Taking the Broader View

Investors have a habit of defining a company’s success by its latest financial report. I get it – I’m an investor myself – and no matter the story a company tells today its financial statements will eventually act as its report card.

Step past the market’s myopic view of short-term results, though, and you’ll step into another puddle: The misunderstanding that investors come first. Again, I get it – we’re the ones putting our hard-won capital at risk – but my view is that long-term investors are best served by putting their key stakeholders first.

Here are a few examples in action.

Employees. Employees are the soul of a business, and for many companies their employees are the very face of the business to the customer. Treating employees with respect, empowering them, and rewarding them in ways that align with long-term goals makes a great deal of sense in that light. And, even if you did instead view employees as commodities, the reality is that employee turnover is costly and disruptive.

Consider US-based budget airline, Southwest Airlines. Southwest is known for a quirky policy of putting employees first ahead of customers with the rationale being that happy employees make for happy customers. It’s hard to argue with the results: Southwest has long been among the country’s most financially stable airlines and was recently rated by J.D. Power as having the highest customer satisfaction among low-cost airlines.

Customers. Companies that treat their customers like annuities invite disruption. That’s a point that was hammered into me several years ago by John Mackey, the CEO and co-founder of Whole Foods who would, later, join the boards of Amazon and our parent company, The Motley Fool.

John’s point was intuitive and yet overlooked. It’s tempting to squeeze a loyal customer for everything they’re worth, especially if they don’t have other viable options, but doing so breeds ill-will and a lot of headroom for scrappy, innovative upstarts to price at a lower level and still make a profit. Here’s looking at you, Foxtel.

Suppliers. Companies tend to view suppliers as either replaceable adversaries or valued long-term partners. It won’t surprise you that, as a long-term investor, I prefer the latter mindset.

A prime example of this mindset in action is a tale I once heard about Costco founder Jim Sinegal. Costco, which is relentlessly focused on delighting shoppers with great service and quality at the lowest prices possible, is also known for nurturing sustainable relationships with its suppliers.

The story goes like this: One of Costco’s buyers, who is a friend of a friend, had agreed to purchase a huge lot of flat-screen televisions from a supplier at a tremendous price. The buyer proudly told Sinegal of his feat only to receive a surprising rebuke: Go back and tell the supplier Costco would pay more than they’d agreed. Sinegal reasoned the supplier couldn’t make a margin at that price and, if they were to be long-term partners, Costco would have to resist the urge to exploit them.

Incidentally, Costco’s shares have delivered a total return of about 550 per cent over the past 15 years. Not too shabby, and one can’t help but think Costco’s long-term mentality with not just customers but also suppliers played an important role in its success.

The World. I know ‘the world’ sounds a bit cheesy but there are practical business considerations to making sure a company stays in the good graces of its regulators, community, and environment. Companies that strut and flout their market power engender discontent that can come back to bite them.

For example, my hunch is that the boards of Australia’s big four banks, who probably see Greg Medcraft in their dreams, would love a “do over” when it comes to how they’ve engaged regulators over the past few years.

Putting Investors First by Being Last

It’s easy to picture how a company could boost short-term profits by cutting back on benefits here, squeezing a supplier on terms there, or taking a high-handed approach to regulators and their communities. All those moves can make for significant long-term burdens, though, and long-term investors would do well to follow companies that share those mindsets.

After all, if a company’s management team doesn’t even treat its own employees with respect, what makes you think they’ll prioritise small shareholders?

Joe Magyer is the chief investment officer of Lakehouse Capital. He owns shares of Amazon. This article contains general investment advice only (under AFSL 400691). All of the commentary, statements of opinion and recommendations contain only general advice and have not taken into account your personal circumstances.