Investors Should Spend More Time Focusing On The Culture Of The Business Behind The Stock

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During his recent interview with Tobias, Ben Claremon, the Principal and Portfolio Manager at Cove Street Capital provided some great insights into how investors can better understand the culture of the business behind the stock. Here’s an excerpt from the interview:

Tobias Carlisle: It sounds like a great process, and it sounds like you guys have created a great culture there, and I noticed when I was going through your slide deck that one of the things you look at in the firms that you’re examining, in the stocks that you’re examining, you spend a lot of time on the culture. And I thought that was an usual slide, and particular detailed, can you just expand a little bit more on what you’re looking for in terms of culture in the stocks that you’re looking at?

Ben Claremon: Yeah, so I don’t want to get on a soapbox, but I’m going to spend a second on it, to some extent the idea of shareholder value, is that shareholders be more valuable than all the other stakeholders has captured corporate America, right? And I think that leaves a lot to be desired in the sense that, there are plenty of other stakeholders in a business, whether it’s your employees, or suppliers, the environment, the board of directors, there are plenty of other stakeholders involved here. And if you’re only focusing on shareholder value, I think you miss out, and you potentially cut off your own legs in terms of the ability to perform over the long run.

Ben Claremon: So, we’re really focused on finding people who are thinking long term, who are acting long term, there are red flags that come up that we try to stay away from. So if someone who’s constantly restructuring, which means that you’re always firing people, you’re probably impacting the culture negatively if people don’t know whether they have a job anymore and they’re always worried about being fired. These are things that are problematic, and so we have a list that we go through when we’re assessing management. So when I think of culture, our whole assessment of management embodies within that idea of culture. And so maybe to make it more concrete, I’ll give you some things that we are looking for and things that we are not looking for.

Ben Claremon: And so let’s start with what we are not looking for, so, we are not looking for companies that when you go through their financial statements they have a laundry list of environmental liabilities or legal liabilities. These are things that might be indicative of a culture that might be a little bit too aggressive in certain ways, we’re certainly not looking for people who are focused on the short run in any way, shape, or form. So whether that’s focused on making quarterly numbers, whether that’s going to the proxy statement and seeing that they’re focused solely on kind of short term results, or primarily on short term results.

Ben Claremon: We also want people who are focused on things that we care about, which is free cash flows and returns on invested capitals, and not quarterly earnings per share. Because again, incentives are a huge determinant in terms of how people act. And so, if I have to encapsulate it, long term focus people who are creating cultures that can last, and a lot of that can be reflected, and this is something else we do, we look at Glassdoor and to see how people are rated, right? And we track that over time just to make sure, or if it’s improving that’s good, but just to make sure in the companies we own that it’s not getting worse. I actually did a presentation at UCLA on assessing management in the proxy statement.

Ben Claremon: And one of my messages to the students, to the undergrads, was that it’s just really hard, it’s not quantitative, I mean, there are quantitative metrics, but it’s really qualitative, it’s a little bit squishy, but it’s doesn’t mean you could ignore it, right? Just because it’s hard to quantify doesn’t mean you can ignore it, and so what we try to do is we try to create a list of things we’re not looking for, try to create a list of things we are looking for, and have a checklist of those things. So, people who are focused on long term are willing to sacrifice short term results for long term gains. People who have a culture where when someone fails, they don’t get fired, it’s a learning moment, an organization that supports its employees, is willing to pay a living wage. I just think there’s a balance between short term profitability and kind of longevity that is, in a lot of cases, skewed way too much towards short term profitability.

Ben Claremon: And we’re looking for businesses who are thinking the long term, “How do we make this business sustainable? How do we make sure that we’re still around in 20 years?” And I just think businesses like that will be able to adapt much faster than someone who is focused on what they’re going to earn next quarter.

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