Why do some companies evolve into wealth-generating engines, while others manage only short-lived growth before fading away? The essence of value creation lies in the series of decisions made by a company’s leaders. These choices steer the organisation’s course and define its future potential. Ultimately, it is the management team that drives value, determining which products and services to offer, formulating the strategies to win market share, and optimising the use of company resources. In their hands rest the fate of the business. This article explores the role of professional management teams, and by learning how to assess their effectiveness, we can gain the ability to foresee the success of any company.
Executives as wealth creators
It is worthwhile clarifying what is meant by value creation as it may mean different things to different organisations. Value creation in this context is about wealth creation. It can take the form of earnings growth, dividend growth, and stock price appreciation. Exceptional management teams create great companies which, like a planet, attain their own gravitational force to attract talent, capital, customers, and therefore profits. Planets continue gathering their own momentum as they get bigger in size, collecting dust from space over millions of years. Great management teams nurture companies that, once set on the right path, continue snowballing in size by themselves and well into the future. And for those that get it right, the financial rewards for shareholders, management teams, and boards are life-changing – not to mention the value created via their products or services that meet or, even better, exceed consumer expectations.
Take for instance Hermès, the well-known French luxury brand. Founded in 1837 as a boutique harness-maker, the business has evolved from a saddlery in the 1800s into the luxury handbag and clothing company it is today. During that time, it has created immense wealth for its founding family, which today still owns 65% of the available shares. At the end of 1994, it was valued with a market capitalisation of US$1.3 billion. Today, its market capitalisation is around US$220 billion – equivalent to a staggering annual compound growth rate of 19.3% per annum. In addition, shareholders have received significant dividend growth over time.
Hermès’s enduring value lies in its brand – it is not a company driven by fleeting trends. Instead, its business value is anchored in a strong brand strategy that will continue to generate wealth for its owners for many more years to come. This success has not been easy to come by; it is the culmination of sound management and long-term decisions that have firmly established Hermès as a symbol of luxury in consumers’ minds. In other words, Hermès’s current success is the product of an accumulation of wise management decisions made over many years.
The pillars of long-term success
Great companies come from diverse sectors and are led by management teams with varying philosophies and styles. The large body of research on management styles and techniques is directed towards professionals so they can employ them to improve their impact. This is a constantly evolving field in its own right, shaped by the ever-changing nature of human behaviour and societal expectations. However, we are not focused on the nuances of management styles and skills; rather, it is the analysis and assessment of the results that we are interested in. And since we are focused on the outcomes delivered through a management team’s skill, there are clear objective tests that can be applied across all sectors and styles to gauge the management team’s potential to create long-term value.
The role of management is to steer and grow the company to create long-lasting value. To do that, they need to demonstrate the capability for:
- Bold decision-making
- Motivation for the right reasons
- Commanding the masses.
Regardless of a company’s industry or size, these three qualities are essential for effective management teams, forming the bedrock of long-term success and sustainable growth. Hermès exemplifies how the remarkable value created by such companies is deeply rooted in each generation of management upholding these principles.
Here we briefly run through the first of the above qualities that companies need to create value.
Bold decision-making
There are specific moments in a company’s history that present a fork in the road for management to decide whether to take a left or right turn. The correct choice generates value, while the wrong choice erodes value. Hermès experienced this in the 1990s when then- CEO Jean-Louis Dumas made the decision to phase out externally owned retail franchise stores while increasing the number of company- owned stores. In the short term this decision significantly increased capital expenditure and reduced sales volumes, but Dumas, being a member of the founding family, had the longer-term goal of elevating the in-store experience. He sought greater control over customer interactions with the brand — and despite the initial cost, the reduction in stores eventually generated an increased sense of exclusivity and brand cachet among customers, leading to an improvement in margins.
This example underscores the value of eschewing rigid conventions in favour of a thoughtfully independent approach. In this instance, what appeared detrimental to the business in the short term was, in fact, the right decision for the long term. Dumas recognised the opportunity to elevate brand perception by limiting volume and enhancing the in-store experience, contrasting sharply with the prevailing strategy of broadening distribution and prioritising expansion. The effects of such decisions may not stand out with great significance by themselves but when stacked on top of each other and compounded over time, they begin sculpting a company’s future.
Bold decision-making is not only based on independent logical deduction but having the fortitude to take calculated risks. Far too many bureaucratic companies fall into a culture frozen by conservatism at the board and management level. The appetite to take calculated risks then becomes lost in the aversion to venture off the beaten track, for fear that veering too far from benchmarked competitors automatically puts the company at risk. History is sprinkled with companies that have failed to move or have been too slow to adapt to changing technology (think Kodak or Blockbuster). We want management teams that take calculated risks and will change course if needed.
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This is a lightly edited extract from The Founder Effect (Wiley RRP $34.95) by Lawrence Lam, which explores the essential traits of successful executive teams and governance structures that drive sustainable growth. Author Lawrence Lam brings over two decades of expertise in global equities, risk management, and advising boards on investment strategies. For more information visit https://lawrencelam.org/
Lawrence Lam is the Founder and Managing Director of Lumenary Investment Management, a firm that specialises in investing in founder-led companies globally. Lawrence’s new book The Founder Effect (Wiley $34.95), is out soon. Firstlinks readers can pre-order a copy using the promo code MAR47587U83B at checkout for a 10% discount (valid until 29 January 2025).
The material in this article is general information only and does not consider any individual’s investment objectives. Companies mentioned have been used for illustrative purposes only and do not represent any buy or sell recommendations.