Is Your Investment Healthy?

Matthew is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

I had the opportunity recently to go to a leadership seminar to hear some of the best minds on leadership speak about how good leaders make good choices.  One of the speakers, Patrick Lencioni made the comment that the, “single biggest opportunity for a competitive advantage is free, accessible and untapped in most organizations.”  He went on to say that most companies think their competitive advantage lies in how smart they are and this is partially true, but most companies hire smart people.  These smart people develop good products and churn out intellectual property that gives them an advantage over their competition. He said that you cannot build a competitive advantage on knowledge alone and that most companies cannot completely live up to their potential because they are not a healthy company which is the second and potentially most important component in a competitive advantage. 

So, that begs the question, what makes for a healthy organization?  Lencioni’s definition was that health was derived from minimizing politics and confusion.  He went on to discuss four principles of a healthy organization:

1)      They build a cohesive team

2)      They create clarity

3)      They over communicate clarity

4)      They reinforce clarity

Building a cohesive team of course starts from the top and the vision set forth from the leader.  A leader isn’t necessarily someone you see yourself working for, but because of the vision you feel that you work with that person, you are part of something bigger.  A great example of this is found in John Mackey the founder of Whole Foods Market (NASDAQ: WFM).  He said in an interview with Motley Fool co-founder Tom Gardner that, “Business, capitalism, is about creating value for other people.  And conscious capitalism, in a sense, is becoming very conscious of the principles that lead to creating that value.  Creating value not just for investors; you create value for the customers. You create value for the employees. You create value for the suppliers. You create value for the investors. You create value for the large community, and it’s all done voluntarily. No one’s forced to trade with the business. They do so because it’s in their best interest to do so.”  Therefore, you can create a cohesive team of employees, vendors, customers and investors.   Everyone is behind the vision and the organization is on its way to becoming healthy. 

The next three principles all relate to the idea of clarity of the vision.  One company that does a great job at this is Southwest Airlines (NYSE: LUV).  Take the Southwest Way for example which gives three core components: Warrior Spirit, A Servants Heart and Fun-LUVing Attitude.  Not only do the employees at Southwest know these but whether they realize it or not most of their customers do as well.  Anyone who has flown on Southwest knows about their Fun-Luving Attitude.  On one memorable flight I had Luke Skywalker and Hans Solo giving the complete flight briefing as if we were flying on the Millennium Falcon which really made for an enjoyable flight.  Because Southwest is a healthy organization they’ve given themselves a profitable competitive advantage in an industry filled with smart people.

Going back to what Patrick Lencioni said about the importance of health in an organization, I think it’s important for investors to take a look at the corporate culture of companies they are investing in.  John Mackey had another interesting quote where he said,

“Right now we do have some organizations like 100 Best Companies to Work For. The Great Places to Work Institute is one filter that sifts through companies that obviously have great cultures. And interestingly enough, they publish how their portfolio has done over the last 15 years since they started that list. It’s handily outperformed the S&P 500, and if you were to rebalance every year, meaning get rid of it, you just bought the original list and held it for 15 years, you’d have doubled the performance of the S&P 500, but if every year you take off the ones that drop out and you add the new ones that have come on, you rebalance so to speak. It’s a significant outperformance; I don’t have the figure right handy, but if you check it, I think it’s more like three to four times the outperformance. So culture does matter, and the companies that have good cultures, they are great places to work. Generally, not always. It’s not a magical formula, but it’s a good indicator they’re well managed, and it does tend to lead to outperformance. It’s a good way to select stocks, in my opinion.”

As Mackey pointed out, culture does matter and that culture usually is created from the top down.  It is interesting that he did point out that it’s not a perfect indicator.  One company on the list surprised me given recent headlines is Chesapeake Energy (NYSE: CHK) at number 32.  They made the list because “the natural-gas giant already had a fitness center with a swimming pool and climbing wall and free Weight Watchers membership. Last year it added a block-long sustainable garden with a pavilion for hot yoga and classes on healthy foods.”  CEO Aubrey McClendon has been in the news a lot of late for his oversized pay packages and founders well program, not to mention his running a hedge fund.  The key is to look at how the vision relates to the culture, in this case Chesapeake wants to be "America's Natural Gas Champion."  However, does McClendon's actions promote, create, communicate, and reinforce clarity?  He certainly puts his money where his mouth is by personally betting heavily on the future of natural gas.  Could it just be that the stock has been hit by low natural gas prices which have therefore fueled McClendon’s headlines?  Maybe.  This begs the question; can a company simply have the right culture but the wrong timing?  Many are calling for McClendon's ouster but if one variable were different, in this case gas prices, he might be thought of in a different light.  In this case Chesapeake might not be smart enough to have a competitive advantage if the man at the top keeps getting price vs. supply and demand incorrect. Or the vision he is creating clashes with the culture if he is as the media portrays him, just out to line his own pocketbook. 

What I want to leave you with is this thought, is the company you are investing in healthy?  Does it have a coherent leadership team?  Is there clarity in their products and vision?  Showing up on a list or in some screen might hint that a company could be a compelling investment; it is not the final determinant.  Long term value will be created by those companies that are healthy enough to stand the tests of time. 


latimerburned has no positions in the stocks mentioned above. The Motley Fool owns shares of Whole Foods Market. Motley Fool newsletter services recommend Southwest Airlines and Whole Foods Market. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. If you have questions about this post or the Fool’s blog network, click here for information.

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