Monday, 8th August 2011

How to build a successful partnership

Written by George Traganidas Topics: Wealth Building

Successful Partnership

Mark Howard of Oaktree Capital Management wrote in one of his memos some very good ideas about building a successful partnership:


If an organization is to be the best, it must find, train and retain the best. Not only does turnover drain off your best people, but it also takes their institutional memory and leaves you bogged down in hiring and training their replacements.

We always have placed great emphasis on preventing turnover, and the results are visible – in the very small number of senior professionals who have moved on to other employment in my 25 years in portfolio management, and in the investment performance that my long-term colleagues have produced. The keys have been (a) hiring team-oriented players who care about something other than just making top dollar, (b) creating a collegial environment in which such quality people will want to work, (c) avoiding stifling bureaucracy, internecine office politics, destructive competition, and overemphasis on short-term results, and (d) always sharing the fruits of our success.

This is one of the few areas where there is a magic formula: be fair. Oaktree’s founders always say it’s our goal to own less and less of a firm that becomes worth more and more. We think sharing ownership with key colleagues – rather than zealously holding onto it – is key in building a great firm.

The most important thing is acknowledging the difficulty inherent in keeping a partnership intact, and going way out of your way to make it work.

The statistics on divorce suggest that successful long-term unions are far from universal. Certainly in the high-octane investment management world, partnerships form and break up with regularity. But it doesn’t have to be that way.

Last month I was privileged to celebrate the twentieth anniversary of my partnership with Sheldon Stone, who joined me as an analyst at Citibank, moved with me to TCW, and has run our high yield bond portfolios since 1985. I found a quote from Andrew Kilpatrick’s “Of Permanent Value” with which to mark that occasion, and Shel and I agree it’s a pretty good formula for a successful partnership.

I think you’ll probably start looking for the person that you can always depend on; the person whose ego does not get in his way; the person who’s perfectly willing to let someone else take credit for an idea as long as it works; the person who essentially wouldn’t let you down; who thought straight as opposed to brilliantly.

Our success in retaining 100% of our senior partners since 1983, and in maintaining harmony, is something I think about a lot. In doing so, I’ve identified some of the major impediments to a smooth-running partnership.

First, conflicts of demeanor or style can have a very negative effect on cohesiveness. In the bull market, the aggressive partner says, “That wet blanket’s holding us back.” In the bear market, the cautious partner says, “That animal’s getting us killed.” Many of Wall Street’s greatest flare-ups have been attributed to “culture clashes,” such as the mid-1980s battle between traders and investment bankers that brought Lehman Brothers’ independence to an end. I can honestly say that all of Oaktree’s leaders subscribe equally to the principles on which our firm operates.

Second, a partnership is problematic if partners don’t respect each other’s contribution. “I can handle all I do and all of what he does” is a statement with dire portent. In contrast, our interaction at Oaktree is highly symbiotic, and we’re fortunate enough to appreciate that fact. I know my partners do a better job of portfolio management than I ever did. And they’re glad to have me out visiting our clients, so they can stay back and manage their portfolios.

Last, any partnership can be imperiled by the wrong kind of partner. There are a lot of people in the investment business about whom we might say, “He’s a jerk, but he can make you a lot of money.” And those people tend to get hired, because the profits they’ll make are so tempting. But the only way to avoid rancor, strife and divisive debate is to work with people you respect and like (and vice versa), and who value working together in harmony above making the most money and winning every argument.

So the recipe’s simple: shared values and complimentary skills; mutual respect and an appreciation for each other’s contribution; and people with whom you enjoy associating.

Follow the practical way,
George

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