I'm a great admirer of any person who can establish a business and maintain it for years into the future and I've always suspected that founder-led companies would, somehow, tend to do better than those companies that have management with no or little stake in the business they're running.
An article recently written for the Harvard Business Review by Chris Zook, a partner of Bain & Company and co-author of The Founder's Mentality: How to Overcome the Predictable Crises of Growth, identified the three reasons why founder-led companies outperform the others:
- The company's special purpose, or its business urgency (the challenging of industry norms presumably to offer a better value-proposition to its customers)
- Front-line obsession which means being across the detail of the business and having a culture that makes heroes of those at the front line in the business, and
- The owner's mindset, especially if many of the company's staff also own shares in the business that allow all of the company to act like owners
Here are the results from Chris Zook's US analysis:
* source: https://hbr.org/2016/03/founder-led-companies-outperform-the-rest-heres-why
Given the information in this graph, it appears to not be a bad thing to at least have a few founder-led companies in your portfolio. Here are three that I think should be seriously considered for any long-term portfolio that demonstrates the three traits referred to above:
Technology One Limited (ASX: TNE)
Adrian Di Marco, executive Chairman and founder of the business, indirectly owns more than 12% of the ordinary shares on issue. Founded in 1987 and a listed company since December 1999, Technology One is a provider of enterprise software to government, education and utilities clients (amongst others).
Whilst this stock always looks expensive, this is definitely a company you'd like to have in your portfolio on any pull back.
Despite Technology One trading at over 40 times earnings, the company is forecast to grow its earnings by another 17.5% to the end of the 2018 financial year.
Nick Scali Limited (ASX: NCK)
Although the original Nick Scali himself today has no shares in the business he founded, family members effectively manage the business on a day-to-day basis and indirectly own 50% of the ordinary shares on issue. With ownership levels as high as they are, you can feel confident that the Scali family running the business have their personal interests aligned with yours.
Considered innovators of the importing and retailing of furniture into Australia over the last 50 years, the company has earned decent returns for shareholders and has done particularly well in the last 10 years providing shareholders with an average annual return of 17.97% (inclusive of dividends).
With reasonably low debt and a 3.3% fully franked yield, Nick Scali appears reasonable value today.
Flight Centre Travel Group Ltd (ASX: FLT)
Graham Turner established the Flight Centre business more than 30 years ago and took the company public in an IPO in late 1995 (at $0.95 per share).
Today, Flight Centre is attempting to position itself as less of a traditional travel agent and more of a 'manufacturer' of travel products across various consumer, industry and geographic markets.
With an indirect ownership of more than 15%, I see no reason for concern in the company's recent fairly subdued full-year profit forecasts. This is a cyclical business, but with Graham Turner and his management team at the helm, and with current weakness in the share price providing a price-to-earnings ratio of under 14 times and a fully-franked dividend yield of 4.3%, this is a good a time as any to buy some shares.
It also isn't a bad thing that Graham Turner is considered the second-lowest paid CEO in the country!
Foolish takeaway
By buying shares alongside proven entrepreneurs with a demonstrated track record, chances are your portfolio will benefit as your newly-employed company founders innovate and take risks to grow their businesses into the future. There's no sure thing of course, but the statistics show that the odds of out-performance over extended investment time periods are in your favour.
