By: Chris Tell at: http://capitalistexploits.at/ [7]
Recent dealings with a company led me to think about the relationship between corporate governance, creativity, innovation and what it takes to create or indeed wreck a successful enterprise.
A result of having been involved in well over 100 private equity transactions (I've long ago stopped counting), Mark no doubt a similar number, has been a lot of lessons learned and a particular methodology for choosing investments. Each day I learn more and I'm far from perfect. I only hope that I keep getting better.
One of our pillars of investment methodology has always been to focus very heavily on management in any company we invest our capital into. I've seen fabulous ideas run by idiots and they have a near 100% failure rate. I've also seen mediocre ideas run by very talented smart people succeed beyond all expectations. Clearly we need to work with good people, period.
Albert Einstein famously commented that "Creativity is intelligence having fun".
But what exactly is creativity?
I'd define it as an ability to create meaningful ideas. These ideas brought to fruition bring value to peoples lives and people pay for value. In monetary terms this is known as intellectual property or IP. It is a critical element worth mentioning as the vast amount of value in today's world resides in intellectual property. Additionally, IP is mobile. Governments, organizations and individuals who try to trap IP by force are facing a tough challenge in our modern world. IP can move across borders in minutes without an individual leaving their sofa.
Mark and I own some businesses which are 100% mobile. They are domiciled where it is most attractive for them to be domiciled and this can be changed in a matter of weeks if not days should the need arise. These businesses are driven by IP and are far from abnormal. They are, in fact, becoming the norm.
Consider companies such as Apple [8], Google [9] or even Glaxosmithkline [10]. What and where is the value in Apple? I'd suggest it is in the IP the company has built. The products are assembled in China anyway and that certainly isn't where the value lies. Apple's products could be assembled in any number of countries which provide competitive labour costs. The IP, however, can move anywhere.
For any company their challenge is to attract talent, creativity and skill. They do this by creating an environment of openness, fairness and opportunity. A company therefore needs strong values and good governance. Without good governance talented people will soon leave as their skills will not be allowed to flourish. What is needed is an environment conducive to flourishing ideas. Ideas die when they're not put to use. Ideas die if there is no sustenance for them to grow and flourish. This sustenance is what is provided by investors in the form of capital and corporate infrastructure in the form of governance.
Corporate governance is a favourite topic of Richard Chandler [11]. If you're not familiar with the Chandler Brothers you're likely not alone. These two Kiwi gentlemen are my heroes. Extremely secretive, contrarian, driven, principled investors who invest their own capital and don't care for the limelight or what others think. They are at heart value investors often focusing on turnaround opportunities.
Over a span of some 20 years the Chandler brothers took a $10 million sum of capital and have parleyed that into over $5 billion. They are amongst the most successful investors in history yet they are virtually unheard of by the mainstream. My kinda guys.
I could discuss the Chandler brothers all day long but suffice to say their influence on me was one of the many catalytic reasons for the formation of Seraph [12], a syndicate of High Net Worth investors who together with Mark and I, invest in early stage proprietary private equity opportunities.
Suffice to say the Chandlers focus a lot of attention on management and though they've often invested in companies with poor management they've done so in order to replace those management teams, turn the companies around and reap the rewards. They are probably THE most successful strategic narrow focused private equity investors I know of.
Richard Chandler has a list of principles of good corporate governance and I'd like to share them with you today.
The Chandler Corporation’s Principles of Good Corporate Governance:
- Commerce and capital are based on trust. Capital will naturally flow to markets where there is a fair and impartial application of just laws. Governments have a responsibility to create a trust-based economy that protects investor property rights through the rule of law being applied without discrimination.
- Good corporate governance rests on the Cardinal Principles of integrity, transparency, and accountability.
- Prosperity flows from a partnership among shareholders, management, customers, and regulators. Management’s role is to create long-term shareholder value as well as social value through the productive use of capital and resources in an ethical manner.
- Management has a social responsibility to respect and nurture the physical, economic, moral, and social environment within which the company operates.
- Shareholders are owners. They must have the attendant rights and responsibilities of ownership. A company's structure should be based on the principle of "one share equals one vote." Shareholders are responsible for electing the board of directors which, in turn, appoints the company's management. Responsible shareholders provide oversight of management’s performance.
- Good regulations support the Cardinal Principles. They enable shareholders to exercise their oversight responsibilities without burdensome and impractical rules and procedures.
- Management is accountable to shareholders for the productive use of the capital entrusted to them and for their financial and ethical performance.
- Capital is a valuable resource which must be prudently managed. When management cannot deploy capital productively in the business, it should be returned to shareholders.
I think good corporate governance is a bedrock on which a company can let its intellectual creativity and innovation flourish. I liken it to the compost my wife is putting into our vegetable patch for the coming spring planting.
- Chris
"I think Asia is the best place to be for the next 20 years." - Richard Chandler