“People don’t buy what you do; they buy why you do it” – Simon Sinek
One of the primary things we look for when deciding who we work with is their “Why”. Sure, we look at the financials, competition, and the business model, but what we really want to see is a purpose driven mission. A passion for foundationally improving the world we all live in.
In order to build sustainable businesses for a more sustainable and inclusive economy, a foundational change in the way we evaluate business success is needed. A proper assessment of corporate value requires not only considering shareholder value, (e.g., equity, rate of return, and stock price) but also the interest and satisfaction of all stakeholders.
Shareholder vs. Stakeholder Capitalism
Under the shareholder model, the firm’s mission is to maximize shareholder profits. All others involved with the company; employees, customers, vendors, etc. enter into formal contracts and their only relationship with the company is to perform the transaction predetermined by the contract (labor contract, sales contract, etc.). The shareholder model was born in the late 1970s / early 1980s, long before the internet and information age would fundamentally change the dynamic of the business landscape.
The stakeholder model takes into account the change in the relationship companies have with their various stakeholders as compared to the era in which the shareholder model was born. The stakeholder model takes a holistic view of all the value created for shareholders, employees, customers, vendors, and communities when valuing a corporation.
One example I like to use to illustrate the difference between these two models is the impact of “corporate restructuring” on corporate value. Restructuring, also known as “canning folks”, is routinely employed to create shareholder value. I’ve seen it more than once over the course of my career. Private equity comes in and deploys its “PE playbook” to improve profitability by “rationalizing headcount”. Just like that, people lose their jobs, those that are left have to pick up the slack, and the dollars hitting salary expense go down.
In the shareholder model, operating income goes up and the corporation is more valuable by virtue of this increased profitability. Under the stakeholder model, there is no increase in the absolute value of the corporation. Value has been shifted from employees to shareholders. Plus, the job satisfaction of the employees still with the company decreases due to increased workloads, which under the stakeholder models decreases corporate value.
It’s not hard to see how profound a difference it would make for management teams to view staffing decisions from a stakeholder perspective. Critics of the stakeholder model say things like “keeping money-losing business for the sake of protecting employees will result in greater downsizing in the future” or “a few people will lose their job so that everyone doesn’t lose their job”. I am not arguing this is not the case in certain scenarios. It has been my experience that downsizing decisions are made, more often than not, for the short-term benefit of a few than the long-term benefit of everyone.
Critics also point out that things like ‘job satisfaction’ and ‘excellent customer service’ are hard to quantify and thus a proper valuation under the stakeholder model becomes too complicated to quantify. Just because something is difficult to do doesn’t mean it shouldn’t be done. One example of an organization in our portfolio that is the gold standard when it comes to managerial decision making through the stakeholder lens is Active Duty Passive Income (ADPI).
Stakeholder Capitalism IRL, Active Duty Passive Income
ADPI is an education company founded on the idea that planning for life and financial freedom after the military can begin while still on active duty. Their overarching goal is for the ADPI community to be the best place for military and veterans to learn about real estate investing and for their members to own as much of America as possible. Delivering value to the military community is at the core of their mission.
The community at large is not even a factor in the shareholder model. There are countless examples of community destruction at the hands of corporate negligence and mismanagement in the name of profit. Income creation, economic development and social stability are all components of corporate value under the stakeholder model.
For ADPI, the military community is the primary consideration during the decision-making process. A focus on community is engrained in the organization’s core values; “We pursue one mission, which is deeply rooted by our military ties… Our bond gives us an acute advantage as we build a business focused on serving those like us”. From sales to treasury management decisions. A commitment to creating legacy wealth and the stability that comes with it for a community that has historically been neglected is what fuels every critical decision the team makes. Employees
A sympathetic attitude toward employees is considered a source of inefficiency in the shareholder model. What they provide today to companies differs greatly from the era of classic capitalism and thus new thinking is needed. Employees are the lifeblood of the modern corporation, bringing deep technical knowledge and dynamic skill sets to the table. They are expected to provide motivation and energy and in exchange not only do they expect a salary but also job security and satisfaction as well as a forum for social relationships and self-actualization.
ADPI’s business has accelerated to the point where it has a need for and can sustain full-time employees. With the proper metrics, discipline and expectations, the team has laid out a path to sustainably add fixed cost to the business. The prospect of creating job security, specifically with an eye towards the military community, is what it’s all about. For example, they look to fill customer outreach roles with active-duty military spouses. A group whose unemployment rate in the US is at roughly 25%, 2.5X the national average.
“What is a fair wage for an employee that comes with all the skills they’ve learned during their time with the military?” is a philosophical question, the answer to which the team centers their staffing plan around. ADPI has gone as far as ending relationships with military job staffing companies because they won’t offer prospective employees that come through their service what the team believes is a fair wage. The creation of corporate value for employees doesn’t stop with salary, the team also aspires to build a culture of robust training and development opportunities.
Customers these days depend on high quality, high product reliability and excellent post-purchase customer service. For ADPI, being hyper customer focused is everything because the team sees it as a competitive advantage to focus on serving those like them.
Because ADPI employs active duty military and spouses, they have access to talent deployed all across the world and as a result can provide around the clock customer support. A personalized experience is the first thing new customers receive when purchasing an education course and the high-touch relationship with the ADPI team doesn’t end there. For members of the ADPI community, the team is there to support the education process, troubleshoot and help their members close deals. After all, “financial freedom for those who serve” is the barometer by which the ownership team measures their success.
In today’s digital society, companies can leverage high quality professional services without the need to have full-time employees on site. This is a game changer for enterprises that are scaling quickly. Given much of the ADPI ownership team is still active duty and have competing responsibilities, they lean into this strategy and as a result have built a world-class management team around themselves. From sales to marketing to finance, ADPI is creating significant value for its vendors and as a result is able to leverage best-in-class operational support for a fraction of what it would cost for a full-time CSO, CMO & CFO.
With roughly 20 million active duty and veterans in the US, and 180,000 Americans joining the military every year, the need for enterprises focused on supporting military families isn’t going anywhere. By virtue of the management team’s focus on maximizing value for all stakeholders, ADPI is well positioned to fill this need for the long term.
HIROTA, SHINICHI. CORPORATE FINANCE AND GOVERNANCE IN STAKEHOLDER SOCIETY: beyond Shareholder Capitalism. ROUTLEDGE, 2017