Skin in the Game

Skin in the Game

I have a confession…When driving a rental car, I don’t slow down for speed-bumps nearly as much as I do when I’m behind the wheel of my own vehicle. When I’m driving the rental back to the lot, the last thing that crosses my mind is, “Where’s the nearest car wash?” I don’t think I’m alone. Who would ever think about washing their rental car?!

It’s sad, but this way of thinking isn’t far off from the way many management teams run public companies. Far too often, these managers are merely “agents” for shareholders – hired professionals to run the company until they hand the keys over to the new drivers of the business. For these agent/operators, things like car washes and oil changes are usually not a priority because there’s not a sense of ownership.

We prefer to partner with managers who will not just wash their vehicles, but wax them – the owner/operator management teams.
Most public companies are what we call agent-operator companies. And many are still worthy owning. But in a lot of cases, management at these companies are focused on the next quarter or next year. They try to “please the street.” They like to make headlines. They’re compensation-orientated. And, they like to grow their asset base, sometimes by doing questionable acquisitions. After all, there’s no easier way to a larger paycheck than by managing a larger empire. But because management doesn’t have much skin in the game, they avoid the consequences of their decisions.

Owner/operator companies are different. They’re typically run by the founders or sizable shareholders and what sets them apart is they’re run with the mindset of a private business owner. There’s a culture of ownership. They like to make money, not headlines. These companies are managed for the next decade, not the next quarter. The operators focus on managing the business rather than managing Wall Street or Bay Street relationships. They typically have the majority of their wealth at risk in the company they are running, which means these companies tend to be conservatively financed. No one wants a more bulletproof balance sheet than these operators who have so much skin in the game.

One element that sets owner/operators apart is their opportunistic and sometimes contrarian approach to running their businesses and investing capital. This mindset allows these businesses to grow in any environment.

Resources,
Dan Hincks
2015 Odium Brown Annual Address (edited)