Fire Your Owner

THE STORY
My finance teacher in college was a brand new professor. He had just finished his PhD and made the transition from being the student directly to being the teacher. He had no meaningful real-life experience in finance (nor any meaningful real-life experience at teaching for that matter, either).

This professor was not much older than I was at the time, which was relatively young. Yet when he taught, he spoke as if he had generations of experience and seemed to enjoy telling his students how most everyone in the business world was misguided.

He hated it when a company would introduce a new product, or diversify into new lines of business (to mitigate risk), or change a strategy to adapt to a changing world. In his mind, every business should be required to sell only one product, and sell it in only one way…forever.

What was his reasoning behind this? He believed that the investing shareholders should have ultimate power. If investors like the one product and the one way it is sold, then they can support it by buying shares in the company. If they don’t like the product or the way it is sold, then they can sell their shares in the company (or never invest in it in the first place). The good would get rewarded and the bad would get punished—by the investors.

Whenever a company changed its portfolio or its strategy, he felt it was interfering with his ability to control the company with his ownership. After all, what if the company came up with two products—one he liked and one he didn’t? Now he could no longer support one with his shares and deny the other by not buying shares. This made him very angry.

And if a company had the wrong strategy, he didn’t want it to change, because then the company would be doing something he couldn’t control. Instead, he would prefer that the company kept the bad strategy, so he could sell his shares in that firm and re-invest them into a company that already had the better strategy.

He did not care if a company lived or died. He would just continue to move his money and invest it in the best location at that particular moment

By contrast, Warren Buffet seems to have taken an opposite approach to investment and done quite well with it. I suspect that Mr. Buffet has done much better in investing than my college professor did.

THE ANALOGY
Although most investors are not as blunt as this professor, many act as if they believe what he is saying is true. They have no sense of loyalty or desire to help a business thrive over the long haul. They just want to move their money around to wherever the success is at the moment. What motivates their personal success often is at odds with what is in the best interests of an individual company’s long term success. For them to win, the company often has to fail.

When devising strategies, it is important to consider the desires of your owner. After all, these are the people who pay your salaries and can get you fired. But sometimes you have to take a stand and not do exactly as they desire. Giving them exactly what they desire may end up not giving them what they really need…an economic engine that produces cash flow for a long time.

Warren Buffet understands the big picture and realizes that the best returns usually come from long-term investing in companies that know how to adapt and survive. When the investor’s success depends on the company having long-term success, then usually both sides win. But if the investor’s best interests are not the same as the company’s, then one or both sides tends to lose.

THE PRINCIPLE
Over the past couple of blogs we have been talking about the concept of “who is my customer”. We have seen that you can use different strategic approaches to choose which type of customer you want to serve. You can serve the people who pay the money, the people who use the service, the people who influence the people who use the service, and even the people that may eventually buy your company.

There is another type of customer we haven’t talked about much. That would be the current owner, be it a corporate headquarters (if you work in a division), a board of directors, an active shareholder, or a venture capitalist (if you are a start up), or something similar.

In general, it is a good idea to make this “customer” happy. They are the boss. At the very least, you cannot ignore them. However, sometimes the best path to making them happy is to do something other than they want. It can be a tricky business to disobey a boss, so we must be careful when doing so. The following are a few principles to help determine when to do so.

1) Move in the Direction of the Greater Good
Sometimes a division of a corporation is asked to embark on a strategy which sub-optimizes the individual division, but optimizes the good of the greater corporation. In this case, the path would not be to disobey and try to maximize your individual business, but to act for the greater good of the entire corporation. To ensure that this happens, the division should be rewarded based on its impact on the greater good.

2) Don’t Move in the Direction of Illegal or Immoral Activity
The phrase, “But my boss made me do it,” does not stand up well in court. You always have the option of quitting.

3) The Owner is the Tie-breaker in differences of Opinion
Sometimes people just come to different conclusions. It’s okay to express your differences to the boss, but in the end, their opinion is the one that matters.

4) When the Owner’s goal is clearly not in the best interest of the company, consider firing the owner as your customer.
If a shareholder is making unreasonable demands that will line their pockets with money but bankrupt the company, perhaps you need to look for ways to “fire” your owner. In other words, try to change the profile of the type of investors that invest in you. Try to cultivate more Warren Buffet type of owners, rather than owners like my old college professor. If you stand your ground and fight for the long-term health of your company, you should naturally attract the investors who are looking for that type of business and discourage the investment by other types of investors.

As a general rule, if you manage for the long-run, you tend to build a strong track record of growing cash flow, which leads to a successful stock price. However, if you just focus on short-term tricks to inflate today’s stock price, you may end up being a poor investment over time. So to make owners happy with growing stock prices, you sometimes have to ignore the stock price and focus on the business. Hence the irony that in order to make an owner happy, you sometimes have to focus on something other than trying to make the owner happy. Their happiness is a byproduct of good strategy, rather than making their happiness become the strategy.

SUMMARY
Although it is important to make the owners happy, sometimes the best way to do so is to focus on something else—namely making the business strong. If the owners do not see the wisdom in this, either try to get a different type of owner or go work somewhere else.

FINAL THOUGHTS
The world is a lot more complicated than what I can describe in a short blog. I don’t want to come off sounding as naïve as my old professor. But at the same time, I think leaders need to do some genuine leading every once in awhile and not just be a puppet of the owners.