By Lawrence A. Cunningham
In bear markets, winnings tend to go to investors who focus on fundamentals, not fads, and who pick stocks based on traditional business principles rather than the latest experimentation in finance or society.
Many stock investors are sidelined today, facing crushing losses in crypto or tech, and a general bruising across equities. They’re confused by the infiltration of politics into business, especially under the guise of stakeholder capitalism or the mantra of ESG (environmental, social, governance).
But look through today’s economic malaise and political polarization and you will find some venerable principles that promise both financial prosperity and social stability — the alignment of capitalism with democracy. Here are three companies that have long followed a durable, proven business model: cater to customers; reward employees, and deliver outsized shareholder returns.
Jet2: UK:JET2 This British airline has built a beloved brand through excellent customer service and a highly trained staff, and the effort has rewarded shareholders. The company focuses on leisure travelers, skipping the business travel market. The tone was set from the top by Jet2’s former CEO and current chairman, Phillip Meeson. He was known to meet customers on the airport tarmac at 5 a.m. to learn what they thought of the service. The staff obsesses over customer service, calling themselves “customer helpers. All functions are done in-house, from check-in to baggage handling, rather than follow the industry practice of outsourcing. From 2010 to 2020, Jet2’s stock price rose 20-fold, delivering a 35% compound annual growth rate.
First Republic Bank: /zigman2/quotes/200683073/composite FRC +0.07% Long one of the fastest growing and most successful banks in the U.S., First Republic caters to high-net-worth individuals in larger coastal and urban areas. First Republic pays its employees well, using a generous compensation formula based on performance in such areas as deposits maintained and loans originated, offset by loans that default.
First Republic boasts a distinctive customer service model, anchored by a relationship manager (RM) giving clients a direct personal contact in the bank who is supported by a team prepared to help those clients with any request. The bank scores high in outside surveys of customer satisfaction. From 2010 to 2020, First Republic Bank’s stock price rose 7-fold, for a 22% compound annual growth rate.
Sherwin Williams: SHW This 150-year-old paint company spends significant time and money in hiring, training and developing employees — and pays its workforce of 61,000 well. Sherwin talks of its employees as its most valuable asset and delivers on this statement. Employees gush about the training and career opportunities available to them.
The data backs this up: Sherwin’s store employee turnover rate runs around 8% compared to a retail sector rate exceeding 60%. The company’s customers are paint professionals — from decorators to contractors — and its mission is to make their lives easier and their businesses more profitable. From 2010 to 2020, Sherwin Williams’s stock price rose 12-fold, reflecting a compound annual growth rate of about 28%.
These three companies — plus hundreds of other great ones — illustrate the myopia of today’s fashionable debates over corporate purpose. These debates pit shareholder capitalism against stakeholder capitalism. There is a tendency to believe that corporate life is zero-sum — shareholder capitalism is only good for shareholders while stakeholder capitalism is only good for non-shareholder constituents such as customers or employees. In this debate, a $1 dividend to shareholders, for example, deprives workers of that dollar, while a $1 wage increase to employees deprives shareholders. Same with a $1 price discount to customers.
It’s also possible that the $1 dividend attracts loyal shareholders prepared to invest more and whose presence increases a company’s value, including the value to employees and customers, and that a $1 wage increase or price discount attracts loyal employees prepared to produce more, and customers prepared to buy more. Their presence thereby increases a company’s value, including the value for shareholders. True, in some allocations, the outcome is clearly zero-sum, where excessive wages are paid despite poor performance or where excessive dividends are made without adequate reinvestment in employee skills or resources.
But in many cases, boards allocate capital wisely and deftly across these and other potential uses and constituencies. When they do, they create win-win outcomes, a dollar paid to employees enhances productivity to the benefit of shareholders in like amount. A considerable body of literature and abundant practical study exists on this topic of capital allocation, and in some ways it is the central activity of a corporate board and senior executives, as well as any manager or investor concerned with deploying resources in their best uses.
To supplement this knowledge, it pays to focus on how a corporation allocates its resources, and in particular how the various participants in corporate life behave. What are the norms that pervade an organization — the incentives, systems and procedures? In a word, culture is the lens to examine whether a company tends to operate toward the win-win or zero-sum end of the spectrum.
During the economic and political turmoil nowadays, watch and listen to chief executives for clues about the corporate cultures they have created. Be wary of those who are most outspoken on political topics of the day, who extol the fashions of ESG and stakeholder capitalism. Embrace those who speak to the traditional conception of a company: the best way to enhance shareholder value is to reward employees and cater to customers.
Lawrence A. Cunningham is a professor at George Washington University, founder of the Quality Shareholders Group, and publisher, since 1997, of “The Essays of Warren Buffett: Lessons for Corporate America.” For updates on Cunningham’s research about quality shareholders, sign up here.