Blume: It is a challenge to be sure, and we don’t always get it right, just as our investment thesis does not always play out the way that we expect. But we can learn a lot from a management team’s past actions. Our research process looks at how management teams behave with respect to a number of factors: compensation, leverage, capital stewardship, sustainability reporting, shareholder engagement, etc. We look at all of these things and more to get a sense of how focused management is on creating long-term value for shareholders. And while our analysis will not always be perfect, we believe that if we adhere to our fundamental values and maintain our discipline in analyzing and selecting companies to invest in, our investors will be well-rewarded over the long term.
Hortz: Does a company’s innovation activities play into your analysis and responsibility screens?
Blume: Definitely. Innovation is a broad term, and it can be used in a number of contexts. If we’re looking at a technology company, then we want to have some confidence that management has created a culture that fosters innovative technological development so that the company will remain relevant and competitive going forward. This kind of consistent innovation requires a culture that encourages creativity and rewards forward-thinking. And while many industries do not rely so much on technological innovation, companies of all types can benefit from this type of innovative culture. This is the kind of forward-looking culture that we try to identify in our analysis of potential investments, whether it is in the context of technology or sustainability or simply business strategy. Innovative culture can be difficult to identify, but it can be a key driver in business success.
Hortz: Do you factor in an innovation premium for companies in your overall company valuation and ultimately in the companies you pick for your client portfolios?
Blume: There is no doubt that we favor companies that have displayed a consistent ability to innovate and stay ahead of their competition, in terms of technology, business practices, sustainability, and marketing. Companies who we believe can continue to innovate well over time should grow revenues more quickly and also maintain higher profit margins, all other things being equal, and that would factor into our valuation.
Hortz: Your research has found that a lot of successful company managements use business innovation practices. Do you feel that these practices would benefit financial advisor businesses?
Blume: I believe that any business can benefit from a culture of innovation and a long-term focus. Obviously this manifests itself differently depending on industry, business size, etc., but generally speaking, having a future orientation is good for any type of business, including financial advisory businesses.
Hortz: Speaking of governance, what exactly is a B corporation and why did you structure your company as a B Corp?
Blume: Well, a B Corp is a for-profit company that is certified by the non-profit B Lab to meet rigorous standards of social and environmental performance, accountability and transparency. These are companies that wish to benefit society as well as their shareholders.
We made the decision to become a B Corp because we saw it as a way to outwardly reflect the culture and philosophy that our firm has embodied since it was started more than 25 years ago. In addition, we saw the very rigorous certification process as a way to push the firm to perform at a higher level.