Edgcomb

"We decided to involve all of our senior partners in our discussions of investments. We would never again allow one person single-handedly to green-light a deal. During my career, I had gotten things more right than wrong, but Edgcomb had shown that I was far from infallible. My colleagues had decades of experience. By working together, arguing and applying our collective wisdom to evaluate an investment’s risks, we hoped we could examine our deals more objectively. Next, we insisted that anyone with a proposal would have to write a thorough memorandum and circulate it at least two days before any meeting so it could be carefully and logically evaluated. The two-day requirement would give readers time to mark up the memo, spot any holes, and refine their questions. No additions could be made to the memo at the meeting unless there was a significant subsequent development. We did not want extra sheets of paper going around the room. The senior partners would sit on one side of the table and the internal team presenting a deal on the other. Around us would be the junior members of our teams, who were expected to watch, learn, and contribute. These discussions had two fundamental rules. The first was that everyone had to speak, so that every investment decision was made collectively. The second was that our focus should be on the potential investment’s weaknesses. Everyone had to find problems that hadn’t been addressed. This process of constructive confrontation could be challenging for the presenter, but we designed it never to be personal. The “only criticism” rule liberated us to critique each other’s proposals without worrying that we might be hurting someone’s feelings."

"The upside of the potential investment should be included as well, but that was not the focus of our early investment committee discussions. Once this group dissection process concluded, whoever was running the deal now had a list of problems to address and questions to answer. What would happen to the company they were proposing we buy if a recession hit? Would its profits decline gently or plummet? Were the best managers likely to stick around following a buyout? Had we thought hard enough about the likely response from competitors? Or the effect on profitability if commodity prices collapsed, as they had after we bought Edgcomb? Did their financial model take account of all these eventualities? The presenter’s team would go back and find answers to our questions, and in doing so, they could implement fixes or figure out how to manage the downside, or they might uncover new risks, new probabilities of loss that they might never have seen before. And back they would come for another round of discussion. By the third round, we hoped, there would no longer be any nasty surprises lurking in the deal."