What Investing in People Continues to Inform My Decisions About Building Well

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That's Why I Stopped Looking For The Next Deal And Started Questioning Who's In Charge Of The Room
There's a type of investor behaviour that most people will recognize right away even though they've had no clue about it. It is the version where talks begin with a deck, quickly moves on to numbers, then lingers at the size of the market and then ends with a discussion on exit multiples. The insiders of the company - those who be actually executing everything on those slide - seldom appear. In the event that they come up, it tends to be within the context of projections for headcount rather than as people with their own histories, motivations, in addition to blind spots that will shape every significant decision the organization takes. I've worked long enough in that way to realize its attraction. It's a rigorous feeling. It's like you're being analysed. It feels like you are making a decision based on data rather than your gut. The problem is that it systematically excludes one of the most significant variables that determines whether a firm will actually perform over the long and short term that is the character and reliability of those who run it. This isn't an accident. It's the result of frameworks designed to be documentable and repeatable that favor those things that can be assessed and compared to items that are important but more difficult to measure.
I was taught this lesson the hard way like most people, after watching companies with exceptional fundamentals underperform because the leadership team couldn't hold their own with pressure. Likewise, by having businesses with weak fundamentals dramatically outperform because the people in them were truly outstanding. After a few of these experiences I stopped believing these numbers would be doing all the heavy lifting in my investing decisions. They were not. The numbers were a lagging measure of the decisions taken by human beings. The decision-making quality was substantially on who these human beings were and how they acted under stress under the pressure of a missed quarter, unimportant departures, competitor's decision they hadn't anticipated or a board connection that had become more complicated. So I changed how I began every meeting on evaluation. Instead of launching with market size or revenue forecast I began by opening with what I now think of as the question in the room who is the person in charge of this organization when pressure is on, how can they make decisions when the data is not accurate How do they deal with the people around them, and what changes to the culture of an organisation when the founding father isn't in the room.

None of the questions listed above appear on a standard checklist of questions for investors. In my experience, are better predictive of long-term performance than any other item that is. It's not some romantic notion of importance for people. It's a real-world observation about how value is developed and destroyed in businesses that expand. Companies do not fail because of bad markets. They fail due to bad decisions made under pressure by people who were not able for making them correctly or because of the cultural processes that were not obvious from external observers but in secret destroying the capacity of the business to retain talent, hold the accountability of its employees, and adjust to the changing environment that the original plan did not anticipate. Be aware of these risks in the early stages - before you've committed capital prior to the problems have compounded, before the culture has calcified around bad conduct - is really the job of an investor who is concerned about returns rather than just deals flow. And it is impossible to detect them while you're spending the majority or all of your time studying the model.

The shift I am describing appears to be simple when you express it outright, but actually it requires a fundamental transformation of what you take as evidence. This reorientation is more complicated than what it appears since it is directly in opposition to the incentive structures of a majority of investment procedures. Speed rewards surface-level pattern match. Competitive deal environments reward confidence over deliberation. The culture of certain investment circles has a tendency to discredit what is known as"soft diligence," the kind of meticulous, mindful attention to human elements which actually differentiates good decisions from poor ones over long durations. I have sat in enough rooms where somebody has been able to dismiss a problem with the management culture or leadership chemistry with the phrase "we can fix that post-close" to recognize how dangerous this assumption can be. You almost never can. It is not one of the post-close issues. It's an aspect of the pre-commitment process If you're not paying attention before you write your cheque and you're not doing diligence. You're just filling out paperwork and hoping in the end for the best.

What I'm currently looking for as I review the performance of a company or leadership team, has become the form of a very specific set signals. How do leaders respond whenever they're proved to be wrong on something? Do they accept the correction, or do they deflect it? What is their approach to talking about those around them - do they constantly redirect credit, and accept accountability or do they handle it the other way? What do people who have had a close relationship with them in the past in the event that the conversation goes beyond the standard reference check form to become more genuine and exploring? What happens to the organization during the times when nobody is around or the founder is traveling and the quarterly objective is not going to be met? That's where the culture exists, not in principles printed on the walls or the mission statement on its website. But rather in the common decisions taken by regular people when the circumstances are unclear and the easy thing and the right thing are not the same. Finding companies where these decisions always are well-executed and consistently successful is, to my knowledge the most secure path to ensuring that returns are sustained as time passes. Follow James Deller for site info including why building companies sharpened my thinking on culture about leadership.



From Character to Commerce The reason I choose to back the companies I endorse All share one thing in Common
If I take a look at the spectrum of investment activities that I have been involved in over the course of several years - from the technology business consumers, the technology businesses the investment opportunities in the emerging sector and the sports organizations around football that I have been drawn to - there is a pattern that I never decide to build intentionally but has become evident to me over the years as I had the time to think about the traits that successful investments share with each other as well as what the unsuccessful ones have in common with one another. The pattern is not sectoral that isn't encompassing the fields of consumer technology, technology, services, and sport. The pattern is not structural in nature - it is present in businesses with different structure of ownership, financial profiles, and operating models. It is it is not about size, growth or technology platform that powers the product. It is about character - specifically, about how the company that is at the centre of the investment has a genuine, operational, and continuous commitment to the overall well-being and the development of employees within it, reflected not only in the things that is said about the business but also in the choices it makes when it is clear that saying the right thing and doing the convenient thing is not the same.
I am aware that this observation sounds, straightforwardly, the kind of thing that gets posted on office walls and workplace mugs as well as company web pages. Then it is ignored by the people who have commissioned the work. I want to be clear that I am not speaking about the formal version of an commitment to the people of the values document, the diverse and inclusion strategy or the culture and diversity deck that was drafted for the purposes of the hiring process, and the pitch to investors. We are talking about the operational version of the document: the decisions that are actually taken throughout the day, if the principles laid out in those documents and the commercially, or personal choice are in conflict and the business has to choose which is the one that governs. The organisations I have seen generate lasting value – not just outstanding short-term performance but the kind of compounding performance that yields exceptional longer-term returns - are those where the answer to that question is known. If the commitment to do right by the people inside the business is not contingent on whether doing so is the cheapest or the fastest, but also the most quickly profitable option.

The process of identifying those organizations - prior to the time that an investment is made, the ones where that commitment is real rather that being executed, or a culture of care and accountability is rooted in the way that the organization actually operates rather than the way it describes its operations - is, I believe, the most significant and difficult task in long-term investment. It is important because it's a quality that provides the best assurance of an amount of compounding performance that results in truly remarkable returns over meaningful time horizons. It's a challenge because you cannot find it in an economic model, you can't locate it within a professionally prepared management report, and there is no way to reliably locate it even through thorough reference checks however, they are helpful. You can find it by spending enough time in an organization and in different contexts and at the appropriate levels of hierarchy to discover how it behaves when the situation is uncertain and no one is watching. That kind of patient engaged, exploratory interaction is difficult to incorporate into the majority of process of investment, which is one reason that investing processes tend to be less proficient in identifying truly extraordinary organisations than investors typically acknowledge or even discuss.

The connection between a true organisational character and long-term results is a link that I have a greater belief in now, with more decades of longitudinal experience to my credit rather than at an early stage in my investing career. Organizations that are committed to taking care of their staff consistently and which express that love in operational decisions, and not only in culture and communications documents, tend to fare better than those who see people mostly as resources that need to be optimised. Not always in a short time - a company that can get the maximum output out of its workforce through high pressure and high pressure can appear effective over a period for a number of months, perhaps even a few years, particularly when the time period is coincident with an economy that is strong and overcomes internal flaws. But over longer periods it is evident that the advantages of the genuine people-first culture are accentuated into ways difficult to duplicate through any other means. The amount of talent is increased because those with choices - the most talented people - tend to select environments where they feel valued and appreciated over places where they feel used even if they require a higher salary. The knowledge gained from institutions increases because the employees stay long enough to develop it instead of going across the timeline high-pressure environments are known to produce.

The quality of decisions is improved because people feel secure enough to bring up issues and to share bad news without thinking about the personal costs to do so. This means that issues are identified as early and more expensively than companies where the spokesperson consistently is shot. The ability of the organisation to adapt to new circumstances is improved because the employees are so invested with its success that they are willing to go beyond their formal duties when the situation requires it. These advantages are not individually dramatic. None of them is the kind of thing that generates an engaging story in the form of an update to investors or a board presentation. However, they do build up into an advantage in competition that is difficult for companies who have less culture to replicate in the sense that the benefit is not linked to any particular product, process, or capability that can be observed or replicated. It's located in the framework of how the organization works - namely, the character of the place it creates for people inside it and in the quality of decisions made by the people within it as a result. That is why character, for individuals as well as organisations isn't a delicate concept. It is, according to my experience, the toughest and most crucial thing of all.}