The Cult of Committee

By Barbara Kiviat

The money managers at Dodge & Cox have heard the adage that a camel is a horse designed by committee. They politely disagree. Their horse, you see, keeps winning. Each of the firm's four mutual funds has from nine to 18 portfolio managers, and every one gets equal say in which stocks and bonds to buy and sell. "The investment business is permeated with the lore of the individual. We think that's a bad way to manage money," says CEO John Gunn, one of many decision makers. "There are a zillion independent variables, and it's very hard for one person to think about them all."

Instead, Dodge & Cox believes the more vantage points there are the better. On the stocks side, 20 analysts track companies, waiting for chances to buy solid, long-term businesses on the cheap--a classic value-investor stance. When an analyst thinks a company is something Dodge & Cox would be well advised to hold for five years, the analyst makes the case to an investment-policy committee.

In this setting, a committee is a leaderless power-sharing team, but it's not exactly a democracy. Sitting in a conference room, the team discusses and asks questions--How are executives incentivized? What would boost margins?--and then, going around the table, each member voices an opinion. "It's not a strict vote. Just because five agree and four don't doesn't mean an idea will go through," says Roger Kuo, an analyst who covers media companies and sits on the policy committee for international stocks. Four strong objectors and five moderately enthusiastic supporters will probably nix an idea. As will the rare situation when disagreement turns into polarization. "The process," says Kuo, "is like taking the temperature of the room."

It might sound iffy--decisions made with no one in charge--but Dodge & Cox has the track record to show that peer review works. The firm's three mainstay funds--Stock, Income and Balanced--all beat more than 95% of similarly invested funds over the past 10 years, according to investment tracker Morningstar. The International Stock fund has sported a similar track record over its shorter lifetime and is one of the 10 hottest-selling retail funds in any category; over the past 18 months, assets have more than tripled, to $45 billion.

Dodge & Cox is used to being popular. After the late-'90s tech-stock bubble, investors disillusioned with momentum plays grew hip to the firm's strategy of buying out-of-favor companies and patiently waiting for them to rebound. Although Dodge & Cox doesn't advertise and shies from almost all publicity, word spread. In the wake of scandals involving some fund firms giving preferential treatment to big-time investors, money poured into Dodge & Cox, which consistently wins top grades on corporate governance from Morningstar and often appears in commentary pieces like "Our Favorite Sleep-at-Night Funds." (Disclosure: Through my 401(k), I'm invested in Dodge & Cox Stock.)

In fact, assets grew so quickly that the firm decided to close both its Stock and its Balanced portfolios to new investors--a decision that benefits current shareholders but not necessarily the firm since it collects a percentage of assets. "We are capitalists," says Gunn, "but long-term capitalists. And if you're a long-term capitalist, you need long-term satisfied customers." After months of informal conversation about skyrocketing inflows, the decision to close the two funds and potentially cut their income was made by more than a dozen people sitting around a conference table.

That ability to make complex strategic decisions collectively requires an almost Benedictine devotion to corporate togetherness, starting with physical space. The firm's 39th- and 40th-floor offices offer sweeping views of San Francisco Bay and the Golden Gate Bridge as well as of the interior hallways--the walls are glass. Two staircases connect the floors, and walking about is heavily encouraged. Branch offices and telecommuting are verboten.

Dodge & Cox also exhibits a level of commitment to employee development unheard of in layoff-crazy corporate America. When freshly minted M.B.A.s are hired to become analysts, the expectation is that they'll remain for their entire careers and eventually become shareholders in the firm. Seven out of nine people on the domestic-stocks team started as analysts straight from B school. Dodge & Cox rarely hires people who have worked elsewhere in finance: disagreements are fine (and considered a strength), but operating with a different investment philosophy isn't. "When we visit, it's almost eerie how on the same page everyone is," says Morningstar analyst Dan Culloton.

Part of preserving that culture is keeping the right ratio of experience to fresh talent. Dodge & Cox hires only one or two analysts a year. Starting in the 1980s, that became a problem as the firm began covering foreign companies. Dodge & Cox could have hired a big batch of analysts but decided not to, fearing it would wreck the apprenticeship model. "If you hire five people at the same time, they all start going to lunch together," says president Ken Olivier, a member of the U.S.-stocks committee. And as years passed, there might not have been enough promotions to go around. So instead, the firm added research associates--recent college graduates who work for a few years and then head off to business school--to provide backup to the analysts and amplify the number of companies each could cover.

Dodge & Cox has also found there to be an important structural element to team decision making. "Committees react best to a specific proposition," says Bryan Cameron, director of research and a member of the committees that pick domestic and foreign stocks. So when analysts make a presentation, they propose a particular course of action--increasing the percentage of Wal-Mart from 2% of the portfolio to 2.2%, say. The analyst advocates, and the committee meditates--somewhat like a jury.

Advocacy, though, doesn't mean an analyst gets all the credit when a stock rises or the blame when it falls. Analysts circulate research reports to the entire firm. Anyone can weigh in. And when the analyst thinks it's time to change the firm's exposure to a stock, the first stop is a sector committee, made up of people who know an industry well and can drill down to test the idea in depth. "The nature of this business is that you're going to be wrong a lot of the time," says Diana Strandberg, who sits on the committees that pick domestic and international stocks. "We're all in it together."

In the long run, that collaborativeness bolsters the firm's ability to do what it thinks is best for investors. Consider the 1990s, when tech-stock valuations soared off the charts. Many value investors came under enormous pressure from shareholders and corporate parents to load up on ridiculously inflated stocks. David Hoeft, who covers technology stocks at Dodge & Cox and sits on the domestic-equities committee, recalls a very different experience. "Our job inside the firm got easier," he says. "We trimmed as time went on. We just couldn't rationalize the expectations." No finger pointing. No pressure from the boss. And at the end of the day, no camel either.