In the fourth article in this series on equity investing, Hugh Young discusses why people and a strong culture are so important to successful companies.
How important are people to a company? Are they its lifeblood? Or just cogs in the wheel? The answer may depend on your view of who matters. When we refer to the CEO or management team, their importance would seem obvious: they provide a company’s leadership and the public face.
A generation ago the successful CEO was a cult figure. Think of Jack Welch or Richard Branson. Today, they seem more like colourful exceptions. Post global financial crisis (GFC), there is a bigger than ever focus on regulatory compliance. Companies have to show they are fit and proper and running businesses sensibly; boards query big deals and keep CEOs in check.
The new mood originates in banking, unsurprisingly. Regulators are still grappling, six years on, with how to prevent a repeat of the last crisis when bank bosses oversaw what were, at best, dangerously aggressive strategies and, at worst, cases of outright financial misconduct.
As long-term investors in Asia, we at Aberdeen appreciate the quieter virtue of competence over ego. Once we have an idea of whether a company is making money and will continue to do so, we look the CEO in the eye and ask ourselves if he can be trusted to grow the business against objective yardsticks and share the rewards with investors.
But CEOs are not the only people worth talking to, nor do they conform to a type. In Japan, the CEO is a figurehead and is rotated frequently, the better to reinforce consensus and allow everyone their turn at the top. In Southeast Asia, the patriarch in charge of the family business is a more typical figure.
We have no preconceptions as to which model is best. What does matter are checks and balances. A majority-non-executive board of directors under an independent chairman is usually the best guard against waywardness. In practice, Asia is home to too many boards that owe their loyalty to the CEO. When there is no one to challenge the boss, this can disrupt or even destroy a business.
'People are our most important asset’ is a clichÈ. Yet it does contain a solid truth: a company that can deliver a successful strategy continuously will nearly always rely on a strong culture. A strategy where the culture is not supportive will, on the other hand, almost always fail.
Indeed, research from Credit Suisse on long-term stock market returns shows that top-performing companies tend to stay that way (the converse is also true). There are many reasons for this but implicitly the study shows that among winning companies a clear plan and effective management of the bottom line is what counts. As for bosses, they come and go.
Company cultures are notoriously difficult to pin down. Values and attitudes are usually set in the boardroom. Successful ones encourage staff to embrace a common purpose rather than ask 'What’s in it for me?’ Policies must also be supportive, recognising people for what they do and giving due motivation and reward, both financial and otherwise. Pride in the job and loyalty is the payback.
What examples are there of good company cultures in Asia? Although Asia generally lacks home-grown brands, there is no shortage of investable companies in Asia that are distinctive. One company we rate is AIA Insurance. It was spun off after its parent company AIG had run into trouble during the financial crisis. (The Asian unit was never involved.) AIA’s model rests on 80 years of experience in Asia, a mixture of product innovation, financial strength and market penetration, mainly via agents selling on commission. Where management earns its keep is in managing the agency force, which means weeding out under-performers as well as rewarding stars.
Hugh Young is the managing director of Aberdeen Asset Management.