Wednesday, January 22, 2014

Corporate Ethos

Ethos derives from the Greek word for "character" and it is used to describe the core beliefs that guide a person, culture, and even a nation. For those of us who wish to Invest Like A Farmer, identifying companies that have an established corporate ethos is vital. It is so important in fact, that nearly all of my investing decisions revolve around whether or not a possible addition to a portfolio has in fact demonstrated a corporate ethos. It will make the difference of whether I buy or sell a stock, whether I stick with a losing position, and whether or not I add to a position. Corporate ethos is that important.

What is corporate ethos exactly though? Corporate ethos is a way of doing business that has usually been instilled from the founder and passed along through several, if not many generations, of corporate leaders and managers. Simply put, it is "the way we do things at _____" (fill in the blank.) Corporate ethos also simultaneously implies a virtuous cycle rather than a vicious cycle; the very fact that a company has a corporate ethos suggests that it is successful and therefore had demonstrated the characteristics of a virtuous cycle.

Let's delve deeper into exactly what I mean by a corporate ethos; it is both the way a hamburger is made, the logistical process for getting the ingredients, the way marketing is conducted, and even how the ingredients are sourced. You can substitute out hamburger for automobile, package delivery, and any number of services or goods. The corporate ethos also includes a certain passion for accomplishing the service or production of the good; the ethos is never satisfied with "good enough." Typically these companies become leaders in their respective industries through constant improvement, refinement, and horizontal growth of their customer base. The corporate ethos becomes a repeatable, proven process of success.

Typically (we'll call it 95% of the time) this corporate ethos has derived directly, without question, from the founder. It is what drove the founder to become successful; the continued success of the business almost always as well is dependent upon the founder's ability to either directly or indirectly pass along the corporate ethos. Show me a a successful company, and I'll show you their ethos. By the same note, show me a flailing company, and I'll show you a breakdown in their corporate ethos. Occasionally, the corporate ethos is so effective that is changes how an entire industry, and likely a society, functions. In these cases the corporate ethos itself now becomes the paradigm on how to do business in that industry. This in turn spawns other start-ups which can dramatically change the existing structure by pursuing a unique corporate ethos.

As financial farmers one of the first rules of investing we look towards in guiding our portfolio selection is the "boringness" of repeated successful earnings from branded companies. These earning streams don't come about by accident, though; they are a direct result of a successfully imparted corporate ethos that propels a virtuous cycle onwards and upwards. By the same token, my ears always perk up when I read about a company seeking an outside CEO; for me that indicates that the internal structure of training, leadership, mentorship, all of it, is broken.

The corporation that needs to bring in outside management is broken on the inside. As a financial farmer one should pay particular attention when senior leaders are sourced from outside the industry, and in particular from consulting firms or management companies. A corporate ethos is the lifeblood of a company and top-level outside leadership implies a transfusion. The flip side of this coin, however, is whenever I hear about the return of a founder to company; pay attention. There is almost a magical, palpable change in the corporate structure where "this is how ____ does things" returns to the lingo and culture. Take a couple hours and  go over the returns of founders to the CEO position; very interesting things occur in the stock price.