Digging into the Multi-stakeholder Operating System

In the following clips and transcripts, from our ‘Investing in Conscious Companies Webinar,’ Rick Frazier discusses the multi-stakeholder operating system (MsOS); how a firm manages its relationships with employees, customers, suppliers, investors, and communities. He also discusses Costco as an example of a company that had been undermined by analysts for its strong relationship with employees.

What is the multi-stakeholder operating system (MsOS)?

The multi-stakeholder operating system is comprised of intangible assets. That’s really the short answer. Now, all companies have a management system or an operating system. We simply believe some operating systems are better aligned with today’s marketplace realities than others. I think it’s safe to say that nearly all analysts primarily scrutinize tangible assets for signs that a company is being well managed. As previously mentioned, our past consulting work showed us that intangible-asset assessments could provide more insight about what’s really happening inside a company, and could provide more reliable forward-looking indicators of performance.

According to Ocean Tomo, intangible assets account for approximately 80% of the market value of S&P 500 companies. Analysts and investors are largely left guessing how well these assets are being managed, primarily because our whole accounting and financial reporting apparatus remains solely focused on tangible assets. Not surprisingly, there’s extensive research indicating that investors systematically misprice shares of intangibles-intensive firms. Also not surprisingly, the readily available 20% information pile, tangible assets, has been sliced and diced every which way for a very long time, while the 80% pile has remained largely untouched. We have plenty of information sources for the 20% and virtually nothing on the 80%. You go where the information is, and that’s where they’re primarily focused. We do look at the 20% as well, but we’re not doing anything unique in that regard. I’m not sure it’s even possible to do at this point. I should go on record that we don’t think anyone has fully cracked the code for evaluating intangible assets, including us. The most we dare say is that you’d be hard-pressed to find anyone who has worked harder at it than we have perhaps. We’ll always be sort of saddled with this healthy dissatisfaction about what we are, because there will always be a gap between what we’re able to learn about a company as insider consultants, like we used to, and what we’re able to learn as outsider analysts today. We’re working hard to try to close that gap all the time.

Frazier on Costco’s Strong Relationship with Employees

I’d like to maybe refer our listeners to an article that was published in Business Week. It was on April 12, 2004. It was called The Costco Way, and the subheading was Higher Wages Mean Higher Profits, But Try Telling Wall Street. What’s interesting here is that Costco had actually beat Wall Street expectations as described in this article, across the board pretty much. The market responded by driving the company’s stock down by 4%. The article states that one problem for Wall Street is that Costco pays its workers much better than arch-rival, Walmart, and analysts worry that Costco’s operating expenses could get out of hand. This quote in the piece was fascinating, “At Costco, it’s better to be an employee or a customer than a shareholder,” says Deutsche Bank analyst, Bill Dreher. I think this is a great example of analysts looking at a firm solely through a financial end, and completely ignoring or just missing the operating system that is largely responsible for that impressive performance they turned in. To my point, they seem, however, to have come around eventually – again, this over-the-long-haul view, as anyone who bothers to look at the performance of Costco over the decade since that article in 2004 can see. They were concerned that Costco was paying people too much, that they were lining the pockets of employees to the detriment of shareholders. Eventually, they had to realize that they just kept on plugging and kept on turning in a good performance. That, I think, speaks volumes. That’s why we’re looking at this operating system, because we know it’s what drives performance based on the work we have previously done as consultants.