With Great Culture Comes Great Returns

Truly great companies almost always come with a very real sense of culture. Foolish co-founder Tom Gardner recently tweeted this pearl of wisdom to his followers:

"Most investors don't care about the internal culture at the companies they invest in -- which is why most investors lose to the market."

This philosophy is at the heart of Tom's market-crushing investing strategy. Indeed, Tom likes to ask himself outlandish questions about the companies he owns: Would I let this CEO babysit my kids or this CFO manage my portfolio? These questions may be purely hypothetical, but the answers say a lot about how you regard that company's management. Personality matters. Culture matters.

With that in mind, I'd like to show you a handful of the strongest corporate cultures I know of. I'd be glad to let each of these CEOs babysit my young ones (anyone available next Saturday?), and the main reason why I don't own all of these stocks is a lack of personal capital.

What's gonna work? Teamwork!
Let's start with a plate of red-hot chicken wings. Shares of Buffalo Wild Wings (Nasdaq: BWLD  ) have served up a tasty 23.7% annual return over the past decade, and not by accident.

Longtime CEO Sally Smith is serious about team spirit. Executives at company headquarters are expected to serve time in the trenches every year. The program, known as "A Day In the Life," takes big bosses out of their pinstripe suits and right into the kitchen, cutting lemon wedges and wiping tables like any regular employee. Think of the TV show Undercover Boss made into a mandatory institution at the company.

"If you can create a culture where team members are a top priority and focus, then the business follows," BWW Vice President of Global Marketing Kathy Benning told Nation's Restaurant News in 2010. I'd say the special sauce is working: B-Dubs' stock has nearly doubled since that interview.

Putting executives in touch with reality is a winning concept. Buffalo Wild Wings remains a favorite of our Motley Fool Hidden Gems team, who still call it a "superior business." And it all comes back to teamwork.

You cannot be serious!
My next paragon of corporate culture might shock you. Netflix (Nasdaq: NFLX  ) is perhaps one of the most hated stocks on the market these days. A massive 22% of the float is sold short, and investors endured a heart-stopping 76% fall from 2011's highs before the bounce started.

So it's easy to forget that Netflix shares have gained more than 400% over the past five years, even after the Qwikster debacle. CEO Reed Hastings makes mistakes, like all humans do, but he has built a phenomenal business with a culture based on freedom and responsibility.

Netflix wants a high-performing team of brilliant engineers, and the company's culture doesn't mess around. "Great Workplace is Stunning Colleagues," blasts a slide presentation right on the company's jobs and recruitment page. It is not "espresso, lush benefits, sushi lunches, grand parties, or nice offices."

And to keep the workforce "stunning," there's this shocking policy: "Adequate performance gets a generous severance package."

This may sound heartless, but it's a very pragmatic and effective strategy. Hastings' thinking is that a handpicked all-star team will beat a larger bunch of lesser lights every time. And don't forget that Netflix jobs pay very well, even when you're let go.

Start with the right people and give them the freedom to succeed, and good things will follow. Netflix's vacation policy is like the Fool's: "There is no policy or tracking. There is also no clothing policy at Netflix, but no one comes to work naked." Good people know how to make appropriate decisions.

I'm impressed by this calculated talent management technique and believe it will help Netflix stay atop the digital video market for a very long time.

If I could change the world (I'd work for Red Hat)
Linux specialist Red Hat (NYSE: RHT  ) also wants to work with an all-star engineering team, but it goes about it very differently than Netflix. Movies are fun and all, but many of the best Linux experts want to change the world. Red Hat takes advantage of that fact.

"People are very, very passionate," executive vice president DeLisa Alexander said in a phone interview. "Most people are here because they want to change the world. You don't find workers just punching the clock or putting in time -- they really feel like they are connected to something bigger."

Many developers work on Linux code for free out of a desire to create great software. At Red Hat, you can turn that hobby into a well-paid job. That opportunity attracts top talent: "A 'B' player at Red Hat is an 'A' player anywhere else, in our experience," Alexander says. "If they're not right for Red Hat, we won't hold on to them."

Red Hat's traditional nemesis is Microsoft (Nasdaq: MSFT  ) and its closed-source Windows empire, but the company is also stealing market share from Unix giant IBM (NYSE: IBM  ) these days. The software is a far cry from its time-worn hacker roots and is fully ready for enterprise. I think that alone says something about Red Hat's talent quality. And like Netflix or B-Dubs, Red Hat has crushed the market and all-comer competitors in the long run: Shares have gained nearly 800% in the past 10 years, leaving Big Blue and Mr. Softy far behind.

All of these culture-conscious companies are winners, in my book. They are sure bets to keep trouncing the market for the foreseeable future. If you're looking for a more immediate return, take a look at "The Fool's Top Stock for 2012" -- a high-growth retailer run by the man who showed Sam Walton and Jim Sinegal how to sell ice to penguins.

Fool contributor Anders Bylund owns shares of Netflix, but he holds no other position in any company mentioned. Check out Anders' holdings and bio, or follow him on Twitter and Google+. The Motley Fool owns shares of Microsoft and Buffalo Wild Wings. Motley Fool newsletter services have recommended buying shares of Microsoft, Netflix, and Buffalo Wild Wings, as well as creating a bull call spread position in Microsoft and writing covered calls on Buffalo Wild Wings. The Motley Fool has a disclosure policy.

We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


Read/Post Comments (2) | Recommend This Article (9)

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  • Report this Comment On March 28, 2012, at 11:04 PM, pintorini wrote:

    Hmm. BWLD's "A Day in the Life" program sounds to me like one of those "pieces-of-flair" gimmicks that end up the subject of mockery in movies starring Jennifer Aniston. I could certainly be wrong, but if I am, doesn't that just illustrate how hard it is for outsiders (e.g., most investors) to accurately assess a business's internal culture? Slogans that H.R. departments post on company websites don't typically tell you much about what happens on factory floors. I suppose it does require an impressive degree of self-confidence to boast about a lack of fancy perks and aggressive firing practices instead of (say) the traditional stuff about competitive benefits and equal opportunity. But even this proposition seems debatable in a loose labor market.

    Also, I thought most investors lose to the market because of something to do with buying high and selling low. ...?

  • Report this Comment On March 29, 2012, at 6:25 AM, TMFZahrim wrote:

    @pintorini,

    "I thought most investors lose to the market because of something to do with buying high and selling low. ...?"

    Yes, exactly. And that's often what ends up happening when you invest in culture-poor companies. If it's really all about the bottom line, it's impossible to hang on to top talent and very hard to attract customers. For examples of this, see Circuit City, CompUSA (yeah, terrible sector), Enron, nearly any bank involved in the subprime bubble, etc. Forgetting the human side of business sets you up for miserable failure.

    Anders

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