view on their position on a spectrum ranging from tortoise to hare and therefore, where – if at all – they fit in your portfolio.
In fact ‘culture’ is a relatively new discovery of investors and regulators. The guardian of corporate probity – the Financial Reporting Council (FRC) – has recently published a first report on the topic. Its principal finding was that, “a healthy corporate culture is a valuable asset, a source of competitive advantage and vital to the creation and protection of long-term value.” Unsurprising, but no less valuable for being obvious.
My experience in businesses of every size is that there are two fundamentally different cultures, and every organisation I have known fits easily into one or the other. The first is what I call the Executive or ‘Aircraft carrier’ culture – these are entities where change is preferably gradual and the future is a safe extrapolation of the past. The other is the culture of the Entrepreneur or ‘Fighter pilot’. Fighter pilots have little or no regard for the past (except perhaps as learning experiences) and have an obsession with living life at the extremes of what is possible.
The defining difference between the two is measured by their appetite for risk: aircraft carriers abhor it while fighter pilots thrive on danger.
From an investment perspective (and to mix a metaphor) aircraft carriers will never knock the ball out of the park. But they deserve a place in any balanced portfolio because their predictable performance, however boring, provides a platform from which to launch the riskier elements of your strategy.
As a portfolio guide, the aircraft carrier/ fighter pilot comparison is necessary but not sufficient; there is another cultural facet which needs to be assessed before you can decide whether you have faith in the long-term wealth-creating potential of a business. Irrespective of whether a company is a tortoise or a hare, there is a second defining factor – their regard for the customer.
As with the oil and water of executive/entrepreneurial values, the customer’s place in a corporate culture is also binary – either they are the business’ number one priority, or they aren’t. Either the organisation’s employees get their thrills from delighting the customers or their satisfaction comes from products or processes or avoiding the regulator. This is not the same thing as deifying the customer – as a good friend of mine is fond of putting it: “The customer is not always right. But they are always the customer.”
Putting the customer at the heart of everything is important, not just for its own sake, but because the resulting loyalty cushions the impact of any downward pressures when the market gets tough – as banks and supermarkets have found to their cost in recent times.
Assessing whether the culture of a potential investment is a fighter squadron or a carrier crew is pretty easy and doesn’t require an army of analysts.
Let’s take the retail sector as an example. Just compare arch disruptor Amazon’s seemingly insatiable thirst for innovation – Amazon Prime, Amazon Web Services, Amazon Music, Amazon Echo, etc with any British department store or supermarket whose principal focus is a continuation of the age-old “pile ‘em high, sell ‘em cheap” strategies, pioneered by Jack Cohen’s Tesco chain after WWII.
As for assessing a company’s attitude to its customers, this is an easy test for anyone who has ever bought anything! As consumers, we find it very easy to differentiate between those suppliers who value us and those who find us an inconvenience – I owe no loyalty to my electricity supplier whom I have totally failed to persuade to correct the address on my post; it’s patently not important to them despite their habit of sending out glossy junk mail to their customers. A classic case of a ‘professional’ marketing communications department which is obsessed with brochure design but disinterested in the recipient. It’s obvious from a thousand miles that they get their kicks from winning design prizes and not from improving customer service.
To conclude, culture is important to the long-term viability of a company and a wise investor considers it, along with the business fundamentals, when making investment decisions.
Ask two easy culture questions before you decide to take the plunge and make an investment:
1. Do they exhibit the habits of the fighter squadron or the aircraft carrier crew?
2. Are they customer-centric?
A sensible portfolio, in my opinion, balances the proportions of tortoises and hares according to appetite and avoids like the plague businesses that don’t revere their customers!
Ken Olisa OBE is a businessman and philanthropist.
He is Founder and Chairman of boutique technology merchant bank, Restoration Partners and is a Director of Thomson Reuters. He also chairs national welfare to work charity, Shaw Trust as well as serving as a director or advisor to several private company boards. He is Deputy Chairman of the Institute of Directors and Her Majesty’s Lord-Lieutenant of Greater London.