By Lawrence A. Cunningham
Corporate culture can be hard to define and even harder to measure — and it is among the most important factors shaping a company’s long-term performance.
I’ve seen this up close at companies ranging from Berkshire Hathaway /zigman2/quotes/208872451/composite BRK.A -0.87% /zigman2/quotes/200060694/composite BRK.B -0.78% , which I wrote about in “ Berkshire Beyond Buffett: The Enduring Value of Values ,” to Constellation Software /zigman2/quotes/207942620/delayed CNSWF -2.67% , which I’ve been studying since just before joining its board of directors in 2017. Most recently I’ve seen this in work I did for Paul Black’s WCM Investment Management , which specializes in studying corporate culture.
As a case study, compare two of the world’s best-known luxury-brand conglomerates, France’s LVMH Moet Hennessy Louis Vuitton /zigman2/quotes/202542535/delayed LVMHF +0.83% /zigman2/quotes/201350549/delayed FR:MC +0.21% and Switzerland’s Compagnie Financiere Richemont /zigman2/quotes/206960176/delayed CFRUY -0.08% /zigman2/quotes/203783259/delayed CH:CFR -0.62% . While their business models and moats are kindred, LVMH stock has vastly outperformed Richemont’s. Culture is a compelling explanation.
LVMH was formed in 1987 by Bernard Arnault as the result of mergers among Louis Vuitton (a fashion brand dating to the 19 century) and Moët Hennessy (a champagne and spirits concern founded in the 18 century). Through a series of acquisitions since, LVMH owns about 60 glamorous brands, all marketed through separate individual business units where managers enjoy wide autonomy in brand management, from sourcing and production to pricing and the product mix. Brands include: Bulgari, Christian Dior, Fendi, Givenchy, Marc Jacobs, Stella McCartney and Tiffany.
Arnault, who remains the company’s controlling shareholder and CEO, is famously hands-off and supportive of diverse management styles, so long as everyone is riveted on protecting and promoting their brand. They do so by tight control over distribution — LVMH, for instance, sells almost exclusively through its 2,400 wholly owned stores.
Thanks to such a coordinated but decentralized culture, LVMH’s divisions are notably nimble in adapting to changing consumer tastes and influential in shaping them. For instance, LVMH hosts a biannual event, called the “Journées Particulières” (Special Days), where more than 100,000 guests visit LVMH properties on four continents to get caught up on the latest fashion offerings among the company’s top brands.
Richemont was founded in 1988 by Johann Rupert, as the result of a spinoff of a conglomerate founded by his father in the 1940s. Brands include: Cartier, Dunhill, Montblanc, Piaget, and Van Cleef & Arpels. Yet most of the brands are not managed as brands, but rather according to product type.
With varying degrees of cohesion, the company has three operating divisions: jewelry (including Cartier and Van Cleef); watches (including Piaget and a half-dozen German- and Swiss makers); and “other”, a catch-all that includes Dunhill menswear, Montblanc pens and various other investments such as a joint venture with Ralph Lauren.
The structure may increase the capacity for headquarters to provide oversight and could result in synergies across common business types among the brands. While such a strategy may be appealing for many types of goods, such as industrial products or low-priced consumer items, it is not an obvious one for a luxury brand. It certainly prioritizes a culture of reporting ahead of brand strength.
A centralized strategy can be defended in the name of strengthening the parent’s brand, insinuating Richemont into the minds of high-end consumers. But that comes at the cost of the individual brands, which can alienate managers and employees of those brands, which ultimately impairs value.
For instance, brands such as Van Cleef have long histories, distinct cultures and long tenured employees. Among Richemont’s half-dozen watchmakers, moreover, the best-performing have been those that have enjoyed the greatest degree of independence. They have been able to move quicker and think more freely than brands that have been absorbed into a group such as Richemont.
In global companies such as LVMH and Richemont, the international scope of operations increases the importance of culture. At LVMH, a proud French corporate champion, the deference to local managers of brands is a deference to their national cultures as well. In contrast, at Richemont, political infighting among senior executives is evident, for example pitting an older French guard with a fluid and open style and a younger German- and Swiss group that is more rigid and process-driven. Worse, Richemont’s senior executive pay is among the highest in Europe, which does not sit well with the managers or troops in the field across the continent and beyond.
LVMH and Richemont not only contrast how corporate culture percolates throughout a company, they suggest its importance. Founded at about the same time, and led and controlled by one person for more than three decades, the financial performance of these two companies has diverged greatly. LVMH is four times the size of Richemont in terms of total assets and annual revenues and has delivered vastly stronger shareholder returns while sporting substantially higher market multiples. It’s clear: culture counts.
Lawrence A. Cunningham is a professor at George Washington University, founder of the Quality Shareholders Group, and publisher of “The Essays of Warren Buffett: Lessons for Corporate America.” For updates on Cunningham’s research about quality shareholders, sign up here.