Before we apply and eventually accept a job, what research do we do about our prospective employer? We obviously look at what the job is and if we have the skill set to perform at an adequate level. We also look at the business and what it does. We may also scrutinize to some extent, the team that we’d be a part of should we find ourselves working there as we interview. We most certainly consider the amount of money that is being offered, benefits, vacation, retirement plans – the usual culprits.
How many of us however make an attempt to understand the strategy of the team/division/company we will be working in? Potentially some of us. Let me take that a step further if I may – Do we ever ask – Who owns this company? What do they plan to do with this business over the coming years? What is their vision and does the culture of the teams and people align with the vision of the biggest investors in the company?
Unless you are an executive taking one of the top jobs in a large organization or an early employee at a startup, you probably haven’t asked these questions before signing that employment contract. When you take a job, you are committing a significant portion of your life to an organization. You likely hope to find fulfillment, appreciation, learning, personal and professional growth. However your ability to achieve these things depends on factors far beyond what you may have contemplated.
I want to discuss one such factor in this post. Something pretty much always overlooked but plays a detrimental role in the growth of your career
The investment strategy of the largest investors in your business.
Let me use some situations to make my points.
- A small family owned business that has about 100 employees and has been around for 25 years, needs to replace their tech support employee that recently left and you’ve been offered the job. Bob, the owner/CEO is 58 years old and is contemplating his exit strategy. The offer is pretty competitive with what you would see in the market.
- You are being offered the job to be a mid level manager in a mid size business with about 500 employees that was sold to a private equity firm 2 years ago. The founder who was the owner/CEO retired after fulfilling his transition commitment and one of the other leaders in the business was promoted to run the business. The compensation being offered is above average.
- You have been offered an HR executive job in a large public company founded in 1934. The CEO has had the top job for about 7 years and the stock performance of the company has been poor. An activist investor has recently taken a large stake in the company and a proxy fight is in the cards (you can google ‘activist investor proxy fight’).
- A large public company founded 15 years ago. The founder of the company is the primary shareholder and the CEO of the company. Financial performance of the company has been average. While the company has grown (in terms of revenue and number of employees) quite consistently, the stock price has been stagnant for the last 2 years. You have been offered a mid level management job that pays below par but has a stock option component that could be lucrative if the stock price turns favorable.
How do you think these jobs stack up? Think about that a little bit.
Without investors, there is no business and every investor wants returns. The devil however is in the details. What type of returns an investor wants and how long they are willing to wait for them is what will determine your fate as an employee. Lets evaluate the above situations one by one.
Situation#1 – This would be something I would run from (not if I had been an employee for a little bit, this is a job offer mind you). The problem with this situation is that I have no clue as to what will happen once the founder/owner/CEO exits the business – whether they sell the business or hand over the reigns to another family member. Past performance is no predictor of the future and there is just too much uncertainty to invest my time.
Situation #4 – This is something that I would absolutely jump at. First of all, the founder is the CEO and has been since the inception of the company. They’ve managed to take the company public and still continued to grow. While my salary will be below par, the stock options give me the opportunity to get on the same train as the owner/founder of the company. The founder likely has all of his wealth tied in company stock (Bezos has over $100 billion of his wealth tied in Amazon stock). This means that if stock prices drop, the guy in charge loses a lot more money that I can even imagine. This aligns our incentives which is extremely powerful if both of us have the same vision of long term success. The fact that despite growing revenues, stock price has remained constant (usually a sign that net earnings and projected earnings have not risen) tells me that the company is making strategic investments in sustained market leadership and growth. This means I will have the opportunity to grow with the company and there is a fair likelihood that my stock options would potentially be worth a decent sum of money EVENTUALLY. This is why people jump at the chance for working for Amazon and why Amazon is so successful. It was a sleeping giant for so many years while it kept pumping all of its growth back into its business and investors were willing to be patient (Bezos convinced them that he had a vision and it could only be achieved by reinvesting all of its earnings).
Situation # 3 – This one is a bit of a gamble. An activist investor usually takes a stake in a company when they feel that the management is not doing enough to unlock shareholder value and returns. They will buy a big chunk of stock on the open market, and then fight for one or more seats on the board in an attempt to shake up the way the business is being managed. Ultimate goal is to somehow increase share price or pay huge dividends to shareholders (ideally the former) so they may benefit from then selling all the stock they just bought. They might trim fat in places (which makes this situation a bit scary) but they might also potentially shake up leadership positions replacing old ones with ones they think are the more capable leaders (which could work well if you are one of the promising ones). As an HR Executive however, if I take the job, I would brace for a rough ride. Proxy fights can get really messy and expensive for an organization. An additional point to note is that the likelihood of a single majority shareholder is very low considering the business has been around for a long time.
Situation # 2 – This one is a mixed bag and begs the most research. Not all private equity firms are made equal. If I was among the 1% and figuring out who to give my money to manage, I would want to find someone who’s investment strategy aligns with my needs. If I am willing to be patient and accept low yield years knowing that I will have bumper yield years as well, I’d hand my money to a certain kind of PE firm that has a similar preference for long term success. However, if a single bad year is going to shake me into pulling my money out, I am incentivizing my PE firm to do what it needs to get me the annual return I expect and that could drive stringency in making investments vital to future success. This can be very dangerous not only for the PE firm but for the businesses it owns. While the PE may be able to deliver the returns their investors expect in the short run, they will lose in the long run because they aren’t making investments that are vital to the resiliency of the business. A downward trend which is a healthy part of a business cycle could prove detrimental to a business that has failed to prepare for it.
When Warren Buffett started his partnership, he had very strict conditions on how returns would be managed and clearly stated the fact that investors would not be able to access their own money for a set period of time. While Berkshire can’t do that today since it is a public company, Berkshire has never split their stock, neither given out dividends. This is because they do not want short term, quick win investors. This investment strategy simply does not align with the vision and strategy on which the company is built.
As a prospective employee, it is important to know what you wish to gain from a job and research if the ownership structure of the company will allow for you to achieve this goal before you sign the dotted line.