Three ways to figure out whether a company is really invested in change
The open-source concept can be better than ESG
There has been a lot of interest over the past few years on environmental, social and corporate governance (ESG) investing, but, truth be told, I’ve found few really know what truly defines being an Esg-compliant company, other than in the sectors they operate in, and it’s often too easy to simply adjust one’s marketing materials.
There has been much talk of integrating ESG into a company’s reporting standards as they do with corporate compensation, but payout models haven’t really changed that much for senior management despite the increased disclosure.
This doesn’t mean we don’t believe in the power of investing in positive change, but there must be a better and more effective approach than the status quo. There also remains a tremendous economic incentive since those companies that genuinely embrace a socially responsible way of operating will be highly disruptive to those remaining under the old shareholder maximization model and they will ultimately make the world a better place.
There is no better way to do this than focusing on employees, just like Henry Ford did when he got started. For example, few know he implemented the $5, eighthour day in 1914, which was double the industry pay for less work. However, his need for top-down control of Ford and his stubbornness ultimately led to the company being disrupted by more stylish and comfortable cars such as the Chevrolet.
It is no different today: companies looking to change the world and make it a better place have to put their focus on their employees and keep it there. This can be a difficult thing to do since we’ve all been taught the client is always right and the shareholder is the boss.
A socially responsible company is one we like to call open source. It is characterized by happy and motivated employees who see themselves as part-owners and, therefore, genuinely feel responsible for the future direction of the company.
As a result, they will often treat clients as if they are their own, which is in stark contrast to the traditional hierarchical structure layered with inefficiencies and riddled with ego. Ego is a real company killer and much more of a threat than outside competitors. More so, ego can lead to unethical behaviour, because self-interest and office politics become ingrained within the company’s culture.
If you’re wondering what an open-source company looks like, here are three ways to verify.
❚ Bench strength and open communication: The company’s front line staff should be highly competent and entrepreneurial in nature, and highly valued and respected by the organization. They are also fully supported by other equally valued employees who may be less entrepreneurial in nature, but are still able to recognize the importance of getting to yes instead of taking the easy path to no.
Employees are also the ones who know the changes a company needs to make in order to stay on the cutting edge. Therefore, it is important to have processes in place to ensure people feel they’re being heard and that they’re comfortable sharing ideas right to the top.
❚ Empowerment and ownership: I really believe most people will make the correct choice between right and wrong when they understand there is a level of trust being placed with them. This means empowering them to say no to bad business or turning down potential business that would compromise doing the right thing, such as creating a conflict of interest or self-dealing. All employees should be participating in the success of the firm, so make them shareholders and you might be both surprised how loyal they are and be impressed with the decisions they make.
❚ No middle management:
Open-sourced companies never have a mid-layer of management with bosses upon bosses. They have tiers of support, not management. Once a mid-level structure is added as a means to manage a company’s rapid growth because “it’s the way it’s always been done,” it is game over. You’ve just become the very thing you were created to disrupt.
In my career, I’ve witnessed firsthand what happens when the entrepreneurial spirit of the front line staff is taken away by introducing a series of new bosses telling them how things need to get done their way or the highway. In those cases, it’s safe to say most people love highways, especially when they’re headed in the right direction and not by someone else’s ego.
Maybe we need to eliminate ESG altogether and move to an employee-centred open-source model instead. This would be more difficult than a top-down, ego-driven structure that can virtue-signal away its actual ESG responsibility. But if you really want to change the world, why not start with those lives you can directly impact and trust them to make the right choices for both the company and society? This is certainly one most of us in the investing world would much prefer to invest in and support.
Martin Pelletier, CFA, is a senior portfolio manager at Wellington-altus Private Counsel Inc, operating as Trivest Wealth Counsel, a private client and institutional investment firm specializing in discretionary risk-managed portfolios, investment audit/ oversight and advanced tax, estate and wealth planning.