VALUE: After Hours (S07 E16): Key Behaviors of Owner-Operators Around the World

During their recent episode, Taylor, Carlisle, and Steven Wood discussed Key Behaviors of Owner-Operators Around the World. Here’s an excerpt from the episode:

Steven: So, we even looked at net promoter scores, we looked at Glassdoor metrics to understand employee engagement, we looked at their M&A behavior. We looked at all the behaviors. And some of the most surprising things were– Well, okay, let’s go with not surprising. Not surprising, they don’t give guidance. They invest in their business. They have significantly higher net promoter scores/customer satisfaction. One of the more surprising things was, and it correlates just as strongly almost as revenue growth that they truly stand out in is they don’t pay dividends. They don’t really do a lot of share repurchases.

Now, remember, this is 1,300 businesses across the world. So, because a lot of them are non-US, because there’s only about 160, I think US– So, in the paper, I break everything up by geography. And unfortunately, there weren’t a lot of Latin-American and African, so I just focused on North America, Europe and then Asia Pacific. And so, we separated all these behaviors.

To me, the interesting point is not do they outperform. Every study shows that they outperform. Well, actually, there is some doubt in the academic literature. To me, the question was how do they behave. That was the most interesting thing because I started this paper at the same time I got on the board of my first mandate, and so I was also self-examining what is it as an owner I’m going to bring to this company and where I was going intuitively the customer employee morale also drove some of the curiosity. So, I spent years researching these behaviors and then it took like–

Honestly, it took like two years just to answer the peer review. That’s why I really wanted to do this is, so that it enters the academic literature universe. Because to the academics this is largely an ignored topic, and to me and you, it’s incredibly important and for market practitioners. And so, that was the value. There was a lot of data scrubbing that we had to do to get this accepted. It was very gratefully accepted in the International Review of Financial Analysis. So, it’s coming out in July. There’s a link to it. It’s already public and I paid for open access, so that everyone can have access to it. We’ve linked it on our homepage as well. I’m sure you can link it on your show notes as well.

Tobias: We’ll do that.

Steven: Perfect. Yeah. So, I’m really excited about it. Also, I think what I’m really excited about is it’s a great time right now to invest in owner operators. Usually, there’s a valuation premium that’s been confirmed through decades of research. Right now, there’s actually a discount on owner operators through the index, probably partially because of the Mag-7 dominance, but there is a valuation discount looking at this better asset class. There’s 1,300 businesses to look through right now where people are co-investing alongside you and owning a significant amount of the business and managing it as such. So, I hope this message lands with some people.

We’re going to continue to update the data every year. Just getting it published was the first step, but then we’ll keep tabs on who’s in the index, how’s it performing, how are they behaving overtime and who knows what we’ll do with it one day. But I do hopefully it adds to this near religious zeal that I have to restore the link of ownership back to management.

Tobias: What sort of role do the large shareholders need to have for you to count them as owner operator?

Steven: In this, we just said they need to be on the board or in the management team. When I also looked at the type of owner– There was no way for me to actually look at families, although there’s plenty of family research out there. We looked at if a company owns it, if a government owns it, if a private equity firm owns it, if a venture capitalist owns it, what the type of person that was on the board–

Interestingly enough, if it was a company or a venture or a private equity group, they didn’t have any sector wide outperformance. You lost almost all your alpha. So, the alpha is in the manager themselves, the individual person with skin in the game, participating in the management or the board.

One of my favorite subjects is sort of independence of board members. Buffett liked to talk about independence and his idea was you have the capacity and temerity to tell a charismatic CEO, no, when something is going to destroy value. The way that you do that is you put your own skin in the game and you’re not dependent upon the board salary or the board position for your reputation. So, those are the two criteria.

So, this skin in the game is really important. I’ve seen it with me. I’m just one voice of 12 on Leonardo’s board, I’m one voice of 9 I think it is on CTT’s board. So, I don’t have a control position. For me, the ideas have to be sound enough to carry support. So, the quality of the idea is the only ability that I have to influence the debate.

So, my typical approach is when something’s not landing– So, for instance, were the first company and told to cancel shares from a share repurchase program. And there were some people who needed quite a bit of education about that because it’s– Especially in Europe, share repurchases are not looked at similarly to dividends, even though– So, dividends are like no brainer accepted. Whereas share repurchases is like “Wait, what’s happening right now?”

The way that I approached that debate was if it wasn’t landing, I needed to figure out another way to describe what something that is common sense to us, three. I needed to find another way to talk about it. But I wouldn’t give up. That’s the key. My skin is in the game. And so, just because the first conversation or second conversation didn’t lead to a yes, we didn’t give up. And so, that is that sort of stamina that an owner brings.

You can find out more about the VALUE: After Hours Podcast here – VALUE: After Hours Podcast. You can also listen to the podcast on your favorite podcast platforms here:

Apple Podcasts