Mercenaries Or Missionaries? President and CIO
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Punch Newsletter First Quarter 2021 Howard Punch Mercenaries or Missionaries? President and CIO I have always been a Minnesota Twins fan. The height of my We meet all kinds of people in our lives. Butch Wynegar was “fandom” was probably during my teenage years when the on a mission to play ball. Chainsaw Al didn’t care whether it team may have been at its worst. In those days, we had little was paper or appliances...he was out to make the most mon- to cheer for other than another batting title for Rod Carew. ey possible in the shortest amount of time. A “get rich quick” During the 1976 season, Butch Wynegar was a rookie catcher disposition rarely ends well. Dunlap’s career reminds me of who surprised everybody by batting over .300 for the first half what Warren Buffet used to say about the importance of hir- of the season and being named to the American League All- ing people with integrity, energy, and intelligence. He said that Star team. I remember watching a commercial featuring Wyn- “…if they don’t have the first, the last two will kill you.” egar saying he loved the game of baseball so much he would play for nothing. Butch knew what he loved and why. The “People Factor” in Investing Al Dunlap had a storied career in business. In 1963, after serv- “People don’t buy WHAT you do; they buy WHY you do it.” ing in the United States Army for three years, he began a busi- - Simon Sinnek ness career that took him through a dozen different companies with no single job lasting more than five years. “Chainsaw Al,” We have been analyzing management teams and putting as he was dubbed, earned a reputation as a hard-nosed turn- “people first” in our research process since the founding of around expert. He would commonly enter a lead role within a our firm almost 20 years ago. We prioritize this—almost self- troubled enterprise and lay off a massive number of workers ishly—so we can sleep at night. Most people wouldn’t let to save the company money. His quickest “hit” was in 1994 someone they don’t know watch their house while they’re when he became CEO of Scott Paper. Within days of accepting on vacation, yet millions of people invest billions of dollars the role, he announced a layoff of over 11,000 workers. This into companies when they don’t know who is running them decision awarded Dunlap over $100 million in salary, equity or what motivates them. To many, stocks are identified mere- awards, and other compensation after he sold the company ly as ticker symbols in an app or numbers in a spreadsheet. to Kimberly-Clark just one year later in 1995. The following We approach every investment with the mindset that we are year, Chainsaw Al was placed in a similar position with Sun- going to be long-term owners of the enterprise. Therefore, beam, a struggling appliance maker. Dunlap applied the same it serves us well to know and have confidence in the oper- playbook, and the shares quickly rose over 70%. It was soon ators of these businesses. One of the most challenging (and discovered, however, that his reputed turnarounds were elab- fulfilling) aspects of our work as a research team is assessing orate frauds, and his career ended after their auditors uncov- management. We like to discover their skills, their business ered a massive accounting scandal that forced the company philosophy, their values, their candor, the culture they are try- into bankruptcy. Chainsaw Al was quite literally a hired gun. A ing to build, and, most of all, why they are doing what they are mercenary. doing. What gets them excited? These qualities are generally Continued on the next page 7701 France Avenue South, Suite 300 Edina, MN 55435 (952) 224-4350 www.punchinvest.com Punch Newsletter First Quarter 2021 Continued from previous page characteristics that quantitative screens fail to capture. We ask USA ETF (ESGU) has gone from $180 million in assets to over lots of questions to determine whether we should go into busi- $15 billion in just two years. Most of the larger ESG funds look ness with these folks. Remember that Enron was a company alarmingly similar to an S&P 500 Index fund. This has been a that “screened well” for profitability before proving to be one pretty decent index to emulate for 10 years, but I wonder if the of the greatest corporate deceptions in history. popularity of these funds would diminish if their performance starts to lag. History has shown that investors can demonstrate ESG mercenary behavior as well. We get asked occasionally where we stand on ESG. ESG stands Many more ESG products are being introduced daily, some by for Environmental, Social, and Governance and is a responsible people who view ESG as a religion, and some by those who investing movement that holds companies to a standard which see it as a marketing opportunity. In the end, a movement goes beyond simply maximizing shareholder value (a concept conceived with such good intentions might be dominated by a 3 put forth by the Friedman Doctrine ). A landmark study en- crowd that is simply following the money. They might be mer- titled “Who Cares Wins” coined the term ESG in 2005. ESG cenaries masquerading as missionaries. factors cover a wide spectrum of issues that are not part of traditional financial analysis yet may have financial relevance. Beware of Too Many Mercenaries These factors might include: how corporations respond to cli- mate change; how good they are with water management; Principled operators of public companies who have a mis- how effective their health and safety policies are in the protec- sionary zeal for what they are doing are difficult to find (but tion against accidents; how they manage their supply chains; are worth looking for). Mercenaries, on the other hand, can how they treat their workers; and, whether they have a corpo- be quite easy to find…especially when a corner of the stock rate culture that builds trust and fosters innovation. market gets hot and investment bankers get involved and start “fanning the flame.” With parts of the stock market up over We believed in the foundations of ESG well before it became 100% in the last year and with Reddit and Robinhood investors a well-worn acronym. The “G” in ESG, Governance, has always re-writing the rules on how to get rich quicker, one should be- been a lynchpin in our process for vetting companies as po- come acutely aware of mercenary management teams. If you tential investments for our clients. Governance = People. Our are trafficking in some of these hot areas, you can’t swing a research—whether an investment gets into a Punch portfo- dead cat without knocking over a herd of mercenaries. Many lio—begins (and sometimes ends) with the people. People are of these folks will scatter like cockroaches when a trend dies the ones that determine the “E” and the “S,” so it makes sense out, and they will scurry to a new area that promises overnight to start there. To us, they should be interviewed like you would riches. We actively try to avoid these types of operators. interview somebody who is applying for an important job. You should know how they are incentivized, how they intend to John Doerr, a legendary venture capitalist at Kleiner Perkins serve the world, and whether they are aligned with you as a Caufield & Byers, is famous for making some of the world’s shareowner. Despite the presence of social media and tools best investments including early stakes in Compaq, Genen- like Glassdoor, you can’t easily see most of what happens in- tech, Google, and Amazon. A Harvard Business Review article side a corporation. Good and bad things can happen well be- summarized an event where John spoke about the difference fore they ever end up hitting the balance sheet or the income between mercenaries and missionaries in business: statement. Once you understand the business, understanding Mercenaries are opportunistic. They’re all about the people can help you gain comfort with how the numbers the pitch and the deal and are eager to sprint for may change, positively or negatively. short-term payoffs. Missionaries, on the other ESG started as an authentic movement with the intention of hand, are strategic. They’re all about the big idea getting companies and investors to come together and make and partnerships that last, and they understand the world a safer, cleaner, and better place. While we believe that this business of innovation is something that in the foundations of ESG, we also must point out that Wall takes a long time—it’s a marathon, not a sprint. Street is doing what it always does with a concept that people Mercenaries have a lust for making money, while are buying: It is selling the hell out of it. Blackrock’s ESG Aware missionaries have a lust for making meaning. Continued on the next page Page 2 Punch & Associates Investment Management, Inc. Please see the disclosures on the last page Newsletter First Quarter 2021 Continued from previous page Bet on the Missionary As for Butch Wynegar? He didn’t play baseball for nothing, and he didn’t finish a storybook career as a Minnesota Twin. After making his second All-Star team in 1977, Butch’s batting aver- age tailed off. Twins mercenary owner Calvin Griffith uncere- moniously traded Butch to the Yankees in 1982 to unload his hefty contract after a sub-par season in 1981.