Company culture can be at the heart of business success, explained by Carla Bannatyne, Scottish asset manager at Baillie Gifford.
As with any investment, capital is exposed to risk.
Over the past four years, the resilience and adaptability of businesses have been put to the test. With financial markets favoring certainty and predictability, strong long-term cash reserves and low debt levels were required to provide some assurance. Yet these aspects of resilience are more like minimum criteria, indicators that the rest of the market will also focus on.
Our knowledge of companies results in large part from our ability to adopt a different point of view and to value the qualitative or intangible elements which seem essential to us. It’s a skill we’ve been honing since we launched our Long Term Global Growth strategy more than 20 years ago. In 2004, the fourth question on our investment research form was: “Are your people consistently better than theirs?” If so, why and in what areas? In 2013, the question evolved to: “Is company culture really unique?” Is it adaptable?
We are convinced that corporate culture, although absent from financial statements, directly influences its decision-making. It is she who motivates employees, who encourages them to seize and create opportunities on a daily basis. In a constantly changing world, a culture that knows how to adapt effectively will do more than survive, it will thrive. Aren’t these the main levers of value creation?
Quantifying the value of company culture
The first step is to consider a company’s actions rather than its statements. Any business can indeed build a narrative around itself, but ultimately it will be how it operates that will define its true values.
Our visit to e.lf Beauty’s discreet headquarters in Oakland, California, confirmed the importance the brand places on the value of the money it spends and the uniqueness of its culture. Significantly, the financial director and the deputy general manager in charge of operations have, on their own, indicated that they were the first in their family to have pursued higher education and that they had mainly joined the company with the aim of to work alongside a motivating management team with similar backgrounds to theirs. Although modest, these two leaders have demonstrated a clear desire to develop their sector of activity.
We are also interested in how companies communicate about themselves and the image they have of themselves. Although most of them are required by regulation to report their quarterly results, there are no guidelines on how they perceive or can comment on this short-term data. We instinctively trust the companies that have a clear vision of the direction they want to take their activities over the next ten years.
The Adyen company recently suffered from its refusal to give in to the sirens of quarterly reporting. Established in the Netherlands, the company has the particularity of publishing its results every six months, an operation which suits perfectly to a management team resolutely focused on the long term. Unfortunately, its shares experienced sharp declines when the company opted for counter-cyclical investments in engineering personnel at the expense of short-term profits, or when commissions were reduced due to share-in effect. operational leverage with merchants. During our regular discussions with their management, we learned that the company consciously adopts a very regular recruitment pace in order to maintain the dynamism of the corporate culture and ensure a certain density of talents within it…
This results in our third method, which consists of penetrating deep into the company’s organization. We won’t learn much from an investor relations manager, a polished professional with a well-rehearsed speech. .The most valuable information will instead come from long-time collaborators, who are less accustomed to talking to investors and who, therefore, will display a certain authenticity.
Our reputation as long-term shareholder-partners opens the doors wide for us. So, earlier this year, we were able to meet with the two co-presidents of Spotify to discuss recent organizational changes that have allowed them to significantly reduce operating costs. This duo who rarely spends time with their shareholders explained to us that the latest adjustments made to their structure, previously largely decentralized, had allowed them to better align and prioritize initiatives while preserving the autonomy and innovation potential of developers. . These details reassured us about the positive effect of recent budget cuts aimed at lightening an overly heavy organizational model. However, we remain aware that Spotify is not yet able to provide proof of its ability to sustainably monetize its platform.
Understanding a company’s culture is not a revelation, but rather a constant learning process, where each interaction and each iteration is a piece of the puzzle. Either way, it will never be possible to see the true big picture, since companies are constantly evolving in terms of size, staff and opportunities.
Culture in the face of change
All this leads us to address the capacity to adapt. With a view to investing in companies for five, ten or twenty years, Long Term Global Growth requires the companies it holds in its portfolio to be able to adapt. We are therefore looking for companies open to change and ready to experiment. It is therefore not surprising that several portfolio companies reinvented themselves during our investment period, such as Amazon, a platform for which book sales no longer represented only 10% of its turnover. revenue in 2023 or NVIDIA whose video games segment returned to only 17% of its turnover over the last twelve months.
Jensen Huang recently celebrated 30 years as CEO of NVIDIA. This remarkable success can be partly attributed to a strategy he describes as “progressing through failure”: trying something new and if it doesn’t work accepting it, adapting, then improving with each times. This state of mind has favored considerable investments in the development of its CUDA software solution which is well ahead of the competition. Today, more than three million developers use the platform, which is now one of the company’s main competitive advantages.
When we look at culture from this perspective, founder-owned or family-owned businesses have always been attractive. They currently represent more than 70% of the portfolio. For what? The primary motivation is often to pass the business on to future generations from a position of strength, a motivation that matches attitudes, incentives and time horizons that align with those of our customers.
A quality corporate culture alone will not determine the success of an investment, but analyzing it in depth can help us prevent some of the mistakes often associated with growth investing. Culture is an intangible glue that ensures the cohesion of high-growth companies. It plays the role of the “facilitator” which gives sufficient space for innovation, it is the standard on which companies can rely to emerge strengthened from adversity.
Important information
This article does not constitute independent research and is not subject to the protections afforded to such research. Baillie Gifford and its staff may have negotiated the relevant investments. The opinions expressed are not statements of fact and should not be considered advice or a recommendation to buy, sell or hold any particular investment.
Baillie Gifford Investment Management (Europe) Ltd (BGE) is authorized by the Central Bank of Ireland to act as an AIFM under the AIFM Directive and as a UCITS management company under the UCITS Directive. BGE also benefits from regulatory authorizations to carry out individual portfolio management activities. BGE provides investment management and advisory services to separate European clients (excluding the UK). BGE has been appointed UCITS management company of the following UCITS umbrella company: Baillie Gifford Worldwide Funds plc. BGE is a wholly owned subsidiary of Baillie Gifford Overseas Limited, itself wholly owned by Baillie Gifford & Co. Baillie Gifford Overseas Limited and Baillie Gifford & Co are authorized and regulated in the United Kingdom by the Conduct Authority financial institution (FCA).
