Strategy:

Greg Hoffman

Virtually all investors will tell you they prefer companies that are “well managed”. But dig a little deeper into the topic and things quickly get murky, complicated and subject to opinion. Let’s contrast two companies with a similar number of employees: Google (listed on the NASDAQ stock exchange as Alphabet) and Woolworths. The former made $US162 billion ($233 billion) of revenue in 2019 and delivered a net profit margin of 21.2%. The latter recorded $60 billion of revenue in 2019 at a net profit margin of 2.6%. Both are widely considered to be wellmanaged companies.

I’ve had the good fortune to visit the offices of Google in both London and Sydney. The food (I dined on roast quail for lunch in the London office) and amenities (napping pods, anyone?) are famously impressive.

Yet can you imagine if the management team at Woolworths tried to offer its employees similar perks? It would be irresponsible. Alphabet generates roughly three times the revenue per employee and almost 20 times the profit per employee that Woolworths does. And that’s after paying for all of the staff perks. At Woolworths, there simply isn’t enough fat on the bone to offer Google-style benefits.

Clearly “well managed” means different things in different industries and companies. In one situation it might be all about efficiency and keeping costs as low as possible; in another it may be about pampering staff and providing a seemingly lavish environment to get the best out of them.

LOOKING FOR CLUES

When researching companies to invest in, pay attention to any clues you can find about the management style, company culture and morale. In the US last year, I was speaking with a staff member at a Lovisa (ASX: LOV) store who told me that she had worked for many retailers but that Lovisa was the by far the most costconscious of them all. Online reviews from employees and former employees can also be an interesting source of information to help form a picture.

A successful management style may not align with your own ideas of how to run a business. But for me it’s about understanding whether a successful company’s culture is sustainable and, especially if it’s growing fast, replicable.

The most powerful shortcut I use to identify such cultures is seeking out companies led by their founders. These cultures are typically clearer and more ingrained. So, if they’re successful, I have a higher degree of confidence that there is something genuine there rather than the claptrap that masquerades as culture at many organisations (you know, with motivational posters on the wall with stuff like “Together Everyone Achieves More”).

SOMETHING FROM NOTHING

Founder-led companies also tend to be able to create something from nothing. A professional chief executive on a three-year contract is more likely to be paying advisers millions of dollars to instigate a “strategic review” while a founder is planning their next masterstroke on the back of a napkin.

This kind of ethos is evident in What It Takes, a

book by Stephen Schwarzman, who co-founded the hugely successful Blackstone Group. He’d been made president of his high school’s student council and “wanted to do something that no [one] else had done, or even thought to do”.

His school and city were music obsessed and he came up with the idea of getting a chart-topping band to come and perform at the school: “There were a lot of phone calls, a lot of whose dad knows whom. And at the end of it, Little Anthony and the Imperials came to Abington High School. I can still hear the music, see the band onstage and feel everyone having a great time.”

“If you want something badly enough, you can find a way. You can create it out of nothing. And before you know it, there it is.”

These lines capture the spirit of a true innovator. The portfolios I manage are stuffed full of companies run by founders (or people who behave identically to founders). These include Ian Macoun at Pinnacle Investment Management (PNI), Hamish Douglass at Magellan Financial Group (MFG), Shane Fallscheer at Lovisa, Matt Hill at Globe International (GLB), Shaun Di Gregorio at Frontier Digital Ventures (FDV), Kent Swick at Swick Mining Services (SWK), Graham Turner at Flight Centre (FLT), Andrew Clifford at Platinum Asset Management (PTM) and David Evans at Evans Dixon (ED1).

SKATEBOARDS TO WORKWEAR

I could wax lyrical about all of these impressive leaders, but let’s take the Hill brothers at Globe International as a case study. These skateboarding brothers created their global brand, focused firstly on shoes in 1994. Yet it has two more recent brands that I’ve found particularly impressive and attractive as an investment proposition.

In 2012, after observing tradies coming and going on a property development, Matt Hill was struck by the lack of style in their workwear. He hit upon the idea of adding a level of design to workwear to make it look better while losing nothing in terms of function. “Function by Design” or “FXD” was born.

Go to any building site in Australia with more than half a dozen workers and you’re bound to find the trademark FXD green colouring around a black and white anvil logo close by. The company struck a seam of gold as mostly younger, cashed-up tradies flocked to a brand whose quality they learned to trust and whose designs made them look better than a boxy old pair of King Gees.

FXD now turns over tens of millions of dollars a year at healthy profit margins. I think that brand alone could be worth as much as the current valuation of the entire company. But there’s more.

In 2017, the company launched Impala, a female-led brand which initially brought funky and fresh designs to old-school roller skates (built using Globe’s technical inventory and know-how). If you search for the clip to the song Confidence by Ocean Alley (number one on the Triple J Hottest 100 in 2018), you’ll see Impala’s distinctive skates featured heavily. Impala has since launched skateboards and inline skates. Impala’s revenue contribution is relatively small for Globe, but it is growing quickly.

Both FXD and Impala have been created from nothing by the team at Globe. The timelines required to nurture such brands is beyond the reach of most professional chief executives who need to show results during their contract term.

I’ve visited Globe’s offices in Melbourne and Los Angeles and the distinctive culture is obvious from the minute you walk in. These are people who are passionate about their products and industry and are true innovators.

Not every founder-led company is a slam dunk, though. Frauds are often founder-led, for instance. And good investments can come in many forms. But given the choice between two similar companies at the same price where one is being managed by a founder, I’ll take it every time.

Disclosure: Private portfolios managed by Greg Hoffman own shares in all of the companies mentioned except Alphabet and Woolworths.

Founder-led companies tend to be able to create something from nothing