Thinking On: Rediscovering the Enterprise Investment Approach

Heron’s Kate Starr argues that looking at investing through an enterprise lens is a return to basics.


Many of us are Warren Buffett fans. His and Charlie Munger’s approach works simply and insightfully to drive enterprise value creation in a complex and noisy global economic environment. Recently here at Heron we adopted a new investment policy statement that puts an enterprise approach to investing front and center. Investing in enterprises—focusing on the past, present, and future of a business’ performance—is not a new or original idea, but has fallen out of favor as an approach to constructing an entire portfolio in favor of asset allocation. However, we are inspired by Mr. Buffett when he says, “Someone is sitting in the shade today because someone planted a tree a long time ago.” Taking the long-term view has led us to rediscover the utility of the enterprise lens, and we’ve made it central to our approach because it helps us focus on the factors that drive both the social impact of a business and its financial health. We think this old approach offers an investing model that provides greater value to society.

As investors, we not only care about the financial performance of our investments, we also care a lot about how enterprises deliver value to society through the economic opportunity available to their workers. We likewise care whether these businesses and operations contribute to, rather than ­­­­­detract from, the environment, public life, and communal infrastructure. We are building a portfolio based on getting exposure to the best-performing enterprises in all three dimensions rather than merely into capital markets targeted in the aggregate for financial return or risk mitigation. Therefore the asset class framework we and other institutional investors have used for so long is not as useful as it once was. Picking and choosing asset classes is not the point of our work. The danger for us in thinking about Heron’s financial resources as “assets” is that we stay stuck in the old assumptions about risk and return that haven’t created stability and prosperity for a majority of Americans the last twenty years.

“As investors, we not only care about the financial performance of our investments, we also care a lot about how enterprises deliver value to society through the economic opportunity available to their workers.”

We care about investing in companies that treat people well, delivering an employment experience where they feel valued and demonstrating a commitment to their ongoing development, even for employees at the low end of the wage scale. When we see this management style in play, not only does society benefit from having workers with time and energy for better parenting, volunteering, making and enjoying the arts, and other things that people do in their off-hours, studies also show the company’s bottom line benefits from less turnover and more worker creativity and loyalty. When we invest in those management teams and companies that think about their broader social and environmental impact, Heron’s money acts as more than just an “asset,” it fuels the positive social change that we’re after.

Heron’s investment strategy calls for us to invest more capital into smaller, private companies; and shift bond exposure into municipalities and agencies that drive economic development outcomes to low-income people and communities. The strategy also targets exposure to public companies that are having a positive impact through their core businesses and thinking about how they use their influence and purchasing power to drive adoption of sustainable business practices throughout their economic value chain. It’s going to take us a while—probably another five to six years to have the whole portfolio positioned even close to how we’d like it to be, and then it will be a continuous improvement process, just as it is for any portfolio.

While we devise the performance metrics we need to evaluate our progress as we shift into the long-term, value-creating companies described above, we also are looking critically and attempting to evaluate our current positions. We believe that the 4,400+ enterprises we own today through the variety of passive, commingled institutional trusts—representing almost 60 percent of Heron’s assets—should also be evaluated for societal and mission value. Those enterprises—large and small and mostly public—employed 83,790,115 people as of the end of 2013. We have very little idea whether or not the companies in our portfolio are providing the economic opportunity at the low end of the wage scale that we scan for in our investment approach. However, we do know that two of them, Wal-Mart and Fox-Conn, aren’t known for their people-centered human capital management practices. If we hadn’t taken the time to look through the manager level down to the companies below, we would still be unaware of the inconsistency of our own operation.

“We believe that taking time to step back and evaluate what we own—and then to edit, curate, continually improve—is better than being blindly invested in companies that undermine the progress we’re trying to make.”

We’re working on moving out of commingled funds that house Heron’s assets into separately managed accounts so that we can make a change based on the knowledge we’ve gained from looking under the hood. With the help of thoughtful analysts, a Bloomberg terminal, CoopMetrics, and Excel, we can weave together an understanding of all parts of our portfolio in social value and mission impact terms. We believe that taking time to step back and evaluate what we own—and then to edit, curate, continually improve—is better than being blindly invested in companies that undermine the progress we’re trying to make.

Warren Buffet and the team at Berkshire Hathaway work toward a bottom line of shareholder value. Heron is working toward a bottom line that creates more value to society. We have committed ourselves to equally pursuing the three duties—care, loyalty, and obedience—that govern the way we invest.  We are moving in a direction that will allow this social enterprise to say in good faith that we are truly delivering on our bottom line.

Read more reflections from Heron on aspects of our work and the many reasons we do it.

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