5/17/2021 12:00:00 AM

How does company culture impact returns?

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Company culture can have a material impact on investment returns, says Chief Investment Officer and Portfolio Manager Mark Devcich. So why is culture so important? 

Companies with strong culture can determine the success of a business. A company is just a collection of people, so the motivation and drive of those people will ultimately determine the success of the business. As someone once said, culture eats strategy for breakfast.

At Pie, our investment team relentlessly tries to understand the culture within companies by talking to management, ex-employees and industry contacts as we believe it can have a material impact on investment returns.

Culture brings long-term results
Culture is easy to sense but hard to measure. Culture is also hard to replicate as it takes many years to develop and is often the result of doing a lot of small things well. This is why when you find an exceptional company culture, the returns from the business can persist for many years. 

Not all companies with strong culture will be a success commercially. But if there are two similar companies in the same industry, the one with the stronger culture will likely be more successful. I see it as if employees are motivated and on a common mission that will create a great experience for the customer. This results in high demand for the company’s goods or services and the success of the business.

Two examples of great culture
Two companies I believe have exceptional culture are Mainfreight in New Zealand, and Dicker Data, an IT reseller in Australia. Both companies operate in hyper competitive industries with little differentiation, so they rely on something else to set them apart from their competitors.

The common characteristics of these companies are:

  • Founder-led businesses with a large shareholding
  • Long CEO and employee tenure
  • Aligned incentives through profit sharing
  • Focus on continual learning and improvement
  • Obsession about satisfying their customers

Mainfreight: low staff turnover
Mainfreight was founded in 1978 by Bruce Plested who has 17% ownership worth $1.2 billion. The business has a 100-year vision. Having a large founder-interest ensures a long-term approach can be taken, which is far more difficult if you have short-term focused shareholders.

Management turnover at Mainfreight is low for the industry, and the current CEO Don Braid has been with the company for nearly 30 years. Eligible employees participate in a profit share of 10% to align their success with the company. The culture is summed up in the saying “Special People, Special Company”.

Dicker data: zero salary for founder
Meanwhile, Dicker Data is a company we first invested in many years ago.

The founders of the business David Dicker and his partner own $1.1 billion worth of the company. In what is the most extreme remuneration structure I have seen, David Dicker has zero salary, options or other benefits. His entire remuneration comes from dividends so he is 100% aligned with outside shareholders.

Employee tenure is shown by the Chief Financial Officer being at the business for over 20 years and the Chief Operating Officer over 10 years. All employees were given $1,000 of shares to enable them to share in the success of the business.

This all sounds very nice, warm and fuzzy but the proof is in the pudding. Investing in Dicker Data at its IPO 10 years ago and reinvesting dividends along the way would have made you well over 100 times your initial investment. You only need one investment like this in your life to make all the difference.

Information is current as at May 2021. Pie Funds Management Limited is the manager of the funds in the Pie Funds Management Scheme. Any advice is given by Pie Funds Management Limited and is general only. Our advice relates only to the specific financial products mentioned and does not account for personal circumstances or financial goals. Please see a financial adviser for tailored advice. You may have to pay product or other fees, like brokerage, if you act on any advice. As manager of the Pie Funds Management Scheme investment funds, we receive fees determined by your balance and we benefit financially if you invest in our products. We manage this conflict of interest via an internal compliance framework designed to help us meet our duties to you. For information about how we can help you, our duties and complaint process and how disputes can be resolved, or to see our product disclosure statement, please visit www.piefunds.co.nz. Please let us know if you would like a hard copy of this disclosure information. Past performance is not a guarantee of future returns. Returns can be negative as well as positive and returns over different periods may vary.