Insights

What Can Management’s Communication Style Tell Us About Corporate Priorities?

“The great man is he who in the midst of the crowd keeps with perfect sweetness the independence of solitude.”

– Ralph Waldo Emerson

9/4/19 Oleg Litvinenko, CFA

In our most recent post, we discussed competitive moats as a critical element of our investment process. An equally complex and arguably more nuanced area of business analysis involves assessment of management and corporate culture. We will devote a number of future updates to this topic but today we will explore the manner in which executives of public companies communicate with investors and whether this can tell us anything about business performance.

Often, management teams of large public companies benchmark their performance to that of their industry peers. For example, in its annual reports, one consumer company describes its main goal as “total shareholder return in the top third of the peer group.” The question that comes to mind is, why not in the top quarter? Top fifth? Another company talks of its “relentless focus on growth” as a way to keep up with peers. While on the surface this goal may sound admirable, companies often achieve it by pursuing questionable acquisitions or investments in product categories that offer limited incremental value to customers. We think favorably of those management teams that instead use their corporate publications to tell us about the ways they delight their customers with the best possible product or service.

Another way to ascertain management teams’ priorities is to gauge the degree to which executives care about Wall Street earnings estimates. The reality is that many executive compensation packages depend on short-term stock performance and beating Wall Street estimates is a way to artificially boost short-term stock prices. For example, a CEO of a company we evaluated last year frequently compared its quarterly earnings per share numbers with Wall Street estimates. What’s more, he did it in official company press releases. Seeing this language in company publications prompted us to quickly move on to other opportunities.

Source: Cartoon Resource/Shutterstock.

The effort corporate executives expend to interact with analysts and the media can also tell us about management’s priorities. A typical corporate CEO spends a significant amount of time attending Wall Street conferences in order to tout corporate performance. Some CEOs appear on business TV multiple times in a given quarter to comment on their quarterly earnings.

Recent studies, including William Thorndike’s work on unconventional, lesser-known CEOs[1] and a Credit Suisse report[2] on family-controlled businesses, have shown that companies led by independently-minded managers tend to meaningfully outperform their peers over long periods of time. Our own experience also suggests that business leaders who, instead of succumbing to Wall Street’s pressure to produce consistent earnings, take a long-term approach to allocating capital and serving their customers are well-positioned to grow shareholder value in a sustainable manner.


[1] Willian N. Thorndike, Jr., The Outsiders, (Harvard Business Review Press, 2012)

[2] Credit Suisse Research Institute, The CS Family 1000 in 2018 (2018)

Registration with the SEC should not be construed as an endorsement or an indicator of investment skill, acumen or experience.  Investments in securities are not insured, protected or guaranteed and may result in loss of income and/or principal.  Diversification does not eliminate the risk of market loss an A long-term investment approach cannot guarantee a profit.  This article is distributed for informational purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, products, or services. Nothing in this communication is intended to be or should be construed as individualized investment advice.  All content is of a general nature and solely for educational, informational and illustrative purposes.  Any references to outside content are listed for informational purposes only and have not been verified for accuracy by the Adviser.  Adviser does not endorse the statements, services or performance of any third-party author or vendor cited.  Unless stated otherwise, any mention of specific securities or investments is for hypothetical and illustrative purposes only.  Adviser’s clients may or may not hold the securities discussed in their portfolios.  Adviser makes no representations that any of the securities discussed have been or will be profitable.

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Sustainable Moats and How to Spot Them

“A strong ability to defend established markets against new competitors is essential for a sound investment.” – Philip Fisher

7/25/19 Oleg Litvinenko, CFA

Fisher’s quote above describes what we here at Cobblestone Capital consider a critical factor when investing in businesses. For a business to generate above-average shareholder returns over a number of years, it must possess a competitive advantage, or “moat”, in order to defend its proverbial castle against competition.

While much has already been written about competitive advantages in the academic and business literature, most of them come down to three types: cost advantages, preferential access to customers (brands, intellectual property, switching costs, and regulatory, among others), and scale advantages. Microsoft’s enterprise customers, for example, would incur meaningful switching costs if they were to transition to a new vendor. These barriers in turn make it easier for the company to sell its cloud services to existing clientele. Coca-Cola has been able to capture abnormal returns over decades due to customers’ brand loyalty and habitual, high-frequency purchasing behavior.

While some competitive advantages are sustained over decades, most are fleeting. Once endowed with a strong competitive position, companies often expand in size but fail to focus on strengthening the advantage. As Charlie Munger, Vice Chairman of Berkshire Hathaway, once said, “Old moats are getting filled in and new moats are harder to predict.” The Gillette example is a good case in point. Not too long ago, none other than Warren Buffett was touting the brand’s impenetrable moat. At the time, it was hard to imagine anyone successfully competing with Gillette’s manufacturing prowess and marketing scale. Fast forward to today, and the rise of the internet allowed the likes of Harry’s and Dollar Shave Club to make a meaningful dent in Gillette’s market share as consumers are no longer confined to the tightly guarded store aisle to find good quality shavers.

The sustainability of moats has much to do with the quality of key decision makers. For a business to be able to consistently fend off competition, it has to have an incentive system capable of drawing out entrepreneurial risk-taking and an executive team focused on creating value over the long term. Paul Polman, former CEO of Unilever, for example, has established a culture of decentralization and employee initiative that has made Unilever much more responsive to changing consumer preferences. Mark Leonard, founder and CEO of Constellation Software, delegates responsibility to business unit managers to the point of allowing them to pursue their own M&A. He also purposefully breaks up business units to allow emerging business leaders to reach their full potential.

Spotting and investing in wide moat companies requires both qualitative and quantitative insights. Consistently high and improving returns on incremental capital employed in the business can indicate a strong competitive position. Said differently, an ability to stave off competition vying for attractive profitability over a number of years reflects a favorable competitive position. A stable or rising market share is another sign of an advantage—it shows that customers continued to prefer a company’s products despite attempts by others to dislodge it.

In order to generate attractive value for shareholders over many years, a business must establish and defend a strong competitive position. The sustainability of that position is critical and depends on management’s ability to cultivate a supporting internal culture capable of carrying the business through shifting customer preferences and economic cycles. 

Registration with the SEC should not be construed as an endorsement or an indicator of investment skill, acumen or experience.  Investments in securities are not insured, protected or guaranteed and may result in loss of income and/or principal.  Diversification does not eliminate the risk of market loss an A long-term investment approach cannot guarantee a profit.  This article is distributed for informational purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, products, or services. Nothing in this communication is intended to be or should be construed as individualized investment advice.  All content is of a general nature and solely for educational, informational and illustrative purposes.  Any references to outside content are listed for informational purposes only and have not been verified for accuracy by the Adviser.  Adviser does not endorse the statements, services or performance of any third-party author or vendor cited.  Unless stated otherwise, any mention of specific securities or investments is for hypothetical and illustrative purposes only.  Adviser’s clients may or may not hold the securities discussed in their portfolios.  Adviser makes no representations that any of the securities discussed have been or will be profitable.

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