Clint Betts

Dan, thank you so much for coming on. We're going to get into your backstory and all this type of stuff, but your investment fund is all about character, it's ROC Investments, which is Return on Character investments. I love that. Where did that come from? How did that happen? What is Return on Character? I feel like that's a completely different way of looking at investing in business than the majority of what you hear.

Dan Cooper

I guess it is, or maybe it's just another angle. I mean, organizations are all made up of humans. I mean, all of us, it's all human beings. And it's all based on how we interact with one another, and the combination and the matrix of how that interaction happens kind of produces results that ends up being quantitative and economic that people refer to as, "A business." But at the end of the day, a business is the essence of a large human organization. And in many ways what we're trying to do is we're trying to tease out that reality in a way that's never been done, but it's always been there.

So Return on Character stands for—it's actually the name that was inspired and borrowed from the book Return on Character published by Fred Kiel. Fred Kiel wrote a book that was published by Harvard Business Review and he did a seven year study on the impact of high character CEOs and he called them Virtuoso CEOs, and low character CEOs, and he called them self-focused CEOs, and their performance. And the book essentially proved out that high character CEOs outperform low character CEOs by a factor five X when measured using Return on Assets, it's basically their measurement tool. And also high character CEOs have higher returns on equity, lower debt ratios, higher employee engagement.

And this seminal study in books published by Harvard was something that I discovered one day when I was typing in the Google bar, "Does anyone care about character anymore?" Literally, hit enter. And up top, this article in Harvard Business Review about this book. And I was so kind of blown away that it even existed, that the seven-year study had been done and wrapped up, and basically proved out that character does matter, that I called him up and it turns out he has an incredible company called KRW International that took the findings of the book and helped other organizations actually develop it. And we partnered and he and his company helped lead the research that we use today, so that's a little bit of the origin story around the name, Return on Character.

Clint Betts

Well, how do you measure character?

Dan Cooper

Well, you can't measure people's internal character, but you can measure their character habits. And so the way we define character and what we use is four pillars. Integrity is one, responsibility, forgiveness, and compassion. And so those four characteristics were the four characteristics that Fred observed in his CEOs that outperformed. And so what we tend to do is focus on how do we find ways to measure those characteristics in today's marketplace in CEO's leading companies today? And so part of the way you do it is one, there's just kind of... It's important that people understand that what's funny is that if you learn about a CEO, for example, Clint, that most people would say, "Hey, that CEO would put the company before his own interest." How do you measure that and how do you value that in a portfolio construction? Or how does an analyst say, "Oh, okay, well he should get a couple extra basis points because of that." Well, they don't.

And so the premise of this whole approach is that that kind of data actually really matters. And so if you have a CEO that has a reputation for owning mistakes, for example, when things go bad, they don't point fingers, they actually own it, or when things go good, they kind of give credit away as opposed to taking it. CEOs that tend to be more humble than they are arrogant, those kinds of characteristics, if you're building an infinite minded organization that's looking to the long term in your long-term focus, those things really, really matter. And what we're doing is we're taking off, we're going around and picking up the shavings of gold that we think Wall Street tends to kind of throw on the floor, picking up those shavings of gold and measuring them, and valuing them, quantifying them, and forming the way in which we allocate capital into the public markets.

And so we do it in multiple different ways. One of the principal ways that we use to, we are Russell, basically the largest 1000 American companies, largest American companies, is our universe. And our first screen is using a behavioral integrity screen using artificial intelligence analysis of language. And we partnered with professors from the University of Virginia, Yale, Duke, and INSEAD in France, who developed the system of being able to take shareholder letters written by CEOs and gauge the degree of integrity in which those CEOs play. And so we actually have a lint score for every single company. We did about 700 companies in our original analysis, took the lowest lint score correlation because the lowest the best. And then we went and reviewed publicly available data in the marketplace like Glassdoor, and interviews, and articles, and transcripts, and looked for markers of character behavior such as responsibility, forgiveness, and compassion.

And we did this with three independent individuals, all of which kind of came to their own conclusions. And then the composite character scores ends up being what we use as our final determinant for who ends up in the portfolio and who doesn't. I also conduct behavior-based interviews. And behavior-based interviews are basically interviews where you're trying to determine if a candidate fits a certain criteria through an interview process and it disciplines it into a kind of quantitative outcome. And so I speak with people familiar with certain sectors and industries and I ask questions like, "Who would put the company before their own interest?" Or, "What CEOs in this sector that you know of tend to be more humble than they are arrogant?" We have a series of different questions which also ends up informing our character portfolio.

So we try to come at the question in multiple different ways and use the different data sources to confirm one another, which informs our confidence that a CEO's character habits are trending in the direction that we're looking to invest in. I don't know if that helps you. It's a little bit complicated, but that's the process.

Clint Betts

No, it's amazing. I want to go a little bit deeper on this investor letter. What exactly are you looking for in the letters that show that they have high character or strong character versus maybe someone who isn't? What are we looking for in there?

Dan Cooper

Specifically, it's informed by a behavioral integrity dictionary that has been correlated to language that correlates to integrity. And so what we're doing is we're scanning for certain language profiles in these shareholder letters that have proven to be scientifically correlated to integrity. And what's interesting about this process that these professors used, that we used with them, is that the book Return on Character went through, and they had over 84 companies in their analysis and in their study, this process that using behavioral artificial intelligence reviews of shareholder letters identified the same high character CEOs that the book identified. And so that's where we've formed a high degree of confidence in this ability to provide an early screen of saying, "Okay, this system really does help us identify and call the herd, if you will, of leaders that we think do fit our profile." But it's informed by a dictionary that's been developed together with these professors that has been also, there's a whole kind of a science behind behavioral integrity that I could forward you the paper if you'd like at some point.

Clint Betts

No. Yeah, that's super interesting. Have you ever applied this to the Fed or the SEC?

Dan Cooper

Well, the big dream is to someday be able to turn what we learn in the markets and be able to analyze and tease out this understanding towards politics. I mean, wouldn't it be great to know who the high character leaders are, whether it be our country or others? I think there's a lot we can learn, but that's later on down the road. It'd be fun to do that. That would be more of a public service.

Clint Betts

What's the return been as you've been following this process and doing that? I mean, how has the strategy been working?

Dan Cooper

We started in March and we have been outperforming on the downside and outperforming on the upside. So we're market cap-weighted, Clint, to the largest American companies. And so the way we designed the portfolio is we really wanted to be able to attribute any outperformance that we get to this character factor as opposed to say, "Oh, the oil and gas sector went really well, you overweighted in oil and gas and you had a lot of character CEOs in that sector, so that's why you outperformed." Our orientation is to provide the same level of risk as you would if you were to buy the market. And we have a lower beta than the Russell 1000 right now, but then also still be able to provide a cushion on the downside and a cushion on the upside for additional performance over time.

I did this once before because my mentor and I, I worked for a guy named Joe Ritchie out of Chicago in the early 2000s, and I developed a whole character investment strategy then, but we only allocated capital purely on the basis of on the CEO character, but we only used his money and he was a very, very wealthy man. So we were able to do that and we weren't able to take outside money, but that process that I did 20 years ago informed a lot of what we're doing today. And we also had the benefit of being able to look back and see how that performed 20 years ago and how it would've performed for 20 years if we had continued. And the performance really gave us a lot of confidence that we found an inefficiency in the market here that is worth pursuing.

The performance of that strategy, I don't think I'm allowed to go into the details of how much performance, but we did a factor analysis and analyzed it, 30% of the outperformance that we were able to identify was attributed to traditional factors that could be explained. 70% was not attributable. In other words, there wasn't an explanation for it. And we think we stumbled onto kind of the character factor or the leadership factor as a contributing factor in the performance of a company. And this data along with the book Return on Character really informed us on how we created this strategy. And then the other side of it too is that, look, the idea of being able to give people a choice now, so instead of just buying the market, you can now buy the market but only buy companies that have been scrubbed for integrity, responsibility, forgiveness, and compassion.

And most of us, when you think about buying the market, you don't think that you're affirming kind of all of it, both good and bad. You can now buy the market and try to affirm the good because we think culture and ultimately the way people treat each other not only contributes to the success of a company long term and employees really wanting to work hard and contribute to the organization, but also affects community. I mean, Clint, have you ever had a bad boss?

Clint Betts

Yeah, yeah, yeah.

Dan Cooper

You know how it makes you feel, you know how it makes you feel when you go home and how you greet your family or your friends. And those things matter, especially when you imagine big organizations with thousands of people and the ripple effect. And so even if you didn't believe in character, we think that there's a value for it from a pure alpha driving perspective, but if you do believe in character and you think it matters in the world and we need to find a way to affirm it, this is a way to do it. And it's the first of its kind, I believe.

Clint Betts

You mentioned Joe Ritchie, who's like this famed investor. What did you learn from him?

Dan Cooper

I got lucky enough to walk by his side for 12 years. He and I got to go on a lot of great adventures together. And for me, the greatest thing that he taught me was that it's almost like the hacking of the line, that there's a difference between impact and investing. Like, "No, you can do both." And the expression of your life and the way you live is in itself a way to provide impact. And that could be in just a pure investment strategy, but it can also be, we would go off and do international diplomacy efforts in Iraq, and Afghanistan, and Rwanda, and Russia, and all sorts of other places. But it wasn't seen as philanthropy, it was just going out and just doing good.

And our business, we kind of looked at it the same way. I mean, evidence that Joe was the first to bet on character. He was the originator for allocating capital on the basis of the character. And we lost him this year regrettably, but I like to think that we're kind of carrying on his legacy with strategies like Return on Character and other efforts, of course. So I don't know if you know Lindsay Hadley, but she's a great advocate of his work as well.

Clint Betts

Yeah, Lindsay is incredible and the impact she has in the world is really cool. I wonder maybe we've put this to the test directly with a company or with the current state of the markets, like a company that's getting a lot of flack right now from investors is Meta, just the amount that they're investing into VR, AR, and the metaverse and kind of freaking everyone out. When you see that, how do you apply this to someone like Zuckerberg or like the very top of the top companies?

Dan Cooper

Well, I would put Zuckerberg, Musks, Gates, Jobs, in the productive narcissist category. And as a rule and just as an orientation, we don't invest in productive narcissists. I don't think it's good to bet against a productive narcissist. I mean, if you want to be in the business of betting on the productive narcissists, well, you can go and do that. But that said, character's not a fixed thing. And so I'm rooting that Zuckerberg does end up in the ROC portfolio. If we started to see character shifts in his behavior that proved to be validated through our process, he'd absolutely be something we'd have to consider. But fortunately, we don't have to consider it now because a lot of the things that Facebook’s doing are arguably very challenging and ethically questionable in the way in which they interact and they're affecting our world.

By nature of our screen, it's really interesting, Clint. I think our highest controversy score stock is like a taser company. So for some reason we don't have a lot of controversy companies by the nature of screening for character. We tend to have a lower beta, we have higher returns on equity, we have lower debt ratios, we have more women CEOs, tend to have better ESG scores. All as a byproduct of looking at the market in this way and choosing on this basis. But yeah, so if you're looking to invest in the productive narcissists of the world, we're not the place to go.

Clint Betts

Yeah. You mentioned ESG, which is another kind of controversial thing. A lot of people really love it, there's obviously folks who are against it. How do you feel about it?

Dan Cooper

Well, my position on the ESG orientation is that more important than an ESG score is a leader that actually believes in trying to leave the world a better place. And at the core of our analysis is that, is a leader that sees beyond themselves, even sees beyond their company. And so I like to say L plus ESG. First, let's get leadership right, let's get the CEO right, and then prioritize ESG and believe more that it's far better to have a leader that really believes in it than say a very well crafted website that explains why they're achieving all their ESG goals.

That's the way I would want to encourage the market in the ESG world to really start configuring their evaluation of the ESG world. It's like, "let's start with the leader." I mean, in every case in all organizations and countries, the leader plays a huge role in the cultural priorities of organizations. And just because it's written on a wall or in a brochure or on a website does not mean it's a cultural priority. And that could be part of the reason there's some tension around the subject. But like I said, I think our fund has been classified as ESG in some of the browsers. And I've never looked at it really as an ESG strategy, I've just looked at it as a really smart way to invest in the marketplace, but it certainly does have characteristics that are applicable to the ESG space and I welcome the discussion around it.

Clint Betts

Yeah, it's interesting. Why do you think it's controversial?

Dan Cooper

ESG in general?

Clint Betts

Yeah.

Dan Cooper

Well, look, Clint, I don't claim to be an ESG professional or on the category.

Clint Betts

Yeah, yeah. Sure.

Dan Cooper

But I mean, I think people are questioning the measurement tools, the accountability in the process of getting certain ESG scores, the arbitrary orientation around, "Well, how do you really measure these things? And are they really making an impact?" And then if it's kind of wobbly, well why in the world would we place such a value on it and allocate capital in that direction when it's based on what some would say is kind of wonky data? And that may or may not be true in certain categories. I'm not in a position to judge it.

Clint Betts

Sure.

Dan Cooper

But what I am convicted on is that unless a leader believes in it and believes in certain aspects of their ESG priorities, it's probably not going to be executed in the way that everybody would hope it would be. And so it's just like, because that's why when a leader leaves, a CEO leaves one of our portfolio companies, we sell the company because we don't necessarily assume that their cultural priorities are going to be carried through with the next CEO. That has to be proved out. It seems like so naturally intuitive that that would be the case, but it's not always. And so any time a company leaves or CEO leaves, we have to run them through the process again, the new CEO, and see if they qualify.

Clint Betts

Who do you think is a great leader? What are some examples of high character leaders or some of the companies that you've invested in where you're like, "This is something, as an example of those who are listening or watching, of a leader with really high character"?

Dan Cooper

Yeah. No, that's an easy one. In the early 2000s, one of the best examples I came into was Jim Sinegal at Costco, the CEO and founder of Costco. He just kind of oozes and exemplifies kind of what we're looking for in leaders. Tim Boyle at Columbia Sportswear was one, Matt Rose, the BNSF railway CEO and chairman, Herb Kelleher at Southwest was another. Those are a few examples that can bring this notion into tangible understanding. Those are the kinds of leaders that we're looking for today and those are the ones that are kind of inspiring examples, I think, of what a character-driven organization ends up looking like when you get a CEO like that in the seat.

Clint Betts

What should a CEO or leader be thinking about in this environment, how volatile the market is? And it's looking like we may, who knows, you would know this better than I, but be in a recession next year. It looks like some of the things are not looking good. What should they be thinking of?

Dan Cooper

Well, you'd have to go back to the four pillars, constantly orient yourself around integrity and what that means and how can you represent that in the way in which you lead your organization? Responsibility, reemphasizing the importance of leaving the world a better place, a collective responsibility as an organization. And then the other two aspects that tend not to be or tend to surprise people is the orientation around forgiveness. I mean, forgiveness builds trust in an organization. Their ability to forgive themselves when they make mistakes, forgive others. And then compassion is huge. A genuine felt compassion and empathy for those that you work with, matters. And that's whenever you're going to end up building organizations, like the combination of all those things creates an enduring workforce that's willing to walk through walls for you.

And if ever there's a time you need that, it's in a recession, it's in a difficult time when people are afraid and when you're asking them to do more work than maybe they need, than they should have to do because of the challenging moments. Those are the four orientations that I would encourage CEOs to really focus on and put it on their wall, that would probably, and I believe likely, help through difficult times. I mean, I think especially in difficult times, these are the kinds of CEOs you also want to invest in. I mean, you want your portfolio with leaders that are behaving in a way that has correlated to performance and doing it in a way that's enduring. And that's why we feel more and more confident in ROC Investment strategy is that if ever there was a time to own the best CEO, that's now.

Clint Betts

Yeah, that's a good point. What led you to this career? How did you get into this? What made you think, "I'm going to invest in public companies"?

Dan Cooper

Well, originally with Joe Ritchie, we were sitting around one day back in Chicago and he asked me the question, "Man, I wish I just knew who the good ones were in the market." And it was asked out of a belief, one, character matters, two,that from the standpoint of just a long-term performance, man, it just has to have an impact. But it was also born out of the fact that there's all this data out there that everybody can analyze. And Wall Street and everybody's competing to look at it in different ways and try to get an edge and try to come up with an investment theory. And we didn't think we could beat in that world, but the one area that we felt like had a huge predictive indicator of the performance of a company in the long term is an area that Wall Street wasn't measuring at all, there was no value for it.

In the balance sheet of a company, there was no value for character as a contributing factor. And so it was like, "Geez, maybe we could go out there and understand that a little better than zero." And that's how it got started. And so I went into the industrial psych world, took a lot of those systems and tried to apply them in our ability to quantify our level of confidence. It's not an absolute, but our confidence level that a CEO is fitting these criteria. And of course Good to Great was out, Jim Collins' book, Level Five Leaders, was also a confirmation of research that confirmed the idea. And that's how it originally got started. And so we placed our bets, allocated capital and then walked away, if you will, and let it play.

But I had a very weird and strange background because at the time we were getting to know the president of Rwanda, President Paul Kagame, and we felt like this company was kind of like a mispriced, or this country was like a mispriced stock, like it just had been wrongly priced in the market. And the President was more interested in meeting American industry than he was in going to say, Washington D.C. and sitting down with a bunch of bureaucrats. And we had the list of all the great CEOs in the markets. And so I was like, "Okay, let's call them up." So I started calling up these CEOs on our character list and say, "Hey, I've got a head of state and I'd like to bring them to your headquarters and meet with you."

And so that started happening, and out of that we formed this huge network of friends of Rwanda that had a huge contribution on changing the country of Rwanda. One of those was, as I mentioned before, the BNSF Railway CEO, Matt Rose. And he put up his hand and said, "Hey listen, I can help you not lose billions of dollars in Africa by developing your railways. Let me see what I can do to see about the viability of a corridor." And so that really grabbed me and that led to about a 10, 12 year effort to try to build a railroad from Dar es Salaamn to Rwanda. And so I spent about 10 years trying to do this with one of the CEOs from our original character fund.

And then ultimately the country just didn't have the capacity to execute on a project, finance a project like this, so I had to close it down and I came back and I discovered this book, Return on Character, by Fred Kiel. I was looking around in the state of the world and saying, "We've got to find a way to affirm character in the world." If ever there was a person that maybe could do it in the marketplace, it's me because of my original strategy. And then I'd kind of tap my network of high networth individuals and investors, pulled together a group. My principal, biggest backer is this incredible company called Bridgeway Capital Management. And they're a 30-year mutual fund company that's been around for 30 years. I think they had last year the number one performing mutual fund in the world. This founder, John Montgomery, has led the company. And the company's given away 50% of its profits for 30 years.

Clint Betts

Wow.

Dan Cooper

But they signed up with, and they loved what we were doing with ROCI and the idea around investing in character. And then they were able to dig into all the historical data that I did with Joe. And we really kind of came together and ultimately ended up launching an ETF around the strategy so that anybody can invest in character, not just the high net worth individuals. So that's a little bit of a thumbnail, I'm sorry, a little long of my past and how I got to where I'm going now.

Clint Betts

No, something you did in 2013 is really interesting, this railway. Can you tell us more about this railway that you helped get together?

Dan Cooper

Well, I mean, one of the things that's interesting is that at the time, because of the original character fund, we had been able to amass this extraordinary group of people around trying to help Rwanda. I mean, it was like there wasn't almost anybody that we couldn't get to. And I was looking around and I couldn't help but feel like this massive influence and power, we need to direct it into a generational

transformational project that could really move the needle on Rwanda because we had all this interest. And so Rwanda, it turned out, I think it was one of the most expensive corridors in the world traveling on truck from Dar es Salaam to Rwanda. And so as a consequence, Rwanda, 40% of everything that's shipped into Rwanda is transportation costs. And so when you think about a nation that's isolated in the middle of Africa, if they did everything like we did in the west as far as efficiency, they'd still be at a 40% discount in efficiency relative to everybody else.

And so it was an obvious thing, how do you improve that distribution problem and transportation costs? And so first we set out, and everybody thought it wasn't possible, meaning it wasn't economically a viable idea, it wouldn't hold up to a capital outlay of that kind of an investment, capital investment into infrastructure. And we proved that there was enough transportation volume on the corridor to justify the capital allocation. And then I realized that if you create a study, you don't necessarily create a deal. So we set out then to create a deal and we got expressions of interest from EXIM Bank of up to $6 billion. Bechtel was our lead construction manager and HDR engineering was our engineering partner, GE was given supplies and we've been working with them with engines and rolling stock. BNSF was going to mentor us, mentor the new company into existence. You had about $300 million lined up to launch the new railroad company, which means buy rolling stock and all the things you need to be able to operate a new railroad.

But ultimately, there were several administrations in Tanzania that just weren't actuating on the need for a railroad in their country. And then we finally ended up with one that just stopped talking to business altogether. And we had to close up shop, we had to walk away, we couldn't justify continuing. It was very sad, but I was super proud of what we did. I mean, we didn't lose the deal because of corruption or because of China or anything like that. It was really institutional capacity on the Tanzanian side that didn't seem to be there yet. And maybe I wasn't good at communicating what we were offering, I don't know. I probably have some responsibility also, but ultimately it was an extraordinary project.

We would've dropped the transportation costs close to half, it would've impacted over 130 million people's lives and impacted over five nations in perpetuity, so it was definitely worth trying for. That's one of the things that Joe always taught me. I mean, my mentor Joe, he would go after things if there was a chance to move the needle in a giant way. Even if the odds were against you, that chance to have such a huge disproportionate impact was something that he always went for. And he certainly inspired me in the pursuit of trying to build this railroad.

Clint Betts

What do you hope your legacy is when you're done with this?

Dan Cooper

The big dream is that if we're able to show that these characteristics, integrity, responsibility, forgiveness, and compassion, outperform the market over time, that it will start to inform the way leaders are chosen in American industry. And boards of directors will maybe start asking, "Why isn't our CEO in the list?" Or, "How do we hire a CEO that amplifies some of these characteristics because it's been shown to outperform?" To me, that would be an extraordinary contribution to the collective culture of American business, because American business, I believe, leads Washington and they have the power to lead in the right direction. We tend to highlight and think about a lot of the folks that lead in the wrong direction, but there's a lot of good ones too. And our hope is that we can really impact the ratio of CEOs that are directionally leading with character, and that would be exciting.

Ultimately too, it's always fun to imagine being able to continue what I like to call cross-pollination of character or cross-sectors for no economic interest. It's such a joy of connecting people that value character and seeing them help each other. We did that in Rwanda at a really exciting scale. And then also, Clint, I think the last thing would be, and this is kind of a call to arms if you will, in a good way, is building a community of investors that really think character matters and are willing to allocate on that basis and get to know one another too. I think this easily can be called a cause of sorts that happens to be just an investment that actually performed pretty darn well and that's fully liquid that you have access to all the time, but just by allocating this way, we're making a statement. And it's kind of we need people to call up their brokers and say, "Listen, if I have any large cap exposure, put the large cap exposure in this Return on Character strategy, as opposed to just putting it everywhere in just broad market exposure."

And so for me, that would be a wonderful thing is that we just have a network of ROC community that values character and is starting to think more when they allocate in the sense that when I put my money in a company, I'm not just affirming that business strategy, I'm also affirming the leader's behaviors and their values. And do I really want to do that? And so I think for the first time, you actually now have a choice. You can decide whether or not you want to be intentional about your allocation when it comes to behavior of leaders in the marketplace.

Clint Betts

Well, Dan, what you're about and what you're doing is fascinating and it's having an impact in the world already, I know. I'm sure we'll have you on again. What an honor to talk to you and for you to spend some time with us on this whole idea of character and how you're investing in it. This is beautiful.

Dan Cooper

Hey, thanks for caring and thanks for having us on it. We appreciate it. And if you ever want to talk about character and leadership or investing again, I'm always here.

Clint Betts

I love it. Thank you, Dan.