The Performance Advantage

And finding good companies requires more than only evaluating spreadsheets and charts. Guided by our rigorous Business 360® framework and Genesis’ mandate for our work to contribute to the world’s flourishing, we search for businesses which add value to the world and serve their stakeholders with care and integrity. This research requires both technical expertise and ethical discernment.

Eventide invests in good companies because it’s right, but what about results? Since healthy returns are also essential, how does our commitment to discovering and investing in companies which serve the common good contribute to performance? Many assume investing with an ethical, biblical framework means abandoning performance; but we believe the opposite. Over the long term, good companies which are good for the world make the best investments.

Focusing on good companies expands every investor’s field of vision. Narrowly fixating only on short-term gains fails to separate good profits from bad profits—and never asks the vital question: what do we mean by profit? If a tobacco company has stellar growth but kills thousands, how could we ever consider this genuine profit? Investors and executives might gain a windfall, but when we tally all the costs, any holistic ledger bleeds red all the way down. The tobacco business suffers a massive, collective loss no matter what returns shareholders enjoy. Tobacco’s performance, understood on the aggregate, is abysmal.

We believe good profits grow when a business is well managed, delights customers, and pursues a noble purpose—all harbingers of a bright future. Bad profits result when a business is poorly managed, manipulates or ignores customers, or considers only their own bottom line—all signs of a storm brewing. Good profits signal growing, sustainable performance, but bad profits put future performance at risk. Unfortunately, standard accounting is incapable of distinguishing between the two.

But when we’re intent on finding good businesses with good practices, we recognize valuable insights and data we’d miss otherwise. Surveying a company’s whole range of stakeholders (customers, employees, suppliers, community, environment, society) offers leading indicators which rarely show up on the balance sheet until the damage is already entrenched. But revenue and profit are lagging indicators; and if they disintegrate, there was trouble well before the spigot slowed. Locating truly good companies demands getting under the hood of a business so we can comprehend the complexities and intricacies likely to affect holistic performance over the long term.

At the turn of the century, the juggernaut America Online (AOL) was the world’s largest and most powerful internet company boasting 34 million global subscribers, piles of cash, and a rocket ascent.¹ When AOL merged with Time Warner in 2000, their combined value was $350B, with executives heralding a future of 33% annual growth.² However, a closer look could have revealed fissures. AOL blew vast sums blitzing the country with free software disks (in cereal boxes, glued to magazines, on in-flight meal trays), annoying potential customers and becoming a national punchline. They spent millions on these disks (many were used as coasters or tossed in the garbage) but failed to shore up their infrastructure; and their modems buckled under the surging traffic. Irate customers gave them a new name: America On Hold. Client satisfaction tanked. Still, the company squeezed for more profit by upping prices and implementing aggressive pop-up advertising. One reporter dubbed AOL “carnival barkers.”³

AOL cratered, now a shell of the behemoth it once was. But trouble signs were visible long before the catastrophic demise. Investors intent on finding companies which add value to their customers and other stakeholders could have noticed red flags others missed and recognized AOL’s performance was in jeopardy.

While a commitment to good companies helps investors identify camouflaged weaknesses, it can also lead us to companies with competitive advantages. We believe that profit from poor or unethical business practices will eventually wither, but good practices sustain profits over a long horizon. Ed Freeman, Professor of Business Management at the Darden School at the University of Virginia, insists “the interest of shareholders is dependent on how well you deal with customers, and suppliers, and employees, and communities. In fact, I’d even venture to say the amount of money you can make is a function of how you deal with those other stakeholders.”⁴ At Eventide, our comprehensive evaluation of a company’s whole span of stakeholders helps us uncover underappreciated value.

A good company can have an advantage because it enjoys one of business's highest prizes: a cadre of loyal, delighted customers. Fred Reichheld, in his book The Ultimate Question 2.0, demonstrates how energized customers provide synergy for dynamic business. Good, growing companies build such meaningful, durable relationships with their customers—and provide such superior service—that their clients become the company’s greatest advocates (what Reichheld calls “promoters”). And these durable relationships produce a cascade of financial benefits. There’s no better (or cheaper) marketing than when someone tells a friend why a business they love is so marvelous. Delighted customers are devoted, slashing customer acquisition costs; and they’re often willing to pay a premium for the service they trust. Profits compound.

One insurance company discovered how slowing customer churn and keeping customers for an average of only an extra month added $1 billion in premiums.⁵ Happy customers spend more (one retail company focused on customer experience averaged almost five times more than the average revenue per square foot).⁶ Research demonstrates how only a “5 percent increase in customer retention could yield anywhere from a 25 percent to a 100 percent improvement in profits.”⁷ Serving customers pays dividends.

Further, we believe employees of good companies feel more purposeful and are more dedicated. When companies add value to the world and meet customers’ needs, employee morale skyrockets. When employees experience their work making a difference for people, when they feel integrity and ethical congruence with their job, when they know relationships are truly expected (not merely a sales slogan), then employees are energized. They are more satisfied in their job and are less tempted to look for other opportunities. They bring their best to work. It’s difficult to deny the power of happy employees when you consider that the 100 “Best Companies to Work For” have cumulatively outperformed the S&P by 2,000% over a 27-year period.⁸

It’s hard to put a value on what happens when positive, electric energy surges through a business. Yet there are concrete tangibles: reduced training and labor costs, an invigorated (and more profitable) customer experience, and momentum impacting production, sales, and service—basically everything. “If you pay attention to stakeholders, and you have a high purpose,” insists Freeman, “you’re basically going to beat the hell out of companies that don’t…”⁹

We wholeheartedly believe good companies are good investments because they pay attention to the whole gamut of factors essential for sustainable performance. Profit is important, but it’s only one piece of the equation—and the kind of profit matters. Reichheld says the verdict is in: “companies that focus on good profits, the kind that come with customers’ enthusiastic cooperation, are more likely to thrive.”¹⁰

John Mackey, co-founder of Whole Foods Market, says being a good company and trying to do good for all their neighbors was core to how they grew from a single store to more than 500 (with $22 billion in annual sales).¹¹ “[This way of doing business] works,” said Mackey. “If it didn’t lead to competitive advantage it would disappear.”

A commitment to doing good works for businesses. It works for investors too.