Buffett likes to quip that “If past history was all there was to [investing], then the richest people would be librarians.”
An addition might be, “If accounting was all there was to investing, accountants would be the richest people.”
This American Life had an interesting podcast this past week, “The Secret Recordings of Carmen Segarra.”*
Ms. Segarra was a bank examiner working for the Fed to help oversee Goldman Sachs. There are a lot of interesting tidbits, but I will focus on one thing. Ms. Segarra gets into many heated exchanges over Goldman’s conflict of interest policy or lack thereof. Does it cover all the divisions, or only apply to a few, is it strict enough, does it meet the Fed’s standards for a conflict of interest policy? She is focused on making sure they have enumerated in specific language, and on paper, what their policy is regarding conflicts. This is important to her.
I have yet to read a business biography where the author has a chapter detailing why he or she thinks a specific company policy, enumerated clearly in their policy handbook was a defining key to their success. Never, not once. Policy handbooks are merely full employment practices for lawyers and HR people.
That being said, Culture matters. It matters a lot.
There is an observational bias called the Streetlight Effect, where people will look for things where it is easiest to look for them, i.e. under a streetlight, even if that isn’t the most likely place to find what they are looking for. Circling back to the quip above, a lot of investors focus on the accounting because that is what they can study. You can create an excel table detailing the profit margins of a company, but it is tough to tease out the culture of a company from the figures, but that doesn’t mean it isn’t important.
This is something that I think is very difficult for investors to find, but it is there. Here is a link to an article about a company whose executives are extremely cheap. This is a cultural thing. It’s not in a policy handbook, but it is a part of the organization. What kind of car do the employees rent when they travel, do they double-up when stay at hotels, where is their annual meeting (at this company, it is in a warehouse)?
Clayton Christensen, in his view from the ivory tower, makes the following comment in response to this “cheap company,”
“It’s a good thing to strive for, but it isn’t the source of a sustained competitive advantage,” says Clayton M. Christensen, associate professor at Harvard Business School. “You can become more profitable by putting your corporate headquarters in a cinder-block building, staying in Motel 6s, and eating at fast-food restaurants. But other companies can do the same. And as soon as they do, what advantage do you have?”
Mr. Christensen assumes all companies can simply copy this culture of cheapness. I disagree very strongly. Culture is incredibly hard to replicate and/or change at a company. It might be one of the most valuable parts of some companies, and one that never shows up on an financial statement.
I have never been employed by Berkshire (at least not yet–maybe I am one of the three people on the list?), but I can virtually guarantee you that there is no policy guidebook that employees receive when they are hired. If Berkshire had had a policy handbook, do you think David Sokol wouldn’t have traded on insider information a few years back. Not a chance. This was a mistake that Sokol made and he would have made it with or without the handbook. Berkshire has created a culture that leads to people making the right decisions 99.9% of the time, and this was merely one of the times when an employee made a bad decision.
There’s no secret to finding the culture of a company, it’s hard…but it is important. There are hints and it usually starts with looking at how companies don’t dance just because the music is playing…
*Full Disclosure on the NPR story. Pro Publica does some great work. Despite my libertarian leanings, I typically enjoy the topics they cover, but I have found their journalistic quality to be less than stellar. For example, in this story, they bury the money quote towards the end of the hour-long story. Despite Carmen Segarra’s frustration with the unethical behavior of Goldman Sachs, she “interviewed unsuccessfully at Goldman three times during her time as a bank examiner.” This disclosure should have been at the beginning of the interview.