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February 8, 2018
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February 8, 2018
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Purpose.

Purpose is important as I believe that companies with a keen sense of purpose will improve people’s lives and prove to be superior, vastly superior, investments.

These two attributes do not stand in opposition to each other. They do not either stand independently of each other. They are intimately connected.
Consider the role of purpose from the perspective of a company’s different stakeholders:

Employees are more motivated

Employees who feel purpose in their work are more motivated and hence more productive and creative. This is perhaps somewhat counterintuitive. There is a widely held belief that people are motivated, above all, by money. This is reinforced by frequent financial scandals, which often have financial incentives gone awry at their root cause. The recent scandal at Wells Fargo is just one example in a lengthy line. People lacking in food or shelter are indeed primarily motivated by money, but once the basic needs are covered, other factors come into play. In an excellent talk Dan Pink describes how financial incentives can be demotivating. According to Dan what motivates people is autonomy (the sense of freedom to do what you want), mastery (the sense of getting better at something through practice), and, above all, purpose (the sense that there is a point in what you are doing). If you are still sceptical, imagine your parents’ reaction if you tossed them a tip after they finished preparing dinner for the family. A quick aside: if you are wondering which career path to go down or advising a younger person on the same question, I believe Dan´s mental model is a far more actionable one than the more traditional advice of “follow your passion”. If you have been playing the violin since the age of 5 and it is all you ever wanted to do, that is great. Back in the real world, if you have not got a clue what you want to do, look for a company that gives you
autonomy, the opportunity to learn, and is doing something meaningful. Irrespective of what the company makes or what service it provides, the passion will come.

Customers are more likely to be fans At a purpose driven company, the customer is also far more likely to receive a product or a service carefully tailored to her needs rather than what happens to be in the company’s short-term financial interest. As a result, she is far more likely to be a fan of the company and refer it to her friends.

Society benefits Society too profits from companies that follow a strong purpose. The lives of its citizens are improved whilst employment and tax revenues are generated. As a result, it is far more likely to provide an accommodating regulatory backdrop and avoid penal taxes.

Shareholders win It goes without saying that we as investors greatly benefit from companies with motivated employees, enthusiastic customers, and a supportive society.

These are the inputs that go towards creating financial success. The financial success itself is just the output.

Leadership

Long-time investors in Business Owner will not be surprised to hear I argued that it is both important and possible to form an opinion on the character of a management. But what are the characteristics that one should look for? Historically, I have posed the question for each of our investments:

“Does the management possess talent and integrity?” One of the benefits of preparing a talk is it forces me to think about what I do and formulate it in such a way that it makes sense to someone who does not know me. Whilst doing this, I realised that one thing in how I think about management had
changed in a subtle but important way.

Like most of the things I have learnt about investing, the idea of seeking talent and integrity came from the teachings of Warren Buffett. If I do not preface every paragraph I write with the words “as I learnt from Warren Buffett”, it is not to take undue credit for ideas which will almost certainly prove timeless, but because I assume the reader knows that concepts such as “moat” are his intellectual legacy and not mine. However, I came to realise that the ideas of “talent” and “integrity” speak to an organisational model for companies which I no longer explicitly seek.

Historically, all the decision-making power at a company was focussed on the guy (it nearly always was a man) at the top. Under such a system, it was essential that this individual was hugely talented and working every hour God sent. Every decision was going through him. As a result, the number of decisions he got through and the quality of those decisions was a decisive factor in the company’s results. It was also important that he had integrity in the narrow sense that he was not out to steal the company’s money.
As the company was so dependent on him, there was little anyone could do about it if he decided to direct the company’s funds towards his own enrichment.

Today, what I seek are companies where decision-making is pushed down to the lowest possible level, ideally to the person dealing with the customer. This provides an experience for the customer which is more tailored to her requirements and is more fulfilling for the employee. It is a superior organisational model that creates a win/win.
The flipside of more responsibility for the employees is, of course, less for the leaders. On the one hand, this makes the CEO less important – other people are doing the heavy lifting. On the other hand, it makes him more so. Absent direct instruction, employees will act in a way which they feel is consistent with the company’s values and priorities. In other words, they will be guided by the invisible hand of a company’s culture.

In such a world, the role of the CEO becomes more important. The CEO is the source of a company’s culture in the case of the founder and, in the case of his or her successor, its guardian. Seen through this lens, the key characteristic to seek in a CEO is integrity, but integrity in the expanded sense of setting the right example. Talent is of secondary import and may even be an active hindrance if the CEO’s genius prevents employees
from making their own decisions. To use a soccer analogy – Who would offer to take penalties if you had Messi in your team? In a modern corporation, everyone needs to step up to the spot.

When I think of the ideal CEO, Brett Roberts, CEO of Credit Acceptance, springs to mind. Credit Acceptance has effective and innovative processes covering all the important aspects of its business such as selling, underwriting, and collecting. It has a talented group of senior executives who oversee their respective parts of the business. It has employees who are motivated and empowered. Were Brett to leave the company, I doubt the company would miss a beat.

And yet, it is difficult to overstate how important Brett is to the company. Brett is the guardian of the company’s culture through the example he sets. Shareholders get a small taste of this through his annual letter, which is honest, thoughtful, and pertinent. The real magic though happens within the company. Brett spends a large part of his time communicating with employees, for example through regular town hall style meetings.
Employees have a forum where they can air any grievances or suggest improvements and, crucially, these are either acted upon or else a thoughtful response is put on the company’s intranet. The direct benefit is that problems are nipped in the bud and small incremental improvements are made. Make no mistake: these small incremental improvements accumulate into something substantial over time. The indirect benefit
though is fostering an environment in which employees feel empowered to engender change.

Sent with Love

Margaret

Margaret Hirsch
Margaret Hirsch
Hirsch COO runs South Africa’s top independence appliance company that specialises in all appliances, electronics, furniture and bedding. They give the best deals and the best prices and everything is guaranteed.