In our investment philosophy framework, our evaluation of management features prominently. For every investment we make, we ask ourselves these key questions;

• Does management understand and execute on creating economic value?
• Does management thoughtfully weigh dividends, buybacks, M&A and debt repayment?

Our framework also refers to phrases such as integrity, culture and the difference between visionary and optimizer management approaches, which are soft metrics that we evaluate.

But in the midst of a crisis what matters most is leadership.

In every crisis, humans look around for a leader. We are a tribal species and we are genetically programmed, especially during times of stress, to seek out someone who will stand up and lead. Humans’ superpower is our ability to coordinate our activities across huge groups. We are able to organize into teams, organizations, cities, nation states, and even on rare occasions engage nearly our entire species in organized activities.

But to do this, we need leaders. And it is in crises such as the current one that great leaders emerge.

We think that our portfolio of companies includes a wide range of excellent leaders. But the best example of corporate leadership we have witnessed during the Coronavirus crisis, or quite possible in our careers, is this video message from Arne Sorenson, the CEO of Marriott hotels, speaking to his employees. Hotels are quite possibly the most hardest hit industry due to the Coronavirus crisis and so Sorenson is speaking as a leader of an organization facing the biggest challenges.

(Click here to view video if you are reading in an email)

Notice how Sorenson is completely authentic. It is clear that he is speaking from his heart. He discusses the “common crisis” that his team faces. He offers reassurance and expresses empathy for those listening. But he offers no false hopes.

He calls this crisis “like nothing we’ve ever seen before,” while noting how remarkable this statement is given that Marriott operated through the Great Depression and World War II. In describing the issue, he doesn’t just speak in generalities. He speaks to his audience like the intelligent people they are and provides data and evidence that illustrates the depth of the crisis.

He does not pretend that getting through this will be easy, but he describes specific actions the company is taking to see their way through. He is blunt about the need to radically pare back expenses, while making clear that these cuts will impact the most senior leaders of the organization, not just the rank and file. He then points to examples of why all is not lost, such as the early signs of hotels reopening in China.

And in the last minute of his message, Sorenson, with nothing but the purest expression of authenticity, begins to lose his composure when he says in an emotion laden voice;

“I can tell you that I’ve never had a more difficult moment than this one. There is simply nothing worse than telling high valued associates, people who are the very heart of this company, that their roles are being impacted by events completely outside their control. I’ve never been more determined to see us through than I am at this moment.”

What Sorenson only mentions in passing, but what his team well knows, is that he has been undergoing treatment for pancreatic cancer and has recently lost his hair due to the chemotherapy.

I don’t know about you, but I’m ready to follow this leader through a brick wall after hearing that speech.

Business is not a zero-sum game. The reason that GDP per capita increases over time is that humans, acting in overlapping groups, are literally creating value. As shareholders in a business, we expect that the company will create value and that as part owners of the company that value will accrue to us. But this definition of value creation only captures part of the value being created.

A company is not just an entity owned by shareholders; it is a collection of people, all of whom have a stake in the value being created by the business. Whether you are a shareholder, an employee, a customer, a supplier, a regulator, or any of the other roles in which people interact with a company, you are a stakeholder in the value (or harm) the company is creating.

If there are no employees, there is no value being created for shareholders. If there are no suppliers, there is no value being created for shareholders. If there are no customers, there is no value being created for shareholders.

But what is amazing about capitalism is that by definition every stakeholder who voluntarily engages in a transaction with a company, whether it is exchanging labor for compensation, inputs for payment, or buying the company’s product or service, both sides of the transaction end up with more value than if they had not completed the transaction. If this is not true, the transaction will quickly stop occurring.

When you understand that the value created for shareholders is intertwined with the value being created for all stakeholders, when you understand that shareholders’ profits are a function of the value being created for other stakeholders, then the actions of the very best corporate leaders suddenly make so much sense.

It isn’t enough to get a company through this crisis, as a leader you need to carry all of your stakeholders to the other side as well. But what’s wonderful is that those stakeholders, the employees, suppliers and customers, want to help. They need leadership. They crave someone to stand up and tell them what is going on, what we’re going to do about it, and how they can help. And when they understand that, they will move heaven and earth to help do their part to get to the other side of the crisis.

This is why Starbucks is paying all of their staff even if they don’t show up for work. This is why Home Depot is seeking to protect their most at-risk, older employees. This is why Netflix is setting aside $100 million to support the content creators whose work is at the core of Netflix’s value proposition. This is why Landstar Systems is paying truckers who are not even technically their employees if they get sick during this crisis. This is why Google is working on a range of ways to help from free Chromebooks for kids trying to do remote school to working with the government to trace who a COVID infected patient may have interacted with before realizing they were sick.

These actions are not just “nice”. They aren’t just “the right thing to do”. They are the actions of corporate leaders who understand that the value their company creates for shareholders is intrinsically tied up with the value created for and by all of the company’s stakeholders.

In every moment of crisis, certain people step up to lead. For the executive teams of public companies, these moments call on them to be brave, to be the leader their stakeholders so desperately need. These moments are painful, and stressful, and no matter how much they think they’ve prepared, each pass through the gauntlet will test them in ways they never expected.

But there is a pattern to how great leaders respond. They take responsibility, they are honest and empathetic, they promise to do everything in their power (and then some) to lead their stakeholders to the other side. And for their efforts, their stakeholders will step up and do their part (and then some).

Every crisis is unique. But the need for leadership when crisis strikes is not. In a 2002 Harvard Business Review article about leadership lessons from the days after 9/11, the ideas discussed are exactly the same as what needs to happen today.

“Suddenly, crisis management was every executive’s job… What I discovered is that, in a time of extreme crisis, internal communications take precedence. Before any other constructive action can take place—whether it’s serving customers or reassuring investors—the morale of employees must be rebuilt.

In periods of upheaval, workers want concrete evidence that top management views their distress as one of the company’s key concerns. Written statements have their place, but oral statements and the sound of an empathetic human voice communicate sincerity… In the words of Rob Densen, Oppenheimer’s Director of Corporate Affairs and a survivor of the 1993 bombing of the World Trade Center, most people engulfed in a crisis “want to be led and accordingly need to trust that you are going to lead them.”

A focus on work, in fact, can be enormously helpful to employees in a time of crisis. It provides an outlet for their desire to help, gets them back into a normal routine, fosters their pride in the company and what they do, and builds strong bonds between themselves and their customers, many of whom desperately need the company to keep their products and services flowing.”

As we’ve discussed, this particular crisis is unprecedented. But the key lessons from past crises can still guide corporate leaders on how they must react. It won’t be possible to thrive on the other side of this crisis, when weaker competitors have been hobbled and great companies will have enormous opportunities, unless on the other side of this crisis a company’s stakeholders are still intact and ready to help the organization execute.

For more information about positions owned by Ensemble Capital on behalf of clients as well as additional disclosure information related to this post, please CLICK HERE.

For more information about positions owned by Ensemble Capital on behalf of clients as well as additional disclosure information related to this post, please CLICK HERE.

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