PRELUDE: THE MESS

People are messy.

I’m messy. The people at Permanent Equity are messy. You’re messy. Your best friend is messy. The people you admire most are messy. And, as you can clearly see, your least favorite people are messy.

Messy is the best description I have for life. Life is complicated, tangled, and confused. We all have shortcomings and mixed motivations. We’re often moved by self-interest, self-regard, and self-righteousness. We care too deeply about our own trivialities, then care too little for others’ tragedies.

We’re also fountains of unexplainable generosity, clarity, and kindness. We have an incredible capacity, and need, for love and self-sacrifice. We crave relationships based on caring, without regard for usefulness. We rise to the occasion, often together.

We’re messy, lovely creatures. And, none of us are the exception.

DEFINITIONS MATTER

“Some cause happiness wherever they go; others whenever they go.” - Oscar Wilde

With that background, it’s odd to name a group of people and seemingly dismiss them. To be clear, that’s not the intent of our policy. We’re all a work-in-progress and we believe all people have equal dignity and worth, regardless of their personal characteristics or circumstances.

But, some people are messier than others. The messiest of them, we’ll call “assholes,” because “jerk” doesn’t quite get there. There are many forms of asshole, but all leave a similar, bitter taste.

Assholes wield power without consideration, use people as means of accomplishment and pleasure, hoard resources insatiably, step on others to get ahead, exploit the powerless, prioritize their own comfort above all else, measure others’ worth by their utility, exert control unnecessarily, and degrade, dehumanize, and devalue those around them. Assholes are quick to anger, slow to forgive, and never forget.

When we talk about assholes, we’re not talking about the person who accidentally cut you off in traffic, or who gave you a dirty look, or who hurt your feelings. Even the best of humanity has done far worse. We’re talking about someone who consistently creates, usually intentionally and maliciously, feelings of humiliation, oppression, and injustice.

THE POLICY

“Gresham’s Law is ungodly important.” - Charlie Munger

Our firm has a strict “no asshole” policy. When we explain the rule to others, they inevitably chuckle and nod. It seems as though everyone can identify with the miseries that invariably accompany such folks.

Ironically, even the people we’d deem assholes love the policy. No one thinks they’re an asshole, or if they do, they laugh it off as a personality quirk. Remember, assholes still sleep at night.

Permanent Equity takes a proactive, zero tolerance approach to unabashed assholism. We have no tolerance for consistently dishonest, manipulative, belittling, or megalomaniacal behavior. No tolerance for those who believe being rude and obnoxious is a strategy. No tolerance for employees or partners who play politics or cut corners as well-honed techniques. No tolerance for those who focus on how to get the most, the quickest.

The honest truth is that we all exhibit some of these traits, hopefully occasionally. Personally speaking, I can think of many times I’ve manipulated someone for gain, told an outright lie, and cut a grey corner. To say otherwise would be laughable. But, I’m trying. If “identification is the first step of recovery,” it wouldn’t be inaccurate to call me an asshole in recovery. And that’s all we expect of others. We’re all either assholes, or assholes in recovery, somewhere on a spectrum between unrelenting self-obsession and selflessness.

If we all have our moments, where do we draw the line? There are certain do-not-pass-Go behaviors. Sexual harassment, abuse, deception, physical aggression, threats, and stealing cannot be tolerated in any dose. Beyond that, it comes down to position on the spectrum, the direction and speed they’re headed, and the cultural strength of the organization to keep them in line.

Assholes follows Gresham’s Law: the bad has a tendency to dominate the good. If everyone else is behaving badly and getting away with it, good behavior doesn’t stand a chance. Said differently, assholes are infectious, but their damage depends on the host. Our goal is to create organizations that are asshole-resistant, because we all catch the bug from time-to-time and need protection from our worst impulses. If the person is trending the right way and the organization can easily withstand it, poor behavior is the gift of a teachable moment. Often the behavior and the person can be separated.

With that said, this policy has cost our firm, and our portfolio companies, a great deal over the years, including profitable clients, exceptionally smart talent, and financially near-perfect acquisition opportunities. Yet every temporary setback has been well worth it, strengthening the organization and setting the tone for the long-term.

THE ORIGIN STORY

“Graveyards are filled with indispensable men.” - Charles de Gaulle

Our “no asshole” rule originated as the result of trial and error, with an emphasis on the error. Early in our existence, we had a fast growing portfolio company fail for the worst reason -- it was full of assholes. From the outside, the company looked like the definition of success. It was packed with heavily-recruited individuals who were capable of delivering outstanding work. Bigger and bigger clients signed on board and the ranks grew.

Despite the success, there was constant chaos. Factions formed, confusion reigned, and conflict was common. The perceivably irreplaceable skill sets emboldened some to push the boundaries of acceptable behavior, often with little recourse.

While management spent time playing conflict mediator between team members, the far more debilitating network of systemic problems went uncorrected for far too long. This network included, among other things, output errors, unidentified customer frustrations, increased absenteeism, and, eventually, substantial losses.

A study by Georgetown University quantifies the “asshole problem” we experienced first-hand. Of those surveyed who had been on the receiving end of incivility, over half said they lost time avoiding the offender (63%), they lost loyalty to the organization (78%), and their work suffered (66%). Just under half reported that they intentionally decreased their work effort (48%) and intentionally spent less time at work (47%).

It’s not just employees who suffer. In one experiment, a bank representative humiliated another employee in front of customers. Of those who witnessed the encounter, only 20 percent said they would use the bank’s services in the future. If you see an asshole in action, it’s easy to imagine how your next encounter will turn out.

Out of our early experiences we developed a common goal: Do what you love, in a place you enjoy, with people you admire. Oh, and avoid assholes at all costs.

ACQUIRE WITH EXTREME CAUTION

As we’ve painfully discovered, no deal is good enough to justify being in business with people who consistently exhibit bad behavior. We once had an employee bring us what looked like a fantastic opportunity. On paper, the deal would return our capital in less than two years by leveraging operational and client efficiencies.

The first meeting went ok, with the deal being as described -- lots of opportunity and seemingly little risk. It was the kind of deal that investors dream about. But something felt “off.” The personalities involved were abrasive and hot-tempered, and there was an added husband and wife dynamic. The second meeting went poorly. Lots of ego-filled head-butting amongst the proposed management team. But the strategy developed was sound and the numbers continued to look even better. We figured they’d work it out and we pulled the trigger.

But as we learned, dreams can quickly turn into nightmares. The management team flamed out almost immediately. The husband and wife closed rank and blocked any progress. Egos flared and the work environment became hostile. What was a low-risk, high-return opportunity reversed course and we ended up losing money.

ASSHOLE ACID TEST

If one asshole can inflict considerable damage, this makes the hiring process incredibly important. We place a large emphasis on culture fit across our portfolio companies.

The Georgetown University study found that only 11 percent of organizations consciously evaluate a candidate’s character and treatment of others throughout the entire interview process. Perhaps the majority of companies should learn from Southwest Airlines, known for their culture, who uses a hiring principal known as, “hire for attitude, train for skill.” While it’s not always feasible to train the skills required, it’s certainly a good place to start.

In software there is a concept called “code debt,” which refers to future liability for continually patching bad code. The little fixes, which save time in the short term, create a ticking time bomb. Eventually the system blows up and costs a tremendous amount of time and money to fix. But until that event occurs, things look considerably more profitable. Culture operates identically. Companies can offer retention bonuses and cajole a rosy facade for a while. Eventually though, the underlying issues show and the culture debt is paid.

We encourage our management teams to employ the same practices we use to identify culture fits. There are a few almost sure-fire ways to understand someone’s perspective. The first is to eat with them. How do they treat the wait staff? Are they demanding, or easily agitated? What happens when things aren’t perfect?

Another test is to meet their significant other. What qualities did they choose in the person who has the most influence over them? Lastly, the most telling environment is to travel with someone. It’s impossible to fake it when you’re at the airport, grinding through security. And if there’s a delay, true colors come out. We call these the “asshole acid test.”

THE LONG GAME

Some companies can seemingly operate well with personalities of all kinds. We can’t and won’t. Life is too short to work with those you don’t admire, regardless of immediate cost. Ultimately, we believe it results in both higher profits and greater happiness. Not a bad combination.

Our “No Asshole” Policy is one of our Foundations. Read the rest here.