In 2010, the BP oil gusher was not a surprise to those investors tracking safety violations. Over the previous three years, BP (ADR: BP) was cited for 760 “egregious” or “willful” breaches by the U.S. Occupational Safety and Health Administration (OSHA), leading the industry by two orders of magnitude (the next companies, Sunoco and Conoco Phillips, had 8. Exxon Mobil had 1). Risk-aware investors factor these metrics into their portfolios, which enabled forward-looking metrics-driven investors to avoid the 40 percent rapid erosion in stock value after the BP disaster.
What gets measured gets managed, but currently many corporate metrics tend to be narrow, short-term and exclusively financial. This creates added risk by not properly accounting for true leading indicators of performance. More profit is possible when investors and leading companies look comprehensively at the business, to build both more profit and a better world.
Five types of metrics – Health, Wealth, Earth, Equality, and Trust – are frequently ignored in financial reports and by traditional stock analysts. These metrics are seen as “soft” when they actually relate to “hard” value. Leading companies appropriately measure their impact on overall society, including the environment, and how it relates to the bottom line.
1. Health: Protecting the Core Asset
Employee Safety – A safe work environment can have many financial benefits to companies – lower insurance premiums and medical costs, and potentially higher sales due to increased staff morale. Thus, a positive return on investment for the company’s most valuable asset: its employees.
John Deere (NYSE: DE) is a leader in workplace safety and health. Last year, its business units received 43 safety awards from the U.S. National Safety Council. An example: in 2010 the company’s Cylinder Division in Moline, Illinois, had operated for more than 15 years without a lost-time injury. Although these training programs require investments of money and time, in the long term they increase productivity and reduce risks to legal and medical expenses. From a long term perspective, this metric can drive increased profit.
2. Wealth: Building Employee Worth
Wealth Matching – HIP companies seek to align financial goals with employee compensation through wealth-matching programs. These programs include pensions, 401(k) matching, and discounts to purchases of company stock. For example, financial software company Intuit (Nasdaq: INTU) promises to grant stock options to all employees – it also earns very high employee engagement scores, a likely driver of satisfied and returning customers, which should boost top line revenue and can contribute to growing bottom line profit.
3. Earth: Reducing Emissions
GHG Emissions – When any form of fossil energy is used, carbon is a natural byproduct. Thus as fuels like oil, natural gas, and coal are used to power planes, trains, and automobiles; generate electricity and heat; and as a feedstock for chemicals and plastics; carbon becomes embedded in our global economy.
A HIP investor recognizes that companies lowering its carbon intensity can outperform financially due to lower energy usage – and decrease its potential liabilities from not polluting. Carbon-efficiency products can generate top-line revenue too; in 2007, DuPont earned $65 million revenue from products that reduce GHG emissions, accounting for 55,000 metric tons of GHG emission reductions. In the future, it is targeting $8 billion in revenue from eco-efficient products. Operationally, DuPont (NYSE: DD) seeks 100 percent of its company fleet of vehicles to be fuel-efficient; in 2008, 22 percent of its U.S. vehicles were hybrid, flex fuel, clean diesel, or E85 octane powered. Leaders like DuPont can realize lower costs, better manage risks, position for fewer liabilities, and generate revenue from customers seeking products with zero- or low-emissions products.
4. Equality: Increasing Diversity
Board Diversity – Most consumer-focused companies serve a wide variety of customers across gender and ethnicity. However, the management of those companies is not always representative of the customer base that it serves, nor the workforce it represents.
One shining example in board diversity comes from an unexpected industry, Ryder (NYSE: R). With more than half of its board either ethnic or female, Ryder has a much better opportunity at understanding their diverse clientele than a more traditional trucking company. This diversity provides a much better chance of understanding the customs and nuances of multiple customer segments and niches, and increasing the likelihood of boosting revenue and market share.
5. Trust: Revealing Political Funding
Lobbying – A HIP investor examines the cost of lobbying, as it may reveal a company strategy towards fairness in the marketplace. Why is it an important metric? First, the lobbying amounts overall tend to advocate for narrow corporate interests rather than a balance with society as a whole, creating risk of a backlash. Second, calculating the amount spent relative to revenue – and compared to industry competitors – may be indicative of a firm overspending on “protecting” old ways while potentially under-spending on innovating new products and services. With the recent Citizens United Supreme Court ruling, this has become a very hot issue, but it has been a leading HIP metric for some time. For example, AT&T (NYSE: T) spends record amounts of money on lobbying and political donations. According to OpenSecrets.org, AT&T has spent more than $43 million on lobbying since 1989, funds that could go to R&D, such as creating the next iPhone network.
Across five elements of HIP – Health, Wealth, Earth, Equality, and Trust – these data-driven metrics can be used by investors. Each metric relates to quantifiable business value – from higher revenues to lower costs, from optimal taxes to premium stock values. The resulting financial performance can lead to a portfolio that realizes higher human impact and profit.
In the next five features, we will delve more deeply into each of these categories. Next time, the focus will be on how Health can drive Profit – companies making your world a healthier place to live while seeking to make your portfolio a healthier investment.
To navigate this series, please use this table of contents.
R. Paul Herman is CEO and founder of HIP Investor Inc. Herman is the author of “The HIP Investor: Make Bigger Profits by Building a Better World,” published by John Wiley & Sons in 2010. Herman is a registered representative of HIP Investor Inc., an investment adviser registered in California, Washington and Illinois.
NOTE: This feature, excerpted and adapted from the HIP book, is not an offer of securities nor a solicitation. The information presented is for information and education purposes, and is not an investment recommendation. Past performance is not indicative of future results. All investing risks losing your principal. The author may invest in the companies mentioned above, and several are included in the HIP 100 Index portfolio. Details and full disclosures are at www.HIPinvestor.com
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