Chairman's letters

03 February 2020

Guy Hands' speech at the LSE Alternative Investments Conference 2020: Culture is everything

Good morning, it’s great to see you all here. It’s an honour and a pleasure to be here and something I look forward to every year. It gives me great hope for the future to see a diverse, bright group of intelligent people gathered together, coming from all over the world and representing the brightest of their generation. This is especially true during these dark times as I am relying on you all to solve the big mess my generation is leaving you. Brexit, climate change, the environment, pandemics, species extinction – it’s all yours to sort out. I won’t elaborate my feelings on these issues, not because they depress me too much, but because it is not really what today is about and it is quite difficult to talk about without feeling totally ashamed. Today is about each of you gaining information that hopefully will help you make better decisions about what you do in the future and making those better decisions will hopefully mean that you create a better world for your children than the one you were born into.

At approximately the age of most of you today, I graduated Oxford back in 1982. I was a scruffy, art-loving punk and practicing entrepreneur who hated the elites and liked pogoing to The Stranglers. I was planning my life as a small business owner and dreamed of moving to Fowey, Cornwall to set up a wine bar, an art gallery and a photography business. Fifteen years of formal education, followed by a further 4 years at Oxford had, if anything, strengthened my desire to create my own destiny and give two fingers to the establishment.

Unfortunately, the art gallery I owned while attending Oxford, called Artsake, was hit by a bad case of subsidence and needed massive repairs, putting me in debt to the tune of £40,000. Back in 1982 a 3-bedroom flat in Pimlico cost less than that and average annual wages were under £7,000 pounds and income tax rates were at 60% for an income of over £31,000. As I saw it, I had but one choice: I went to the university careers adviser and asked, ‘which company would pay me the most?’ The adviser responded, ‘Goldman Sachs.’ But told me that they would never take me as my predicted degree was a third. This didn’t stop me from trying; indeed, it encouraged me. After over 20 interviews in Oxford, London and New York, I got a job at Goldman Sachs and joined the ‘dark side’ the Monday after I finished my degree. I started as a trainee bond trader in Goldman’s London Office.

I had read about Goldman Sachs in The Economist when I was doing my A-levels. What I liked about it was that from the mid-70s it had this anti-establishment reputation. Back then, Goldman wasn’t part of the mainstream. It was a trader’s investment bank with a hungry, entrepreneurial culture and it was still establishing its presence in London. It was not the sleek, mighty, global organisation it is today, and that suited me just fine: it was as far away from the British establishment as you could get.

My London boss was named John. John would have been as happy selling watches on a market stall in the East End as he was trading bonds on Goldman’s London trading desk. He was commercially as sharp as a whip with an equally sharp wit; as a signed up Tebbit Essex man he could have easily written The Sun newspaper headlines, which he displayed on his desk each day. By contrast, his number two was Eddie, an Anglo-Greek university educated socialist who was waiting for the Revolution, and still is. Besides one person in the group, who went on to be CEO of Citigroup, the rest of the desk was a collection of equally intelligent misfits, and we shared little in common with each other aside from an unbelievable determination to succeed.

Compared to my experience at Oxford, which back then was largely white, male and private school educated, I was struck by how diverse the team at Goldman was. Goldman hired people from all walks of life and very diverse backgrounds. Based on the beliefs of the time, we should not have accomplished anything, because we all had such very different viewpoints and approaches to business and life. But we were bonded together by one thing: Goldman’s strong sense of culture. This culture was not just determined by the firm’s partners and executives, but strangely also, by our collective response to feeling like outsiders. Our anti-establishment mentality meant that we fought constantly with each other, just like a big dysfunctional family. But like a big family, we were bonded together and that strengthened our resolve to win together against the rest of our world. The culture was incredibly powerful in getting people to take responsibility as individuals, but also it forced people together. I attribute the success of Goldman Sachs from 1976 to 2006 – over 30 years - to its incredibly strong corporate culture.

A company’s culture is the traditions, customs, rituals and behavioural objectives that influence how its employees’ behave and what they believe. This, in turn, drives everything else and over the long term is ultimately responsible for the success and failure of a businesss, an organisation, a country, or a civilization. It’s the single most important thing to get right in a business if you want the business to achieve long term success. 

If you have any doubt that culture is powerful in an organisation for good or bad you needn’t look too far in the business world to find examples. A culture of silence and intimidation is what kept men like Harvey Weinstein of the Weinstein Company and Roger Ailes at Fox News in positions of power for so long. At the height of the Me Too movement, between November 2017 and November 2018, the power structures across all industries were shaken enormously. In that year, 201 prominent men lost their jobs in media, government, and entertainment. Nearly half of them were replaced by women. Now, this of course is only what was reported: these 201 cases are the most prominent ones of men in power abusing their power, and the only ones openly reported in the press. In terms of power, the media, government and entertainment industries are society’s most visible. But do we believe that the problems really started and ended with these 201 people? Of course not. It was a deep-seeded, systemic issue of corporate culture, which existed because of decades if not hundreds and indeed thousands of years in which some people in power –largely men- have used this power to obtain sexual gratification from women, other men and indeed children, and this all too often has been viewed as acceptable behaviour or behaviour to turn a blind eye to. Changing the culture that created this view of what is acceptable or can be swept under the carpet will take more than one generation. In the same way that racism has not gone away just by changing the law, nor will changing the way companies react publicly be sufficient to change the culture that drove these behaviours. It will take huge efforts by many, many people over many, many years to make a real long-term difference to how people with power treat others, not just in the West, but everywhere. 

As an investor, I see that culture directly impacts the bottom line. Look at SoftBank. The media reports a toxic and chaotic culture and this has reportedly had an effect on its investment strategy over the past three years. The firm’s $100 billion Vision Fund poured billions into financial disasters like Uber and WeWork. The culture was to go out and find the next founder-led unicorn and to do it quickly. There was pressure to make rapid, frenzied investment decisions. Anecdote after anecdote have raised questions about the corporate culture and work atmosphere, which, according to the press, includes the top brass berating its employees with racist, sexist, homophobic and bigoted language. Not to mention, on the other side, employees walking around barefoot and the alleged in-office vaping. And yet, this eyebrow-raising behaviour and the embarrassing performance of its first Vision Fund has not changed their approach to culture: despite stalling the fundraising for Vision Fund 2, its leaders say they won’t be making radical changes anytime soon. The CEO recently said, ‘I cannot stop. I want to create an organisation that can last and continue to become more and more important’. Best of luck to them, as without SoftBank making a huge cultural shift, I don’t think it’s possible to change the firm’s trajectory. All of the controls, risk management and by-laws put in place in will be for naught if you can’t get the culture right. 

By contrast, a culture of motivation and creativity is what has driven Google’s success. Despite the scrutiny that Big Tech is currently facing, there’s no question that Google has been the global leader in creating a modern, identifiable and innovative corporate culture that has attracted, trained, developed and retained top talent.

Google has a three-word vision: ‘don’t be evil.’ This on the face of it is simple; everyone can understand it, but it is very, very difficult to live up to. And as Google becomes more powerful and, indeed, part of the establishment, it gets even more difficult to live up to but living up to it is something it is striving to do. 

Its mission statement is: ‘to organise the world’s information and make it universally accessible and useful.’ Now that’s less straightforward but probably easier to achieve than ‘don’t be evil’. But it’s the challenge of the Vision and Mission that are appealing to Google’s employees, and most employees say that it’s the vision and mission statement – and not the fancy lunches, video games and napping pods that keep them engaged, motivated and driven. Because their goal as employees is noble and inspirational, it resonates with them and the vast majority of Google employees go to work each day with a skip in their step as they work to fulfil their corporate mission.

Tesla also has an aspirational mission statement: to ‘accelerate the world’s transition to sustainable energy.’ All of its work points back to these words by aiming to build accessible, affordable, electric vehicles that are faster and more fun to drive than their competitors. They are a younger company and do not currently turn huge profits, and they do not offer Google-like benefits or sky-high salaries. What they rely on is buy-in from their employees into their mission statement; because they are mission-driven and together, they are making history.

I believe that the culture today in most investment and financial businesses is not fit for purpose for the world we now live in. In late 2017, I woke up and smelt the coffee and decided that I no longer liked the culture existing at Terra Firma, a firm I had built up over 22 years. Terra Firma had, I felt, since its founding in 1994, moved away from being an outwardly facing entrepreneurial organisation where people worked together to succeed through transforming businesses, to becoming an internally focused business where people fought against each other to take as much of the pie for themselves as they could. Not surprisingly, the shareholder – me – had stopped making money from the business, and worse, most of the people working in Terra Firma were only there for the money. Unsurprisingly, if you work anywhere just for the money, you will be unhappy, and most employees were unhappy and so was I. When people are unhappy, in business you often think you should do what a football manager would do to keep his or her best players when the team is doing badly, so you offer more money. But when people are only staying for the money, you are not going to have a culture that will lead to success either on the pitch or in business.

I did the opposite: I offered less money and now, two and a half years later at Terra Firma, 50% of the people who were there in 2017 have left. We have together forged a new vision and a new mission, and while we have not quite got it right yet, people are far happier than 3 years ago. While the earnings are not there yet, I believe they will follow. What’s more, I am enjoying investing again, and I enjoy seeing the firm enjoy it too.

Away from Terra Firma and my thoughts as the shareholder on the firm, other stakeholders in the private equity industry in other firms are looking at what PE actually does in society besides make lots and lots of money for those employed by it. As a result, the industry is under greater and greater political scrutiny.  

When I left Goldman to form the Principal Finance Group at Nomura, the PE industry was very small, and didn’t pay lots and lots of money. Back then it existed for one mission: to help companies grow and prosper, and through this we believed we were benefiting society. Today, the focus is largely on a private equity funds’ performance, the amount of capital raised, and how fast the returns are generated. We had lost sight of the aim of value creation. But now, we are having to talk about ESG and focus on value creation.

The industry had got too insular and we tended to only talk about ourselves – the funds we raised and the paychecks received – rather than how our companies are performing, how many jobs we’re creating, and what we are doing to improve the environment, reduce social injustice, and fight corruption.

However, culture isn’t static in any area and that includes private equity. There is something positive happening that is beginning to change the culture of the PE industry. 

It is that investors are becoming willing to accept slightly lower returns from investments in exchange for greater broad value creation that will affect a broader group of stakeholders. Value creation here includes: long-term job creation, a strong focus on ESG and a commitment to helping local economies prosper. The reverse is also becoming true in that investors increasingly will not invest just to achieve high returns but at a social cost. 

Investors’ evolving priorities are driving a shift in PE culture. The industry is finding that it needs to allow itself to be evaluated more explicitly according to broader value creation criteria to determine the ‘good’ that has been generated. Ultimately the longevity of the industry – and in much the same way, the longevity of capitalism – will depend on reinvigorating companies, motivating employees, creating jobs, helping the economy flourish and doing social good. In that way, everyone will benefit and the private equity industry will continue to prosper.

So what can you learn from this very quick discussion of culture and how companies like Goldman, Softbank, Google, Tesla, and Terra Firma, have got it right, got it wrong, and what they’ve done in trying to use it as a competitive advantage to hire and retain talent.

First, I would say look for a place that fosters a culture you relate to. Don’t be like me in 1982, wanting only to work for a place that pays the most. Culturally, in my case I need openness and transparency. But not everybody does. Google encourages openness by taking full advantage of its talented, energetic employees and letting them coach each other in their ‘Googler to Googler’ programme. At Goldman Sachs, we were paid to go out with the senior people. While it was certainly great to have pretty spectacular dinners with these people, what was most valuable was having from 7 to 10 in the evening where we got to chat and be together and learn from people with years of experience. When a culture includes encouraging collaboration, communication and community building, you develop trust, which again to me is a very important cultural value.

But openness, transparency and trust might not be what you want. There is a PE firm out there that gives an award to an employee each year that has most successfully legged someone over from another firm. That’s part of their culture, and it seems to work for them. Therefore the important thing is to decide what you want culturally and then find somewhere that has it. If you cannot find anywhere you would be happy at culturally, then build your own firm. 

In our Nordic McDonald’s business, one of the questions I ask interviewees who are looking to be a franchisee, is what they would do if they came into their restaurants and the toilet wasn’t clean. If they say they would clean it themselves, I will hire them. If they say they would get the manager to get a junior employee to clean it, I won’t. Because a real owner will clean the toilet and set an example to their manager, while most employees will decide whose job it is. So you have to ask yourself: do you want to be an owner or do you want to be an employee?

Finally, and most importantly for me, I would look for a culture that encourages diversity of all kinds: diversity of race, creed, religion, sex and ethnicity. I do not look at diversity as a box-ticking exercise. I want and need people with a diversity of thought, diversity of experience, diversity of education to learn from and spark my creativity. I love companies that welcome challenge from its employees, no matter where they fall in the hierarchy, and one that understands and demonstrates its commitment to protecting diversity.

So these are the cultural values that drive me. They are probably not what drives you. So what are yours, and how much time have you spent defining them?

I believe there is one major question you need to ask when evaluating an organisation that wants to bring you on board. You must ask yourself and answer honestly the following questions: ‘Do I believe in the organisation’s vision, mission and culture? Or am I just joining it for a job that pays me the most?’ If the answer is no, then do not join because you will not be happy there; however much money they pay, however good it looks on your CV, you will not do well because you will not be motivated. 

Remember that you all already have sufficient intelligence, skills and resources to succeed. It’s why you’re here. However, these things will not determine your success no more then what you earn will determine your happiness – the culture of where you work is going to be incredibly important to you; indeed your long-term success in a company is largely going to be determined by your cultural fit. It’s the culture of the firm you join that you have to live with going forward. So select based on what organisational culture is most appealing to you.

I hope that you select a culture that chooses to do good and not evil. It’s not money or power that provides life satisfaction or happiness, but how you feel about what you are doing and where you are doing it. Money will not make you happy and power should be used for good, not evil. My generation and my parents’ generation have not used our wealth, power, intelligence or skills in a way that has produced long-term good for society. We squandered the opportunity to use the biggest increase in wealth and the fastest technological advances in history for good and instead worshipped the god of material happiness. I apologise for that. It’s up to you now. Please do better – for your own sake and for that of your children’s sake.  

Thank you very much for listening. I am happy to take any questions.

Parts of this text were originally used in a speech at the LSE Alternative Investments Conference on 3 February, 2020.

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