Red Hat Submits A Job Application

Summary

• CEO Jim Whitehurst's "The Open Organization" is the best business book of the year.
• The idea is that the best corporations maximize human capital, and Whitehurst has a roadmap for that.
• Buy Whitehurst, buy Red Hat, buy people and companies like them.

The most important business book of 2015 is The Open Organization, by Red Hat (NYSE:RHT) CEO Jim Whitehurst. I received a pre-release copy. The official release date is May 26.

Designed as a call to corporate action, it also acts as a long-form job application, possibly for Whitehurst, but also for his company.

Whitehurst, who was formerly Chief Operating Officer at Delta Air Lines (DAL) during its bankruptcy trial of the last decade, got "fire" at Red Hat, which he joined in 2007. Like a caveman returning with the secret of cooking, he writes with the passion of a convert about an organizational model that stands the hierarchies of Alfred Sloan's General Motors (GM) on its head but which works very, very well in today's highly-computerized age.

When high-value analytics can be brought to every worker's fingers, the old-style organizational structure becomes inefficient, Whitehurst writes. You want only employees who are mission-oriented, dedicated to what the company is all about, and you want to empower them to fulfill that mission, weeding out those who aren't so dedicated.

This doesn't just work in technology, where teams of programmers need to be empowered to meet impossible deadlines and come up with innovations. It also works at companies like Costco (COST), where everyone who works in the store is part of the same family. The resulting salary structures are also less hierarchical - Costco's strength isn't that line cashiers make $11/hour; it's that store managers make just $25/hour and will act as cashiers if that's needed. Whitehurst also cites Starbucks (SBUX) as a place where stores are run by teams, meaning no one is isolated from the store's mission.

In an open organization, Whitehurst writes, the job of management is to ignite passion among workers and to be accountable to them. It's also to define the company's mission, and to be accountable to it as well. It's to find people who will devote themselves to the corporate mission, and to promote or cull from the herd based on merit, ignoring formal hierarchy.

You can see this in the movies of Frank Capra, even manufacturing-age chestnuts like "You Can't Take it With You." Family patriarch Martin VanderHoff (James Earl Jones in the recent Broadway revival) is Whitehurst's model CEO. People follow their passions. The play teaches that life is about more than the bottom line.

Well, Whitehurst is writing, today business is more than the bottom line as well. The best companies focus on building human capital, then maximizing the value of that human capital. In a world where energy is becoming abundant (thanks to renewables), where commodities and suppliers are interchangeable, the best companies are creative furnaces, the people inside those furnaces interacting based on their desire to get something important done.

This means turning a company into a community, but it also means bringing customers, both real and potential, and suppliers inside the community. Customers help define the mission, and their loyalty defines brand value. Suppliers need to be partners rather than adversaries, so that the innovation furnace can run at maximum efficiency.

This is how open source works, and after 10 years on that beat I know it works. But, as Whitehurst explains, this model can also work in a highly-proprietary environment, like that of Delta or Starbucks.

In my view, Whitehurst also writes like a man who, having been given fire, is anxious to spread that fire. Red Hat, whose market value is up 300% under his leadership, also seems ready for bigger things. My view is that, if another company comes in for Whitehurst, you should buy stock in that company, and if a bidder comes in for Red Hat that's willing to transform itself under that management's leadership, you should buy that stock.

Meanwhile, just buy Red Hat, on weakness if you're concerned about the valuation. Growth is averaging about 13% per year on the top line, about 11% on the bottom line, despite the fact that you can download the basic product they deliver for nothing, right now. For an open source company that is an astounding record.

Imagine if Whitehurst, or Red Hat, actually had something material of their own to build, and sell?

Analyst’s Disclosure: The author is long COST, SBUX. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.