Great Culture and Great Returns Can Come Hand in Hand

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

Imagine a company that has no dress codes, no vacation policy, freedom for employees to set their own wages and a participative culture where every rank-and-file employee is given a vote in important company matters. To most business school graduates, this would seem like complete anarchy and they would believe such a company would be doomed to fail. However, to SEMCO such a ground-breaking view of corporate culture is embraced with open arms, and the company’s 40% annual growth in sales and profitability since the mid-80s would have proved any naysayers wrong.

The incredible story of the Brazilian company SEMCO, detailed in Maverick by its CEO Ricardo Semler, bore striking similarities to one of America’s great success stories – Zappos – in terms of how a democratic, fulfilling and participative corporate culture helped to transform their fortunes. Zappos’s own story was recounted in Delivering Happiness by Tony Hsieh, CEO of Zappos, after Amazon (NASDAQ: AMZN) acquired the online fashion-retailing company for approximately $1 Billion.

Amazon CEO Jeff Bezos was savvy enough to recognize the importance of Zappos’ corporate culture to their business success, and he has pretty much left Zappos to operate independently. Zappos’ continual inclusion in Fortune’s 100 Best Companies to Work For list after the acquisition provides evidence to support Bezos’ claim of an independently-run Zappos.

While I was reading about these two companies, it struck me that a great (a generally fuzzy word that can be characterized as democratic, participative and fulfilling) corporate culture could actually be a great predictor of continued business success. Companies such as Google (NASDAQ: GOOG), Whole Foods Market (NASDAQ: WFM) and Costco (NASDAQ: COST) have all had articles and books detailing their unique corporate cultures and practices. They have also delivered great business performances over the last 5 years, judging by their increase in revenue and earnings as depicted in Figures 1 and 2.

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GOOG Net Income TTM data by YCharts

What’s more, all three stocks have beaten the S&P500 over the last 5 years as shown in Figure 3. Whole Foods and Costco have actually delivered pretty substantial cumulative returns of 115.9% and 40.30% respectively, trouncing the S&P500’s cumulative return of -4.68%. Even though Google’s investors have essentially endured a flat share price compared to 5 years ago, Google’s revenue and earnings have grown substantially since then and is now traded at a fair price (TTM PE of 22 as compared to annual growth rate in earnings of 26%) for what is a wonderful company. So, what exactly is unique about their corporate cultures that can enable them to deliver sustainable growth?

GOOG data by YCharts

In Google's case, they are famous for offices where they marry fun and productivity. They also offer employees a sense of fulfillment by letting them have up to 20% of their working hours to engage in or self-start blue-sky projects. This has enabled Google to transform themselves from an internet search-engine based company to one where their employees are involved with self-driving cars, wearable-computing glasses, super high-speed internet cable services and many more.

These are all projects that were dreamed up by Google’s employees, who were given the freedom and support to dream-up and push through their Big Hairy Audacious Goals. These projects are still really small and some remain in the gestation period, but if history does rhyme, we can see these as great drivers for Google’s future growth. As Sergey Brin, co-founder of Google puts it,We’ve let a thousand flowers bloom; now we want to put together a coherent bouquet.”

Whole Foods is unique among retailers and many other corporations for their operational and hiring policies. As recollected in Tim Harford’s Adapt, Whole Foods organizes their employees in small teams in each store location and management gives their teams a lot of autonomy in product offerings, pricing and marketing. Whole Foods' hiring interviews consist of team-based on-the-job trial periods lasting four weeks, after which the candidate has to be voted in by his or her peers. This is a great move that not only increases a sense of participation in employees and fosters better teamwork, but also ensures that the corporate culture within Whole Foods is not diluted. The company's large degree of decentralization of power and responsibility has allowed them to continue their amazing business success.

Jim Sinegal, former CEO of Costco sat down for an interview with The Motley Fool’s CEO Tom Gardner and answered questions relating to Costco’s culture. In it, Sinegal said that The culture of the company is not just the most important thing, it’s the only thing. Costco’s great, participative culture is reflected in them trying their best, and often succeeding, in promoting from within, as well as much higher employee salaries as compared to industry peers. Costco is also fanatical about offering the lowest possible price they can to consumers and they wear that lowest-price-badge with honor. Once again, Costco’s insistence on maintaining their corporate culture has resulted in great cumulative earnings and revenue growth.

Conclusion

Tom Gardner has also mentioned in interviews that websites such as Glassdoor.com can give him a peek into the culture of a company, which is vitally important to the long-term sustainability of a company’s growth. More often than not, investing is done not just based on the financial statements alone – reading up on companies with unique, participative and creativity-fostering cultures might just throw up great investing ideas for companies that can grow and operate profitably for years to come.


serjing has no positions in the stocks mentioned above. The Motley Fool owns shares of Amazon.com, Costco Wholesale, Google, and Whole Foods Market. Motley Fool newsletter services recommend Amazon.com, Costco Wholesale, Google, 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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