Here’s the news of the week – and how we see it here at McAlvany Wealth Management:

Just Because Culture Can’t Be Quantified Doesn’t Mean It Should Be Ignored

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One of the great tragedies of the COVID-19 pandemic is the plight of the average worker. As of yesterday, since the pandemic began, 36 million Americans had lost their jobs in just the last eight weeks. While there are nascent signs of a reopening across the United States, it is a slow process. People are afraid of spreading the virus to their loved ones. They don’t find enjoyment in sitting in a restaurant with a mask on their face so they just stay home. 

It is unquestionably a painful decision by the leadership of an organization to be forced to reduce the size of their workforce – in so many cases to preserve the franchise as a going concern. However, to us, how cost cutting is carried out is a glimpse into the culture of an organization and reflective of corporate values. In listening to our quarterly calls, we have listened for how companies go about reducing their overall cost structure. We commend managements and other leaders who have taken the pain with their employees. On one conference call, the entire C-suite had deferred their compensation for the quarter entirely. Others articulated ways they might go about cost cutting without a reduction in their staff, such as cutting out “extras” or cutting wages as a percent of income across the entire workforce such that the pain is shared. For many companies, however, given the levels of distress their businesses are experiencing, not reducing the workforce is simply not an option. Layoffs are particularly difficult and impersonal in this time of social distancing, as the news cannot even be delivered in person. It is crucial to be authentic, but to deliver the truth with compassion and honesty. 

Then, there are the others. We have witnessed all sorts of shenanigans, seemingly in the spirit of never letting “a good crisis go to waste.” This week we noted an insolvent company that had asked the bankruptcy courts for $25 million in compensation to appropriately “motivate” and “incentivize” its top executives – you know, the very same ones that put the company into its insolvent position. The CEO of said company had received total compensation of $15.9 million in 2019. 

Another particularly egregious example is a snippet from an email that went around at one particular unnamed Fortune 500 company this week: 

Between now and May 26, 2020, interested employees may submit their voluntary resignation offer to XXXX on the attached form by specifying the number of months of Base Salary that they will accept in exchange for voluntary separation from their employment. Each employee may amend or withdraw previously submitted offer forms until the earlier of (i) when XXXX has accepted the offer from such employee or (ii) May 26, 2020 at 5:00 p.m. Central time at which point all offers become irrevocable….

In essence, this company is pitting its employees against one another in a “Hunger Games” style competition to low-ball each other for whatever severance dollars they can get to put food on the table for their families. That company is using their dire financial situation as leverage as they instill fear in the hearts of the employees that they might not get anything at all if they do not take the voluntary package and the company is forced to restructure under Chapter 11. Maybe it is the broken culture that put the companies in the precarious financial situation in which they find themselves. Sure, one can blame the economy and COVID, but what did their solvent and more fiscally healthy competitors get right that they got so dreadfully wrong? If they do survive as a going concern, why would anyone want to work there? 

By now you are probably wondering, what does any of this have to do with investing? The analysis, while qualitative, is important to us, not just because of the human element. It boils down to a question of business ethics and values. While culture cannot be quantified in a Wall Street model (and therefore is often ignored by professional investors), there are certainly consequences of a broken culture that do eventually show up in the numbers, and those not paying attention to this do so at their own peril. Employee turnover can be very expensive, and the competition for quality talent is fierce. Further, talent that does not trust or believe in leadership is not incentivized to do the very best job they are capable of doing, and will not be invested enough in their future at the organization (or in the future of the organization itself) to find creative solutions to business challenges. A broken culture is value destructive over time. 

In short, how a broken culture can impact the bottom line is easy to illustrate by the most extremely egregious examples of how to handle sensitive employee matters as we show above. Culture is the difference between a great company and one that is simply mediocre or even subpar. Taking care of people and treating them with dignity and respect isn’t just good ethics, it is good business sense, and, for us, it is good investing.

Best Regards,

David McAlvany
Chief Executive Officer
MWM LLC