Lessons from the world’s oldest companies

This is partly why survival was described as “the ultimate performance measure” by former managing director of McKinsey, Ian Davis. The 'dinosaur' companies of the FTSE 100 – some of which have existed for more than three centuries – have won admirers over the years, including renowned investment company Lindsell Train, whose managers sift for companies with a long track record of high returns and “genuine staying power”. Lindsell Train Global Equity (IE00BJSPMJ28) fund has an average portfolio company age of 125 years, and includes golden oldies such as Diageo (DGE), Heineken (NL:HEIA), Pearson (PSON) and Brown-Forman (US:BF.B), each over 150 years old. “The one thing we value very highly is the ability to look back on the history of a company – to interrogate its heritage, and see that it’s already proven itself,” said James Bullock, who manages the fund alongside Michael Lindsell and Nick Train, on a recent webcast. 

The long view also prevails at Fundsmith (GB00B41YBW71), where manager Terry Smith looks to invest in “the companies which have already won”, rather than tomorrow’s growth heroes. 

Now, as the clichéd disclaimer goes, past performance is not a predictor of future returns. By the same token, being old does not guarantee a company will survive a future crisis, nor does being young doom it to failure. Businesses that have lived long enough for a telegram from the Queen have defied the odds, though, as research suggests that only around half of all companies survive beyond five years, with the rest wiped out by insolvency or subsumed by mergers and acquisitions. By looking at the world’s oldest companies, investors can glean some insights into the difficult question of what makes some companies survive over others.

The secrets to a long life

Few will be shocked to read that longevity is a subject the Japanese are familiar with, but what is more notable is that it isn’t only a demographic predisposition. According to the Tokyo-based Research Institute of Centennial Management, Japan is home to more than 30,000 businesses that have been running for more than 100 years – or 40 per cent of the world’s total stock of centenarian companies. According to Masahiko Komatsu, head of active ownership at Nikko Asset Management, “around 80 per cent of these long-lived companies are very small, family businesses”. The world’s oldest business, legendary hot spring hotel Nishiyama Onsen Keiunkan in Yamanashi prefecture, was founded in 705 AD and has stayed in the same family for 52 generations.

These companies' survival hasn’t been occasioned by a lack of hardship. They have faced continuing threats, from Japan’s recurring earthquakes and tsunamis, to the asset bubble that burst in the early 1990s and gave way to ‘lost decades’ of economic stagnation in its wake. Even so, since the Covid-19 pandemic hit, Japan has consistently reported lower rates of insolvency than other developed countries.

There are upsides and downsides to this tendency towards long lives. For value investors, it has made Japan a haven. Alexander Kinmont, founder of Tokyo-based Milestone Asset Management, noted that the value factor has historically outperformed in Japan, a fact he attributes to the country’s lower rates of bankruptcy. When a Western-listed company hits the rocks and suffers a major fall in share price, there is a “reasonable chance of the thing actually going bankrupt”, whereas in Japan, the market’s survival bias has meant that companies are more likely to stay afloat and eventually benefit from a cyclical swing back.

“This constant refilling of the pool of opportunity, without the reduction of opportunity occasioned by bankruptcy, such as one would have had in other jurisdictions, was the origin of the outsized value effect in Japan,” said Kinmont. 

Yet Japanese stocks as a whole have not performed well in recent years. The MSCI Japan index has notched up annualised gross returns of 6.2 per cent over the past 10 years, compared with 10.7 per cent for the MSCI World over the same period. This has entrenched lower valuations for its companies, with an average price/book ratio of the MSCI Japan index sitting at 1.4 times at the end of April, compared with 2.9 times for the global index and 4.5 times for the MSCI USA. Many Japanese corporates are long in the tooth, but in some cases this looks like ossification.

“Looking at their performance, Japanese companies’ objective looks like it is just to survive,” said Nikko’s Komatsu, who believes that most Japanese firms have not rewarded shareholders enough to compete with other equity markets.

Another part of the Japanese longevity equation is the business ideal of ‘sanpo yoshi’, which roughly translates to ‘good for three parties’, and refers to doing business in a way that benefits everyone – a win-win-win for buyer, the seller and society at large. This idea dates back to the ‘Omi Shonin’, a group of travelling merchants who wandered from town to town in the 1600s, selling productssuch as medicines and textiles. Their shops supposedly thrived because they worked to gain each community’s trust, by putting profits back into the local area with building works such as bridges and schools. 

A family affair

Survival over centuries often goes hand in hand with being family-owned. Soy sauce giant Kikkoman (JP:2801) began in 1917 with the merger of eight family businesses, and those original families still own a 20 per cent stake in the company and rotate the position of chief executive among themselves. 

Outside Japan, companies such as Brown-Forman, which has been making Jack Daniels whisky and Southern Comfort since being founded in 1870, has embraced a policy of planned nepotism, promoting members of the founding Brown family to top jobs. The UK market also has a number of companies where founders still exert a strong influence, including Associated British Foods (ABF), Antofagasta (ANTO) and Schroders (SDR).

Family ownership often means control of voting rights and a limited free-float, a state of affairs that isn't typically beneficial to other investors. On the other hand, those same qualities might help a company to withstand a recession. Research from Credit Suisse has found that family-owned businesses – those in which founders and their descendants hold at least a 20 per cent stake in shares or voting rights – tend to grow revenues faster and maintain better profit margins than their non-family-owned peers. The researchers also found that they played it safer with their finances, taking on less debt and keeping more cash on their balance sheets.

Cash on hand

The same is true of the world’s oldest companies, more generally. One of the first to study company longevity, Dutch business researcher Arie de Geus, wrote in his 1987 book The Living Company, that long-lived companies were “frugal and did not risk their capital gratuitously”. This helped them in difficult times, but also put them in a cash-rich position that allowed them to grasp opportunities that did come “without first having to convince third-party financiers of their attractiveness”.

Back in Japan, professor Toshio Goto of Centennial Research Institute surveyed the country’s 100-year-old companies during the first pandemic wave in May 2020. More than a quarter said they had enough cash on hand to last for two or more years, with most saving for a rainy day in the belief that a crisis was likely to hit once every 10 years. Factory automation specialist Keyence (JP:6861) even boasted in 2020 that it could survive for 17 years without any sales revenues. 

Even in the pandemic’s wake, balance sheets have not noticeably diminished. Eastspring Investments noted in February that 58 per cent of companies on Japan’s Topix index held net cash positions, compared with only 25.4 per cent of British companies on the FTSE All-share. 

While conservatively managed finances can be a plus during lean times, Milestone Asset Management’s Kinmont warns that hoarding cash on the balance sheet is “the accounting representation of a lack of investment”. The same goes, said Kinmont, for companies that generate a lot of cash only to spend it on share buybacks, which ultimately do not help to secure future business growth. For example, Nippon Telegraph and Telephone Corporation (JP:NTT) has spent as much on share buybacks as it has on research and development (R&D) expenditure for the past 10 years. 

Continuity matters

While companies that live for a long time focus on preserving their legacy, the most successful are often those that have undergone the most radical reinventions. Equally, history is replete with once-successful companies that failed to change with the times, such as BlackBerry (US:BB) and HMV.

The world’s oldest limited liability company, Finnish paper and pulp maker Stora Enso (US:SEOAY), began life as a copper mining operation in 1288 and is now moving into making sustainable building materials. Similarly, famous consumer electronics firm Nintendo (JP:7974) began by selling hand-painted playing cards in 1889 and tried out multiple industries, from selling ramen noodles to taxi services, before the founder’s great-grandson, Hiroshi Yamauchi, launched a successful foray into arcade games in the 1980s.

On the UK market, there is Shell (SHEL), which traces its origins to an importer of decorative shells from the far east in the 1830s before its merger with Royal Dutch Petroleum at the turn of the 20th century. The oil major is now trying a more contentious sustainability shift with inroads made in offshore wind and green energy. 

The mother of invention

Older companies are not usually given credit for their willingness to change, and are often seen as barriers to the essential force of creative destruction. This idea, put forward by economist Joseph Schumpeter in the 1940s, suggested that a cycle of new inventions and processes destroying and replacing was the principal driver of growth. It’s true that innovation can be difficult for established public companies, since lengthy and expensive research and development projects do not always play well with a shareholder base that expects stable returns. As a result, young companies are usually seen as the drivers of innovation – even if lots of them fail within their first year. 

“In the cult of innovation, there's an attempt constantly being made to identify the preservation of old companies as somehow a negative that prevents the starting up of new companies. The two are not linked,” said Milestone Asset Management’s Kinmont. Besides, he added, “it's not clear that innovation resides exclusively in new companies”. One example is the American chemicals giant DuPont (US:DD) has historically aimed for 30 per cent of revenues in any given year to come from inventions made in the past four years. Its inventions have included materials such as lycra, teflon and nylon.

Morgan Stanley economist Michael Mauboussin compared companies to ant colonies, which have a nearby source of food that the majority of the ants exploit but depend for their survival also on other ants continually exploring for new food sources. A similar model can help explain why companies die, said Mauboussin. “Successful companies generally have a core source of profits. For many reasons, corporate leaders tend to dedicate too many resources to exploitation of profits and not enough to exploration. Commonly, exploration requires a different structure than exploitation, causing companies to stumble. The best companies are those that can skillfully balance exploitation and exploration.” 

A company’s investments in its intangible assets, through R&D and other capex, can be a good proxy for a company’s level of exploration. Previous research by Investors’ Chronicle has examined the UK stocks with “an intangible edge” (IC, 4 March 2022) – companies whose investments in their intangible asset base over the past five years has outpaced the market. This stock screen yielded names such as software maker Sage Group (SGE), telecoms company Spirent Communications (SPT), food producer Greencore (GNC), and personalised card maker Moonpig (MOON). 

It is also worth considering companies that have grown based on reinvestment of their cash flows at high rates of return for their sector. One old company, 1867-founded consumer staples giant Nestlé (CH:NESN), for example, is bucking the traditionally staid sector with R&D spending at around 2 per cent of total sales – or SFr2bn a year. That is not much by the standards of other industries, but it compares favourably with a sector average of around 0.4 per cent of sales. Its return on capital, meanwhile, is a healthy 16 per cent. This push has allowed it to enter growthier markets such as plant-based foods, and experiment with product launches such as vegan KitKats and plant-based tuna. In other sectors, AstraZeneca’s (AZN) investments in its drug pipeline has long outpaced those of its rival GlaxoSmithKline (GSK), which have led it to be rated much more highly – on a forward price/earnings multiple of 19, compared with 14 for the latter company.

People power

Another aspect of older companies is that they tend to keep their employees around for longer. This has been taken to the extreme in Japan, where traditionally, companies hired most of their staff in a single yearly intake of university graduates, who could then expect lifetime employment and a rigid progression up the company hierarchy, said Komatsu. He noted that this level of workforce stability often leads to a lack of diversity at Japanese companies, which can preserve outdated modes of thinking.

Nevertheless, there are strong positives to having a stable workforce. Employee retention has shown a direct correlation with stock returns, with Morgan Stanley’s Counterpoint Partners finding that the top quintile of companies for employee retention enjoyed 25 per cent higher share gains than the bottom quintile. Analysts suggested this is down to employees having a clearer view of their company’s performance, and being more likely to stay at one they thought would be successful, creating a positive feedback loop. 

Companies in the UK and US are not obliged to disclose their employee turnover rate, even after new US Securities and Exchange Commission disclosure rules on company workforces. One proxy for investors to gauge employee satisfaction is through Glassdoor, a site that hosts employee reviews of their workplaces, and aggregates them based on scores from 1 to 5. 

Research led by the University of East Anglia’s Norwich Business School found that companies achieving a one-star-higher overall Glassdoor rating saw a higher annual return on their assets, and public companies saw up to 16 per cent higher stock returns per year. This is backed up by research in the US, where analysts at Bank of America Merrill Lynch found highly-rated companies on Glassdoor outperformed lowly-rated companies by 5 per cent per year from 2013 to 2018. 

According to Glassdoor, the highest-rated public companies in the UK include the litany of US-based tech giants Meta (US:FB), Microsoft (US:MSFT) and Google-owner Alphabet (US:GOOGL). On the UK-listed side, Abcam (ABC), Wise (WISE), Ocado (OCDO), Diageo (DGE), The Gym Group (GYM), Softcat (SCT), Sage Group, and Jet2 (JET2) were at the top of the pack. The pitfall here is that these scores can be open to manipulation, with the Bank of America analysts noting that average Glassdoor ratings had risen in recent years, suggesting that companies may be cottoning on to their significance.

Flaws like these mean no single indicator is enough to tell you whether a company will survive a recession. But history suggests when a storm hits, strong balance sheets, ongoing investments in organic growth, and a stable source of labour can provide companies with some shelter.