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Why stewardship matters
The concept of stewardship is fundamental to being a long-term investor
Prioritising long-term growth over short-term gains takes confidence and vision from high-quality management. Great stewardship through long-term decision making benefits businesses in myriad ways but it doesn’t manifest the same way in every company.
Investors seeking to hold shares in a company for a decade or more are looking for businesses that are managed to a similar timeframe, and not those focused on meeting next quarter’s earnings per share target. Over the long term, the main drivers of returns are business fundamentals, not short-term market noise. And those fundamentals are the outcomes of management strategy, capital allocation and long-term decision-making.
There are two main ways that long-term decision-making benefits a company. First, it allows for the business’s culture, values and ways of doing business to persist over decades. This brings many benefits such as focus and discipline, employee satisfaction and lower costs. Second, it enables management to make difficult decisions that however painful they may be in the short-term, bring great long-term benefits. Valuable benefits to employees and customers as well as shareholders, making everyone better off.
So stewardship is important, but what does it look like? It doesn’t manifest the same way in every company, but there are some clear themes. Here we look at four U.S. based companies with excellent stewards and explore the ways in which they continue to add value.
Fortinet
The most obvious example of company stewardship is one that is run by its founders. Fortinet, a cyber-security company based in California founded by brothers Ken and Michael Xie in 2000, is a prime example.
Fortinet’s edge comes from the development of an integrated circuit, especially for security. This greater processing power enables quicker detection times and means that customers do not have to choose between security and performance. This has allowed the company to take market share rapidly over the last 10 years, but it was not an easy journey, requiring about 20 years of research and development. The founders’ commitment to the longer-term vision of a better product enabled them to stay the course and shareholders have been reaping the reward.
Costco
Costco, the large Washington-based membership retailer, was started by entrepreneurs Jim Sinegal and Sol Price in the 1980s. It is now run by professional management, but the culture, values and systems put in place by the founders persist.
For example, Costco treats employees very well. They are paid above the minimum wage and get health insurance as standard. As a result, staff turnover rates are low at 14% compared with rates of 70% at a leading competitor. And this has not come at the expense of profits, as the company continues to generate high-quality and healthy margins while also supplying high-quality and healthy food at great prices to its customers.
Both Fortinet and Costco are examples of larger companies with great stewardship, but there are many examples of smaller companies that embody these qualities as well.
AO Smith
AO Smith is one such business, with a long history of stewardship by the Smith family. The company was formed by Charles Jeremiah Smith in 1874 and is named after his son, Arthur Oliver Smith.
Based in Milwaukee, the company has reinvented itself many times over the years from its beginnings as a leading supplier of metal tubes to make prams and bicycles, to the leading supplier of boilers, heat pumps and water purification systems in North America. At each stage of the journey, the hand of the Smith family on the tiller has guided the business to make decisions for the long term, a proven strategy that now sees them growing into overseas markets. Mark Smith, who is on the board, is the fifth generation of the family and several members of the sixth generation are working in the firm. Despite its long history, AO Smith continues to look to the future with initiatives such as a dedicated Innovation Hub at its Milwaukee headquarters. It is developing the products that will be needed five years from now to maximize energy efficiency and bring cost savings to their consumers as they meet their basic needs for heating and clean water.
Edwards Lifesciences
A more dramatic example of company reinvention can be found at the healthcare company Edwards Lifesciences. Based in California, Edwards make artificial heart valves that are used in open-heart surgery for people whose hearts have failed.
The valves are painstakingly made out of silk, with the inner sections sewn by hand to achieve the desired quality. Originally founded by Miles Edwards in 1958, corporate change saw it pass into the ownership of other larger companies. It was eventually spun out again in 2000, this time with professional management in charge, but with the founder’s vision to transform patients’ lives still very much in view.
Around this time, the company started developing a heart value that could be inserted into a patient using a catheter instead of through open-heart surgery. In doing so, Edwards would completely disrupt its existing business. An expensive, time-consuming undertaking that required a complete reorganisation of the sales process. It took 12 years to get FDA approval - requiring management to stay the course. Thanks to this long-term commitment, since 2011 patients have been benefiting from shorter recovery times, improved quality of life and lower medical costs, while shareholders have continued to benefit from a high-quality and growing company.
As the above examples demonstrate, companies with great stewardship can show up in many flavours and arise in companies of any industry and size. What they have in common is the ability to make decisions that prioritize the long-term growth of the company over short-term gains. This takes confidence and vision, and is a sign of exceptional high-quality management.
Decisions made for the long-term benefit of a company are generally also those that increase employee satisfaction, provide better products and services to customers and help make the world a better place. This combination of quality management, an excellent franchise and great financials allows a company to better position itself for a long period of increasing returns to shareholders.
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