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Weekend Briefing No. 307
Welcome to the weekend. Hi from Sydney!
Since this is the last briefing of the year, I’m going to recap my favorite stories of the year, each of them are worth a read (or a re-read). As a special bonus, instead of covering the normal 7 stories, this week I’m giving you a double dose – 14 stories.
From my perspective, the most important story of the year was the Business Roundtable’s statement in August. The Business Roundtable made a significant announcement on corporate purpose that was signed by 181 CEOs of Fortune 500 companies. This group made up of Fortune 500 CEOs has historically affirmed shareholder primacy – the purpose of a corporation is exclusively to maximize financial returns to shareholders. However, in an atmosphere of widening economic inequality and deepening distrust of business, the powerful group dropped a bombshell of a statement redefining corporate purpose to include all stakeholders and not just shareholders. In fact, in the statement (see below) the word shareholder isn’t even mentioned until the very end. (I dedicated Weekend Briefing 289 to focus on this announcement. If you missed it, you may want to read it.)
Anyhow, I hope the stories below give you good food for thought as the year concludes. See you next year.
40 – 2019 marked the 40th anniversary of … the release of Sugar Hill and the Gang’s Rapper’s Delight, Ayatollah Khomeini coming to power in Iran and the Three Mile Island nuclear accident.
1.71 – July 2019 was the hottest month on record for the planet Earth. The average global temperature in July was 1.71 degrees F above the 20th-century average of 60.4 degrees.
1.623 – In August 2019, the yield on the benchmark 10-year Treasury note was at 1.623%, below the 2-year yield at 1.634%. This phenomenon is known as a yield curve inversion, which is a major signal of an impending recession.
The Business Roundtable Statement
Statement on the Purpose of a Corporation
Americans deserve an economy that allows each person to succeed through hard work and creativity and to lead a life of meaning and dignity. We believe the free-market system is the best means of generating good jobs, a strong and sustainable economy, innovation, a healthy environment and economic opportunity for all.
Businesses play a vital role in the economy by creating jobs, fostering innovation and providing essential goods and services. Businesses make and sell consumer products; manufacture equipment and vehicles; support the national defense; grow and produce food; provide health care; generate and deliver energy; and offer financial, communications and other services that underpin economic growth.
While each of our individual companies serves its own corporate purpose, we share a fundamental commitment to all of our stakeholders. We commit to:
Delivering value to our customers. We will further the tradition of American companies leading the way in meeting or exceeding customer expectations.
Investing in our employees. This starts with compensating them fairly and providing important benefits. It also includes supporting them through training and education that help develop new skills for a rapidly changing world. We foster diversity and inclusion, dignity and respect.
Dealing fairly and ethically with our suppliers. We are dedicated to serving as good partners to the other companies, large and small, that help us meet our missions.
Supporting the communities in which we work. We respect the people in our communities and protect the environment by embracing sustainable practices across our businesses.
Generating long-term value for shareholders, who provide the capital that allows companies to invest, grow and innovate. We are committed to transparency and effective engagement with shareholders.
Each of our stakeholders is essential. We commit to deliver value to all of them, for the future success of our companies, our communities and our country. Business Roundtable (5 minutes)
Purpose & Profit
Five years ago I wrote a book called Profit & Purpose. Being an optimist, of course I hoped that these concepts would influence business practices for the better, but I assumed that would be a very slow and a bottom up movement, beginning with startups and working up to big business. So, when the CEO of BlackRock (which manages more than $6 trillion in assets, making it the largest investor in the world) released his annual letter this year entitled Purpose and Profit: An Inextricable Link, I was very pleasantly surprised. He notes: Purpose is not a mere tagline or marketing campaign; it is a company’s fundamental reason for being – what it does every day to create value for its stakeholders. Purpose is not the sole pursuit of profits but the animating force for achieving them. Profits are in no way inconsistent with purpose – in fact, profits and purpose are inextricably linked. Profits are essential if a company is to effectively serve all of its stakeholders over time – not only shareholders, but also employees, customers, and communities. Similarly, when a company truly understands and expresses its purpose, it functions with the focus and strategic discipline that drive long-term profitability. Purpose unifies management, employees, and communities. It drives ethical behavior and creates an essential check on actions that go against the best interests of stakeholders. Purpose guides culture, provides a framework for consistent decision-making, and, ultimately, helps sustain long-term financial returns for the shareholders of your company. BlackRock (7 minutes)
Dannone’s Plan B
In January, I was teaching a class on the duty to maximize shareholder value (and whether it exists) and came across this article on a huge multinational corporation that says the “purpose of this firm is not to create shareholder value.” Danone is rethinking the motivating idea of the company. That means rejecting the Anglo-Saxon idea that a firm exists primarily to maximize the welfare of its owners, the shareholders. Danone is pursuing what CEO Mr. Faber sees as a more meaningful goal - to get healthy food to as many mouths as possible, benefiting everyone from suppliers to consumers to owners. To that end 30% of Danone’s various subsidiaries are B Corp certified. The goal is to do them all within a few years, at least by 2030. In April Danone North America, encompassing WhiteWave, an organic-food firm that Danone bought in 2017 for $12.5bn, became the world’s biggest B Corp. The idea is that the blending profit & purpose will help to win back trust from consumers. The Economist (8 minutes)
Does more ethical behavior correlate with higher long-term growth in stock prices? A study by the Torrey Report seeks to answer that question by examining the long-term historical performance of different sets of companies including the S&P 500, Jim Collins’ “Good to Great” companies, Raj Sisodia’s stakeholder-focused “Firms of Endearment” and Ethisphere’s 2019 “Most Ethical Companies.” After comparing these 4 sets of companies’ financial performance on the NASDAQ and NYSE over the past 20 years, they found that while Ethical Companies do enjoy a higher level of stock price growth (50% higher than that of the S&P 500 over the same period), stakeholder-focused companies (Sisodia’s Firms of Endearment) had the highest growth of all in stock price (100% higher than that of the S&P 500 over the same period). This leads to two conclusions. (1) Ethical business behavior correlates with high financial returns. (2) Companies who take things one step further and adopt a stakeholder-focused model (that explicitly serves employees, customers, suppliers, business partners, investors, local communities, the environment and society) have historically shown even higher returns than standard ethical companies. Torrey Project (8 minutes)
Recent data released by Morningstar showing that sustainable funds are taking in more cash. Net flows into sustainable funds this year are on track to triple their 2018 total, driven by ESG (environmental, social and governance) factors as well as the desire to make a social impact, according to Morningstar. A recent Bank of America Merrill Lynch report predicted a “tsunami” of capital flowing to “good” stocks, fueled by high levels of interest among women, millennials, and wealthy individuals. BofA Merrill Lynch predicts that over the next two decades, $20 trillion in assets will flow into sustainable funds and strategies, nearly equaling the market value of the S&P 500 today (some $24.7 trillion). Barron’s (5 minutes)
Discipline > Vision
As a founder, I’d choose discipline over some grand vision any day of the week. Working on your company’s vision is necessary, but it’s something many early teams spend too much time on; there’s a sort of navel-gazing element to the exercise. The bottom line is more simple: are you disciplined enough to make it happen or not? Discipline comes down to focusing on the right thing, which means you need to be crystal clear on what success looks like and how to measure it. Here are a set of questions to run through for a focused assessment. 1) Making progress: What metrics are you using in order to see if the company is succeeding? How are you orienting your entire team around them? How frequently — and consistently — are you communicating updates? 2) Managing time: Does your calendar actually reflect the priorities from above every single week? Is there an activity you aren’t spending enough time on? Do you have the discipline to disconnect and step away? 3) Fundraising: How are you managing your investors? Are you sending frequent updates on your progress, tightening your pitch and proactively building relationships? 4) Team building: What are you doing to consistently create a great work environment? How are you making sure that every hire meets your standards? First Round Review (21 minutes)
Some tech companies are worth billions of dollars. But the vast majority are not. They should stop raising money like they could be. Raising a bunch of money, and raising way more than you need ends up stunting business’s growth. If you plant a seed, it needs some water, but if you just pour a bucket of water on it’s going to kill it. Venture capital kills more businesses than it helps because the pressure to grow crazy-fast means companies keep raising money to keep their growth rate up. It’s round A, round B, it’s like, you’re going back to the drug dealer. That, in turn, means they rarely have the opportunity to learn how to spend money in a disciplined, sustainable way. Lots of businesses could be great $10 million, $20 million businesses, but they’re not allowed to be. They’ve got to be $200 million or $500 million or a billion… or nothing. Recode (60 minutes)
Typical VC equity investments can work quite well for businesses that are aiming to be unicorns, but what alternatives are out there for profitable and growing companies? Quite a few, actually. Over the course of 2018, our client Village Capital interviewed more than 200 investors and asset managers to gauge their interest in various alternative capital strategies, but the one option that received the most interest from investors — with 63.1% willing to explore or co-create such a structure — was revenue-based financing. A revenue-share deal typically involves a capital investment that is later repaid from a share from the revenue of a growing business. It has historically been used to invest in businesses with potentially predictable cash flow and high profit margins, from Hollywood movies to high-margin service businesses. After backdating a hypothetical revenue-share investment in 30 companies, they found that, on average, it would take around 4.4 years to realize a 3x return on the initial investment amount, which ranged from $20,000 to $100,000… faster than an equity investment. Novel GP has a $12 million fund focused on revenue-share investments in software-as-a-service companies. Indie.vc recently raised their second $30 million fund that invests through a “profit-sharing” structure by which the fund receives disbursements based on net revenue or net income, depending on which is greater. Candide Group, Adobe Capital and our affiliated fund VilCap Investments are a few more examples. TechCrunch (7 minutes)
The world has gone mad and the system is broken, so says Ray Dalio. This is his reasoning: (1) Money is free for those who are creditworthy because the investors who are giving it to them are willing to get back less than they give. (2) Large government deficits exist and will almost certainly increase substantially, which will require huge amounts of more debt to be sold by governments—amounts that cannot naturally be absorbed without driving up interest rates at a time when an interest rate rise would be devastating for markets and economies because the world is so leveraged long. (3) Pension and healthcare liability payments will increasingly be coming due while many of those who are obligated to pay them don’t have enough money to meet their obligations. (4) At the same time as money is essentially free for those who have money and creditworthiness, it is essentially unavailable to those who don’t have money and creditworthiness, which contributes to the rising wealth, opportunity, and political gaps. Linkedin (4 minutes)
The (Eventual) Recession
The economy is hot. Interest rates just went even lower. There is speculation that the Fed is concerned about a slowdown, potentially a recession. Nobody can predict these things, but here are some economic indicators of a coming recession. (1) Unemployment Rate. Look for rapid increases. (2) The Yield Curve. Look for Interest rates on 10-year Treasury bonds falling below those on three-month bonds. (3) The ISM Manufacturing Index. The index falling below about 45 for an extended period. (4) Consumer Sentiment. Look for declines of over 15% in a year. New York Times (9 minutes)
Should I Launch a Startup?
This is a letter by Graham Duncan to a friend that’s contemplating launching a fund, but I think most of the advice is broadly applicable to any startup. He thinks these are the key questions: (1) Are you ready to fully own the ambiguity of a new initiative? (2) Is your spouse fully on board? (3) How will you accelerate the process of building trust with new partners? (4) How will you protect the climate within your skull? (5) How are you going to source enough good ideas? (6) What are you compulsive about? Is it possible to put that at the center of the platform’s activity? (7) Are you really focusing on what you’re going to value over the long term? Graham Duncan (13 minutes)
Resentment in Relationships
My friend Khe Hy wrote a powerful article. If you’re in a relationship, I highly recommend digging into it. Resentment acts as a relationship tax, forcefully injecting itself into every dimension of our marriage: money, in-laws, chores, vacations, and parenting philosophies. And left unchecked, it has some gnarly compounding effects. So how do we deal with it? 1) Name it, to tame it. The philosopher Carl Jung wrote: “Until you make the unconscious conscious, it will direct your life and you will call it fate.” It’s much easier to see recurring behaviors if you can identify them with a name. 2) Share your own introspection. One of the hallmarks of difficult conversations is that they tend to be conversations about identity. To become more familiar with your [particular sensitivities], observe whether there are patterns to what tends to knock you off balance during difficult conversations, and then ask yourself why. What about your identity feels at risk? What does this mean to you? How would it feel if what you fear were true? It may take some digging. 3) Turn towards, instead of away. In Gottman’s Seven Principles for Making Marriage Work he introduces the concept of bids. Bids are “any attempt from one partner to another for attention, affirmation, affection, or any other positive connection” and can show up “in simple ways, a smile or wink, and more complex ways, like a request for advice or help.” 4) Don’t go to sleep mad. It helps to make the apology specific. “I apologize for raising my voice. I apologize for saying this mean thing.” The specificity of the apology honors the fact that a broad solution isn’t possible whilst passions are flaring. And with any accelerating conflict – a brief pause (combined with a night of sleep) – can defuse any tense situation. 5) Go heavy on the attaboys and attagirls. Three words. (And nope, not the L-Word.) You can never say them enough. “I appreciate you.” Rad Reads (12 minutes)
The Domino Effect states that when you make a change to one behavior it will activate a chain reaction and cause a shift in related behaviors as well. There are three keys to making this work in real life. 1) Start with the thing you are most motivated to do. Start with a small behavior and do it consistently. This will not only feel satisfying, but also open your eyes to the type of person you can become. It does not matter which domino falls first, as long as one falls. 2) Maintain momentum and immediately move to the next task you are motivated to finish. Let the momentum of finishing one task carry you directly into the next behavior. With each repetition, you will become more committed to your new self-image. 3) When in doubt, break things down into smaller chunks. As you try new habits, focus on keeping them small and manageable. The Domino Effect is about progress, not results. Simply maintain the momentum. Let the process repeat as one domino automatically knocks down the next. James Clear (6 minutes)
When people ask me (Kyle) what I do, my typical answer has been, “I write, teach and run a law firm.” The most common response I get is, “So when do you sleep?” (I love sleep and rarely get less than 7 hours… I just don’t flex on this… I also don’t have children.) I sometimes feel a little embarrassed or self-important describing myself that way. But the truth is, I love my work and feel so lucky to do a few things I love. I’ve always struggled to articulate to people why doing a few things is actually better for me, but this article in praise of being multi-hyphenate encapsulates my thinking… We miss out on wisdom if we’re too narrow. Specialists become so narrow that they actually start developing worse judgment about the world as they accumulate knowledge. Breadth of training predicts breadth of transfer. Transfer is your ability to take knowledge and skills and apply them to a problem or situation you have not seen before. And your ability to do that is predicted by the variety of situations you’ve faced. So, as you get more variety, you’re forced to form these broader conceptual models (in the classroom setting called “making connections” knowledge), which you can then wield flexibly in new situations. Wisdom is fungible. The more you have of it — regardless of where you got it — the more places you can apply it. Human Parts (7 minutes)
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I hope that in this year to come, you make mistakes. Because if you are making mistakes, then you are making new things, trying new things, learning, living, pushing yourself, changing yourself, changing your world. You're doing things you've never done before, and more importantly, you're Doing Something. So that's my wish for you, and all of us, and my wish for myself. Make New Mistakes. Make glorious, amazing mistakes. Make mistakes nobody's ever made before. Don't freeze, don't stop, don't worry that it isn't good enough, or it isn't perfect, whatever it is: art, or love, or work or family or life. Whatever it is you're scared of doing, Do it. Make your mistakes, next year and forever. -Neil Gaiman
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