The more I read about extraordinary companies, the more I've come to believe that they share a handful of core traits that distinguish them from the corporate world's default setting of mediocrity.
These traits explain why Goldman Sachs is the gold standard among stand-alone investment banks. They explain why Wells Fargo and JPMorgan Chase seem to operate in a parallel universe compared to Bank of America and Citigroup. And they explain why the company you work for, whatever it may be, is either building a respected and sustainable business or simply trying to make a quick buck.
The traits that matter most revolve around management's decision-making. In Berkshire Hathaway's latest letter to shareholders, vice chairman Charlie Munger attributes the company's success in part to Warren Buffett's conscious "reservation of much time for quiet reading and thinking." Buffett himself has attributed it in part to his isolation in Omaha, Neb. Both help him to think clearly, insulating him from exposure to the vast majority of people and businesses that, not coincidentally, compromise their standards in exchange for short-term profits.
The tendency for people and businesses to "settle," so to speak, is pernicious and widespread -- and it's nearly impossible for people who do so to recognize it. This is because our brains aren't designed to acknowledge our own mistakes. Psychologists refer to this as cognitive dissonance. It's a state of mental tension that occurs when a person is confronted with dissonant (i.e., conflicting) cognitions (i.e., ideas, attitudes, beliefs, values). It's our "hard-wired psychological mechanism that creates self-justification and protects our certainties, self-esteem, and tribal affiliations," explain Carol Tavris and Elliot Aronson in the book Mistakes Were Made (But Not By Me).
In the lead-up to the financial crisis, for instance, risk managers who sounded the alarms at companies like Citigroup and Merrill Lynch were marginalized if not outright fired because they didn't conform to the prevailing groupthink about the riskiness of complicated securities and derivatives backed by subprime mortgages. Meanwhile, companies like Goldman Sachs, Wells Fargo, and JPMorgan Chase have long recognized the value of conflicting viewpoints and actively promoted intellectual dissent. In Goldman Sachs' case, one could even argue that this was the single most important reason it not only survived the calamity of 2008-2009, but will go on to thrive in the years and decades to come.
So how do you know whether the company you work for, or perhaps the company you're thinking about investing in, suffers from the self-defeating effects of cognitive dissonance? Ask yourself:
- Is the quality of the company's products or services subordinate to short-term profit?
- Have the executives or managers designed an incentive system that rewards expediency over excellence?
- Does the corporate hierarchy either explicitly or implicitly discourage pushback or feedback from below?
These are the battle lines that separate extraordinary companies from mediocre companies. These reveal ingrained values that will live on even after the company has milked a generation or two of customers for all that can be easily had. Thus, if you aspire to be associated with excellence or to be extraordinary yourself, I encourage you to think long and hard about how your own company, or a company you're invested in, measures up in this regard.
John Maxfield has no position in any stocks mentioned. The Motley Fool recommends Bank of America, Goldman Sachs, and Wells Fargo. The Motley Fool owns shares of Bank of America, Citigroup Inc, and Wells Fargo and has the following options: short April 2015 $57 calls on Wells Fargo and short April 2015 $52 puts on Wells Fargo. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.