In my ~8 years of work experience, both in a large organisation and starting + growing a startup from scratch, I learned that the single biggest asset, as well as a threat to a company’s fortune, is its culture which is largely influenced and formed by the people it hires. Depending on the hire, a company can stay resilient and innovative, putting itself in front of the ‘next-big-wave’ or it can deteriorate into history.
No one would disagree that staying resilient and innovative is key to growth of a company but to many people, these concepts are just ‘nice-sounding words’ displayed on the company’s pantry and too many companies, especially the large and mature companies, fail to walk the talk. Why is this so? What are the key differences between the companies that achieve such qualities and those that fail to do so? In my opinion, one of the most determining difference is in human psychology, especially our tendency to linearly extrapolate past data (this concept is also well understood and practised by many successful investors that I follow. For instance, Howard Marks explains the danger of extrapolation in his book The Most Important Thing, my note here. And Dennis Hong from ShawSpring Partners explains succinctly in its letter to investors on why they think the market fails to properly value Optionality) being applied to an organisation’s decision-making process, especially in the HR department, barring the company from making the bold and innovative hires that could move the needle for the company.
I have experienced such gap in HR decision translated into the stagnation of an organizational innovation while working at a conventional bank as an Equity Derivative Product specialist, trying to introduce a new and innovative (at least in my opinion) payout structure. The most common response from the senior management was ‘Who else is doing it?’ or in other words, the bank would rather be conservative than correct. And at the core of this problem was the fact that most people were brought-in from our competitor banks. This cross-hiring phenomena also answered my question of ‘why isn’t anyone else doing this payout structure?’. It was because everyone else was hiring from each other too! The entire industry was essentially one giant bank. How can a bank (or any other industry) expect innovation when all they are doing is to steal talent from their competitors, and justify such process by valuing conservatism (or linear extrapolation) over the right choice. While everyone seemed to be ‘ok’ with such industry practice, to me, it was odd. I mean, if you take out a $10 bill from your left pocket and put it in the right pocket, the value of the bill is still $10 and yet everyone seems to be thinking that somehow such switch increases the value of the bill. It doesn’t.
In a similar vein, I have also pointed out in my other essay, Competition isn’t the only answer, that the genuinely groundbreaking innovations tend to happen from companies that are outside of the industry: Apple, not Nokia or Motorola, redefining mobile phone industry and Tesla, not Ford or GM, putting the end to the internal combustion engine. Based on the experience I had at the bank, I would wager that part of the culprit for stagnation from Nokia, Motorola, Ford, and GM was partly because they were hiring too conservatively, shunning the out-of-the-industry talent and justifying such hiring process as being too risky (or more bluntly put it, unable to comprehend with the potential of non-linear future).
But why is it so? How can we be assured that merely hiring of talent from a nearby industry (not too remote but tangential such as a Fintech company hiring a talent with a startup experience rather than from another fintech competitor) will yield in increased optionality leading to an exponential growth versus a linear growth? In my option, the answer lies on the inevitable difference in an attitude that the new-hires (one from another fintech, we will call employee A and the other from a more diverse but tangential background which we will call employee B) bring into the company.
The attitude of an employee A would be defensive and reactive because his/her duty is to bring over her knowledge and experience from the previous employer and carry on with more or less the same job. In other words, there is a very little question or almost no meaningful questions asked about why he/she is carrying out the task. Undoubtedly, employee A brings what is considered as an ‘industry standard practice’ to the company which is no different than copying/pasting a solution. In contrast, employee B’s attitude would be more proactive and inquisitive, trying to understand the root of the business which would involve asking a lot of questions that begins with ‘Why…?’.
Going back to my banking experience, this makes sense. The reason I was able to ask the question of ‘Why isn’t anyone else doing this payout structure?’ was not because I was smarter or better educated than others but because it was my first job and I was trying to draw and understand the banking business on a blank canvas. Sure a company full of employee Bs would also be a disaster but to me, a company that builds the right mix/balance of employee A and employee B is the difference between the exceptional company and a good company. The former recognises that being exceptional and an industry leader requires constant challenge and iteration which can’t be achieved with employee As alone while the latter stays as a good company, dismissing employee Bs as being too risky and unconventional (or valuing conservatism over what is right).
I am yet to see an investor uncovering on a company’s HR practices when valuing the company but maybe its time to start incorporating that when gauging the company’s level of resilience and willingness to take risks/innovate.
Who knows? Maybe such is the recipe for repeatedly unlocking/spotting the hidden value of a company.