BlackRock’s Stefan Griers identifies the secrets of Denmark’s successful firms.
As active stock-pickers in European equities, we operate in a highly diversified region with more than 2,000 investible companies. While our universe is broad, our criteria are narrow; primarily we look for companies that we believe have superior wealth-creating abilities.
Something that has caught our interest is the concentration of high returning companies within a single country in Northern Europe.
Despite its relatively small population of 5.8 million people, we find ourselves uncovering numerous companies in Denmark that have consistently created value for shareholders over the long term.
This has led us to have a large overweight to companies listed in Denmark in recent years, not owing to any structural view on the economy, but owing to Denmark being home to what we believe are world-leading, highly innovative companies that are dominating the respective industries within which they operate.
The question was why? Why would you find a whole army of management teams that exhibit strong capital discipline and a strict focus on returns, which means investments are undertaken only if they further the value of their business in a meaningful way?
To answer these questions we recently conducted a research trip to Copenhagen and spent time with the management teams of companies that possess all the hallmarks described above.
It comes as no surprise that a stable political system and access to world-class education, research and talent were mentioned as important components for allowing innovative enterprises to flourish.
However, going deeper into the workings of the individual businesses, we detected several common features that speak to a “Danish Management Style”.
Not only did the most successful businesses herald extremely flat organisational structures, the Danes seem to take their entrepreneurialism one step further by putting incentive structures in place that allow for completely decentralised decision-making. To put this plainly, local management teams are paid for making the right long-term and wealth-creating decisions for the business as well as all its other stakeholders, including minority shareholders.
The only controls put in place by the centre are the metrics used to evaluate those local business managers. These typically consist of a combination of factors such as margins on new business, return on capital employed and cash flow generation - a dream combination for any investor seeking companies with the potential for long-term value creation.
We believe this entrepreneurialism, aided by a flat structure, encourages employees to think like owners of the business, with a much greater focus on cost and capital allocation. Importantly, this culture is often led right from the top of the organisation, a point made clear to us recently by the CEO of a leading freight forwarding company. This CEO put himself in row 27, in economy class, during a recent business trip to Switzerland to seal the largest deal in the company’s extremely successful history.
Another equally impressive firm we own that upholds the Danish Management Style is a consumer beverages company. Management has been instrumental to its success post-financial crisis, changing both the shape of the portfolio, away from beer and towards soft drinks, as well as the culture of the company, again prioritising decentralised, faster and more effective decision-making.
In an industry shaped by changing consumer preferences, at ever faster velocities thanks in large part to social media, this company values decentralisation in helping bring it closer to the customer. This allows local management to identify trends for products, brands and packaging and to react quickly to capitalise on this.
Additional to the culture, it appears no coincidence that many of the groups we identified here have stable and large shareholder bases, which include foundations. This provides the business with the freedom to take long-term investment decisions.
With all this in mind, it should come as no surprise that we have run overweight allocations to Denmark for a number of years in our portfolios, reflecting the exceptional companies we find in the country.
We believe putting our clients’ capital to work with a group of managers that can only be described as extremely hard-working, humble, disciplined and, most importantly, with real entrepreneurial flair, will give us the best opportunity to grow that capital over time.
Stefan Gries is co-manager of BlackRock's Greater Europe Investment Trust.