Skin in the game: the hidden power of persistence

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Many Europeans remember December 2020 as the Christmas that Covid cancelled. So, it was audacious timing for Ryanair to embark on a massive fleet expansion. Chief executive Michael O’Leary ordered 75 new Boeing aircraft that month with the option to double the purchase.

For context, many airlines were more focused on staving off bankruptcy. Flybe, Air Italy and SunExpress Deutschland were among European rivals that had ceased operations in the preceding months.

Yet O’Leary’s actions were far from illogical. Rather, they represented the type of confident leadership that comes from decades of pursuing a long-term strategy and having his own “skin in the game” – in this case, O’Leary’s 4 per cent stake in Ryanair that ties his personal fortune to that of the company.

“O’Leary has a maniacal focus on unit costs [the operating expense of flying each passenger] as a way of taking market share in downcycles,” Jenny Davis, an investment manager with Baillie Gifford’s International Alpha Strategy, tells our Short Briefings on Long Term Thinking podcast.

“Even before Covid, the airline industry was in dire straits. In 2019, 90 out of 96 European airlines made under €1 profit per seat flown. Ryanair, by contrast, made nine times that. So although the pandemic hit Ryanair’s short-term profits too, O’Leary was able to buy more planes at massive discounts, resulting in a younger fleet with lower maintenance and fuel costs. And that lets him keep fares low and add new routes, stimulating further demand.”

O’Leary exemplifies the type of persistence Davis looks for in the ‘quality growth’ companies she specialises in – businesses that combine above-average growth with durability.

“We find that inside ownership is often a signal of a business that will grow faster for longer,” she explains. “It can be a founder, family ownership, a well-aligned executive team with long-term incentives or a foundation – but in all cases, the resulting culture is typically more about being stewards of a legacy than playing the market game.

“These businesses tend to be more innovative, file more patents and spend more on research and development. Their strong balance sheets also mean they can put their money to work when others are retrenching. And we see fewer instances of fraud and other wrongdoing.”

Discovery’s healthy profits

O’Leary’s significant stake, and a bonus scheme that will increase it if he stays on until at least 2028, mean he more than qualifies as an ‘inside owner’. Davis cites Discovery Ltd’s founder, Adrian Gore, as another larger-than-life CEO who hits the mark. He retains about a 7 per cent direct holding in the Johannesburg-based firm.

The entrepreneur recently ran the London Marathon, aged 60, adding to his athletic achievements. It was very much on brand, given his firm’s Vitality health insurance scheme centres on nudging its members towards healthier behaviours.

For example, it rewards those who regularly engage in gym workouts or walk 10,000 steps daily with free coffees and cinema tickets. Healthier customers mean fewer claims, so everyone benefits. Discovery has also applied the same principle to create a ‘behavioural bank’ in South Africa that incentivises healthy spending habits.

“Gore embodies Discovery’s culture,” says Davis, “and his ambition and willingness to relentlessly reinvest profits have turned it from being a very profitable health insurer into a broader financial ecosystem in South Africa and at the heart of a global health ecosystem via partnerships he’s established with other insurers.”

Family-crafted companies

While both O’Leary and Gore provide persistence through years of personally committed leadership, some of our other companies have passed the baton between different members of the same brood. Family-run firms are relatively common among our luxury holdings, with successive generations of the Dumas, Rupert and Agnelli clans leading Hermès, Richemont and Ferrari, respectively.

“The desire to preserve and grow capital for future generations creates a unique alignment of interests that makes short-term thinking anathema,” says Davis. “Instead, these companies prioritise resilience, reinvestment and cultural preservation.”

Family ownership also appears elsewhere in our portfolios. For example, six members of the same Japanese family have captained the leading bicycle component maker Shimano over the past century. And the Crippa family built Technoprobe from a kitchen-based startup into one of the world’s largest manufacturers of probe cards – equipment that spots faulty computer chips early in the manufacturing process.

“Technoprobe remains majority-owned by the Crippa family, with the founder’s son serving as chair and its nephew as CEO,” says Davis. “The family focuses on delivering one thing and does so brilliantly, keeping pace with ever-shrinking circuitry – and they match well with the broader semiconductor industry, which is also very long-term with extended investment cycles.”

Farsighted foundations

Persistence isn’t limited to those making day-to-day decisions. The philanthropic Novo Nordisk Foundation is the controlling shareholder of the drugmaker that shares its name. And industrial conglomerate Atlas Copco’s largest shareholder is Investor AB – a holding company founded by Sweden’s prominent Wallenberg family to “create value for people and society”.

Both provide institutional stewardship by prioritising their desire for sustainable growth over any temptation to inflate short-term profits.

“The hearing aid manufacturer Demant is another example,” Davis adds, noting that the Danish firm’s majority shareholder is the William Demant Foundation, a charitable body set up by the founder’s son in 1957.

“Having that anchor has encouraged the company to act on long-term trends. For example, in recent years, Demant has been buying independent audiologists to gain greater sales channel ownership.

“Hearing aids are effectively sold, not bought – users don’t research or compare brands. So Demant gains resilience by getting closer to its customers. And that’s the kind of investment that comes from knowing you have long-term patient capital behind you.”

As an engaged investor seeking to hold stocks for five to 10 years or longer when establishing a holding, Baillie Gifford itself can confer some of the advantages of persistence. Davis gives the example of helping thwart an attempted takeover of the German residential and commercial property portal Scout24 in 2019 as one example. The intervention allowed the firm to pursue a successful long-term growth plan, benefiting it and our clients.  

In this respect, Davis acknowledges that not every company we invest in is owned by a founder, foundation, family or other highly involved insider. But she suggests that the quality growth businesses that do qualify gain a distinct advantage.

“Inside ownership is the signal, not the end,” she says. “What makes a company persist is inherently tied to its culture, as that is the soil, sun and water in which good decisions grow. And an ownership mindset tends to sharpen the mind about long-term growth and legacy more than short-term wins.”

Words by Leo Kelion

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