LTGG Reflections: The value of culture

Our belief is that, while notably absent from financial statements, culture ultimately determines corporate decision-making. It is responsible for motivating employees to show up day after day to seize and create opportunities. And in the face of a rapidly changing world, a culture that effectively adapts will thrive, not merely survive. Are these not the very levers of value creation?

How then do we quantify the value of a differentiated company culture?

Three measures we take

The first step we take is to consider a company’s actions, not its words. Any business can create a narrative around itself, but it is how it operates that defines the values of the enterprise.

Our visit to e.l.f. Beauty’s understated headquarters in Oakland, California was affirmative of the brand’s focus on value for money, and the plucky outsider element to their culture. Interestingly, both the CFO and Senior Vice President of Operations, unprompted, spoke about the fact that they were the first in their families to attend college and that finding an inspiring senior management team with similar backgrounds was a large part of the appeal of joining. Both came across as humble but ambitious to change the industry. One such initiative is e.l.f Beauty’s pursuit to “Change the Board Game.” Its campaign “So many dicks” highlights how there are more men named Dick (Richard, Rich and Rick) on publicly traded boards than entire groups of underrepresented people, agitating that it is in the interest of profitability for corporate America to push for change.

Second, we look at how companies communicate or think of themselves. While most companies are now required by regulation to report some form of quarterly numbers, there is no direction on how they view or commentate on these short periods of time. We instinctively trust those who have a vision of where they would like to get their business over the next decade rather than those who revert to a Gartner-style third-party report on the total addressable market (TAM).

Adyen has been a recent victim of not running on the quarterly hamster wheel. A quirk of its Netherlands domicile is six-monthly reporting. This sits well with a management team that is resolutely long-term. But shares have seen precipitous falls when short-term profits have been forfeited in favour of countercyclical investment in engineering staff or take rate has compressed due to operational leverage being shared with merchants. During our regular updates, we learned from the co-CEOs that they adopt a very clear pace of recruitment to ensure culture doesn’t atrophy and talent density is maintained. In turn, we fed back that providing capital markets with more directional guidance around near-term developments between reporting cycles should reduce informational vacuums and the likelihood of the market extrapolating short term developments.  

Related to this is the third method – getting as deep as you can into an organisation. There is little to be learned from a highly polished Investor Relations professional with a tight corporate script. Rather, insights come from long-serving employees who are less experienced in communicating with investors and, therefore, possess veracity.

Our reputation as long-term, supportive shareholders grants us significant access. Earlier this year, we had the opportunity to sit down with Spotify's co-presidents to discuss the recent organizational changes that have enabled significant reductions in the company’s operating cost base. The pair, who rarely grant shareholders time, explained that the recent fine-tuning of a previously radically decentralised structure has resulted in greater alignment and prioritisation of initiatives while retaining developer autonomy and innovation. This helped us to gain comfort that recent cuts were addressing existing organisational bloat, but we remain cognisant that Spotify is yet to prove sustainable monetisation of its platform, and our reduction of the holding size, following share price strength, reflects this.

Pulling this together, there is no eureka moment at which a company’s culture is revealed, rather it is a constant learning process, where each interaction and iteration provides a piece of the mosaic. Equally, we never have a full picture because the companies themselves are changing in terms of size, people, and opportunity sets.

Culture in the face of change

Which brings us on to adaptability. With a view to invest in companies for five, ten, twenty years, Long Term Global Growth requires adaptability from its portfolio holdings. We, therefore, look for companies that are open to change and willing to experiment. It is no coincidence that the portfolio’s R&D spend as a percentage of revenue (15 per cent) is three times that of the index. Nor should it be a surprise that several holdings have reinvented themselves during our holding period, be it Amazon’s book sales only comprising 10 per cent of revenues in 2023 or NVIDIA’s gaming segment shrinking to just 17 per cent of the total revenue over the last twelve months.

Jensen Huang recently celebrated three decades as NVIDIA’s chief executive. A remarkable achievement. His success can in part be attributed to a strategy he describes as “failing forward”—taking a chance on something new, admitting when it isn’t working, adjusting, and then pressing onwards, becoming better every time. This mindset allowed for significant investments into developing its software proposition, CUDA, well ahead of competitors. Fast forward to today, more than three million developers use the platform, and it has become one of its most significant sources of competitive advantage.  

When thinking about culture in this way, founder and family-owned companies have always appealed. They comprise more than 70 per cent of portfolio weight. Why? The primary motivation is often to pass their business on to future generations from a position of strength, a motivation that drives attitudes, incentives, and time horizons that align with those of our clients.

Looking back at some of the sales of the portfolio over the years, the decision to move on has stemmed from a deterioration of these factors. Illumina provides a recent example, where strategic decisions, such as the repurchase of GRAIL ahead of regulatory approval and letting innovation slow, compromised the company’s position of relative strength. After prolonged engagement with the company, we took the decision to move on, especially given the degree of competition for capital in the portfolio.

A strong culture alone won’t determine the success of an investment, but a close examination of culture may help us avoid making some of the inevitable mistakes that growth investing entails. Culture is the intangible glue that can hold fast-growing businesses together. It is the facilitator that gives space for innovation and the standard behind which companies can emerge stronger from adversity. 

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