A few years ago, a representative of an employee resource group at American Electric Power (AEP) told CEO Nick Akins at the ERGs’ annual meeting with him that there was not enough diversity in the company’s upper management and leadership team. “And he definitely appreciated that call out,” said Kim Hughes, a 21-year AEP veteran who has served as a diversity, equity, and inclusion (DEI) manager since last February. She may have heard that story secondhand, but said she saw firsthand the ways in which AEP sought to diversify its C-suite and board, and how Akins has been “adamant” about making DEI core to the company’s culture.
And in a report earlier this month about Akins and the board’s decision to pass the CEO mantle to current CFO, Julie Sloat, board director Sara Martinez Tucker noted that Akins’ tenure since 2011 has been marked not only by technical innovations setting the company up for future success, but also by “an open, collaborative culture that embraces diversity, equity and inclusion.”
It’s been a team-wide project for the Columbus, Ohio-based energy company, with roughly 16,700 employees across 11 states, and while its leadership is clear about the ongoing nature of its DEI work, its commitment to inclusion and career mobility for its workforce led to AEP’s recognition as No. 20 among the Russell 1000 in JUST Capital’s 2022 Workforce Equity and Mobility Ranking, built with support from the Annie E. Casey Foundation.
That ranking has particular relevance today, when corporations, whether they’re expanding or reining in growth plans, are figuring out how to retain top talent during a lingering tight labor market.
To learn from AEP’s example, we spoke with both Hughes and fellow DEI manager Alyvia Johnson. Their pairing provides a fascinating look at AEP’s journey.
Hughes has been at AEP for over two decades, has a background in engineering, is based in Dallas, and focuses on inward-facing DEI initiatives; Johnson joined AEP in March after a few years at Wendy’s, has a background in human resources, is based in Columbus, and focuses on DEI in recruitment. Through a recent discussion with both, we identified key insights into how AEP made inclusion and mobility a critical rather than ancillary function of its business strategy and continues to build on that.
It is intentional and iterative with its efforts
When she was a young engineer during her early years at AEP, Hughes said she initially wasn’t aware of any leadership development programs at the company. And when she did find out about them, she thought they targeted a limited set of people – mostly white men who worked in Columbus. As the company grew across the country, especially over the past decade, Hughes said, its leadership became more aware of its need to expand leadership pathways. When Hughes had the opportunity to enroll in a year-long Targeted Development Program two years ago, she took it.
Johnson said that coming in as a new employee earlier this year, she was able to first learn about and then experience HR’s commitment to the approach that Hughes saw evolve over time. “The commitment has become even deeper and intentional as the company has grown and our communities are becoming more diverse across the United States,” Johnson said. “We’ve had many conversations about how in order to be competitive and to attract and retain the best talent, we need to have that focus on DE&I to create those opportunities for diverse talent. It’s also just the right thing to do.”
When Hughes enrolled in the program, she was told that it gave her access to leadership across the company – and she said that wasn’t just talk. She asked a since-retired executive named Charles Patton to become her sponsor, and he gladly accepted. Hughes said she would tell Patton things like, “I’m not sure where my next step is at AEP,” or “I’m considering this…” and he would guide her through her options, ultimately leading to the path she’s on today.
Hughes also told us that the company is not afraid to iterate its opportunity programs, and pointed as an example to the Women in Linework program, dedicated to increasing women’s representation among AEP’s lineworkers, who maintain power lines – and who are almost entirely men. It was designed as a training program with the goal of becoming an AEP employee. But, Hughes said, it didn’t take long to realize that the women they were recruiting were juggling responsibilities, including families, and that they needed to be paid if the program was actually going to achieve its intent. Women in Linework is now a 14-month program that starts with stipends and progresses to an hourly wage.
It uses employee resource groups and HR as a sounding board for the C-suite
A common refrain in business today is “listen to your workers,” but when you’re leading a national or multinational organization with tens of thousands of employees or more, that can be easier said than done. It’s why AEP has established the ERG and CEO meetings mentioned at the top of this article, along with what Akins dubbed “Nick’s Network,” where a rotation of representatives from different business units meet with Akins at the company’s headquarters. In both instances, Akins encourages what Hughes called “unfiltered feedback” from employees.
And while ERGs are critical for this approach to communication, Hughes also noted that AEP’s recent internal employee surveys conducted with Gallup found that ERG members were more engaged than the rest of the AEP population. That finding wasn’t surprising, she said, but it allowed them to isolate areas of disconnect among earnestly involved leadership and management and the average employee, on topics like management training and inclusion programs.
Johnson added that AEP’s DEI team has also made HR leaders “DEI champions” since, “A lot of times when employees are having concerns or issues, our HR managers are the first people to hear about it.” These HR managers get DEI coaching and are encouraged to facilitate related difficult discussions when it can lead to company-wide improvements.
It sets metrics and then consistently and transparently tracks them
“We all know in DE&I, we never arrive. It’s always we’re striving to be better,” Hughes said.
And while AEP is clear that it is far from where it wants to be – as of the end of 2021, its executive and leadership makeup was 78% male and 88% white – it makes its DEI-related metrics public. The company publicly reports its workforce and board demographics, gender-based salary ratios, incidents of discrimination and responses, and community impact data.
This year, leadership has also been given access to a DEI Dashboard, updated monthly and intended to be shared among leaders’ teams. It provides monthly data related to DEI initiatives and includes tips on how teams can potentially improve certain aspects of relevant initiatives through actions like partnering with a talent acquisition team.
And, for all of the company-wide goals, the board gets buy-in.
It begins employees’ development journey on day one
AEP has deliberately set out to prevent situations like the one Hughes experienced in her early days at the company, where she felt like leadership pipelines were out of reach for a Black woman like herself.
Aside from increased efforts in recruiting diverse entry-level talent, “Retention is really key,” Hughes said. “One of the things we do with new employees in orientation is we make them aware of our employee resource groups. Again, it speaks to engagement. We want them to be aware that they exist and that they can plug in immediately.”
And then, because there are still plenty of veteran employees like Hughes at the company, the DEI team also works with HR to ensure that they get access to growth opportunities as AEP evolves
“I’ve talked to many employees where they’re on their 20th year or 10th year, and they’ve been able to move around if it’s lateral or vertical to different areas and get that exposure,” Johnson said.
It made DEI core to its business
Under Akins, AEP expanded its DEI team and made diversity, equity, and inclusion a stated component of its culture alongside its foundational commitment to safety for its workers and customers. Notably, AEP also began incorporating DEI components in its incentive compensation plans for leaders across the company.“It’s nice just saying it’s important, but it’s putting the money with it,” Hughes said. “Not only is it safety, is it – of course – company performance, is it culture, but it’s DEI, as well. So to see that importance placed there is really good, too.”
The 2022 Workforce Equity and Mobility Ranking was funded by the Annie E. Casey Foundation. We thank the Foundation for its support. The findings and conclusions presented here are those of the authors alone, and do not necessarily reflect the opinions of the Foundation.
To learn more about how AEP and other companies are putting these best practices into action, explore our full 2022 Workforce Equity and Mobility Ranking and complementary Issue Brief. For more information on how we’re engaging with the country’s largest employers on these issues, reach out to our team at programs@justcapital.com.
Three years since the Business Roundtable dedicated its CEOs to pursuing a stakeholder-driven capitalism and just months before the pandemic helped fuel record growth of ESG (Environmental, Social, and Governance) investing, the backlash against both has been intense. But for George Serafeim, one of the foremost academics studying stakeholder capitalism and ESG, that’s a good thing.
As he writes in the introduction to his new book, “Purpose and Profit,” Serafeim spent much of his career trying to even bring the topics up for debate. In 2011, a year into his tenure as professor at Harvard Business School, he gave a presentation on the subject to an audience of about 100 “senior investment professionals across major financial institutions.” The feedback? Non-financial metrics are irrelevant. Friends, he remembers, told him that he was stubbornly sinking his academic career with the topic.
But he was convinced of his research’s findings of a link between companies’ dedication to purpose-driven, long-term, stakeholder-driven investments and market outperformance of their peers. As his research grew, it also caught the momentum of shifts in society that soon led to a massive shift in how he and his work were received. He founded and still leads the Impact-Weighted Accounts Project at HBS, which oversees and promotes an evolving framework for measuring the business impact of non-financial metrics relevant to executives and investors alike.
His new book draws on that research, as well as his experiences teaching future business leaders in the “Reimagining Capitalism” class he’s co-taught with Rebecca Henderson. We spoke with Serafeim from his office in Cambridge about his career, where he stands on the debates around Tesla’s ESG scores and Danone’s struggles with living up to stakeholder capitalism rhetoric, and why he’s hopeful about the future of business.
The following transcript has been edited for length and clarity.
Your book covers different aspects of a movement that’ve been evolving over years now, but would you say that what it comes down to for you is impact-weighted accounting principles? Is that a core path to progress?
I think it’s a core path to progress, but it’s not the only piece. The “why” rests on understanding the interconnection between the ideas of accountability, transparency, and meritocracy.
As a society, do we want the people that manage not only financial capital, but also human, natural, social, and intellectual capital, to be accountable for their impact on all of those elements? That’s the only way to have actual meritocracy.
And so, if we do want to have a system where people are held accountable for their impact on the environment and society, then we should have an accounting system that reflects those impacts, as well.
What would you say is the current state of progress on those principles, in terms of conversations you’re having with corporate leaders?
Broadly speaking, measurement and accountability around operating impact is a process that started decades ago, and I would say has fundamentally accelerated in the last 10 years, especially so in the last few years. You see that with the creation of SASB and the increasing adoption of its standards, for example, the adoption across dozens of countries around the world of listing requirements and guidelines for ESG reporting, the creation of the International Sustainability Standards Board, and so forth.
So the question is how do we actually move forward? We take all that work on non-financial metrics and focus on what matters, which is the measurement of outcomes instead of effort, and then the valuation of those outcomes. Because if you don’t have valuation, then it’s very hard to make resource allocation decisions when those resources are scarce. You need some type of prioritization mechanism.
Is Tesla ESG Friendly or Not?
We’ve been seeing, especially over the last year or two, that there are so many ways to interpret what ESG is even going to mean. For example, in your book, you cite multiple times the example of Tesla leading with purpose around climate impact, but on the other hand, you have its CEO Elon Musk constantly saying ESG is stupid and a movement that can’t work. He’s pointed specifically to S&P docking Tesla from its main ESG fund for “S” reasons while a fossil fuel company like ExxonMobil can make it into an ESG fund. JUST Capital has dinged Tesla for some of the same reasons in our Rankings. Where do you stand on this?
That discussion goes to how one creates an ESG analysis framework and what relevant measurements, attributions, and prioritization it has.
So on the one side to me, it’s certain that Tesla has really moved forward not only itself in displacing internal combustion engine vehicles, but it has really accelerated movement across the whole industry. From there, if you ask the question, if this company grows, will its positive impact grow as well? I think the answer is yes.
Now, if you have a framework where it says that’s good, but look at some of the governance concerns, look at some of the work practice concerns, then you get a company that might have a bunch of controversies and be excluded. You can see how you can get two very different outcomes, but I can actually see why somebody like Elon Musk would be very frustrated if a best-in-class framework ends up with a portfolio that includes an oil and gas company and excludes Tesla, where he would be like, “What are you talking about?”
Tesla is certainly a firm that I would include in a sustainable investing portfolio. While they need to work on the “S” and the “G” sides, the potential impact of the “E” effect seems to me to be an overwhelming one.
So you think Musk has a point that we might be losing sight of the ball if an ESG framework is leading to them being penalized?
I think he has a point that we should be clear about our priorities. And I believe that valuation is a very, very important element of that, because it allows us to be much more clear about which impacts should be prioritized over the long term. Now, that doesn’t mean that you should say, well, because you are having a big environmental benefit, you can have terrible everything else.
What Does the “S” Even Mean, Really?
Looking at the “S” specifically, at JUST Capital, we’re trying to help bring clarity to that because it is all over the place. We know, for example, that there is popular support for DEI initiatives and pay equity, but then the challenge becomes how to measure the impact of a company that says it is investing in diversity or has achieved pay equity across demographics. How can you take something that has popular stakeholder support and tie it to a direct financial impact that will allow us to evaluate companies in a new way?
When it comes to the impact on employment, we use wages as the evaluation mechanism. We start by asking the question, “Is this a company that is creating a lot of jobs?” Jobs have inherently huge social utility. And then we also ask how good those jobs are. We ask, for example, if the company is paying a living wage across locations, and if there is equal pay. We then ask whether there’s a diverse set of people working at the company relative to the local demographics, and if there is opportunity and career advancement inside the organization.
Wages can be a mechanism by which you can unify all of those seemingly different elements. They have unique characteristics but all connect to whether you’re getting paid.
So is the way you see it that the “S” is unified through wages and then a core benefit of it is stability of the company, a resiliency, maybe?
It’s about stability, but not just about people staying there, because sometimes that can be a negative thing. It’s about attracting the right people and keeping the right people, but also growing them inside the organization.
What We Can Learn From Emmanuel Faber’s Ouster
In your book you include a discussion of the Danone board’s dismissal of Emmanuel Faber as CEO last year. That move could easily be seen as a catastrophic failure for stakeholder capitalism because he was an icon of the movement. Can you tell me how you processed all of that?
Let me start by saying that indeed Emmanuel is very purpose-driven personally, and he’s a fantastic leader.
The narrative that you would have gotten from the media is that Danone is an impact company and it faced a lot of pushback because the financial results were not good. You connect the dots and it becomes the story of how being an impact company was detrimental to its competitiveness and affected its financial results.
But we took a step back and we used impact weighted accounts to assess the first part of that narrative. We asked if, within consumer good companies, it was a positive-impact company or one that was in the transformation of potentially getting there but isn’t there yet. We found it was the latter.
You wrote that you found General Mills actually outperformed it on several sustainability metrics.
Right. So now, if you’re going to write an article, it’s not that Danone is struggling because it is a positive-impact company, it’s because it is having financial challenges.
In order for us to be able to understand all of these things at a much deeper level, we need to be able to make an assessment of the first statement, about whether it’s a positive-impact company, because the second statement, on whether it is financially healthy, we can make very well. We have a financial accounting infrastructure that allows us to look at it and say whether this company is delivering on return on capital.
You cannot say a company is having a positive impact because of its pronouncements around what it wants to do.
Hope for a Bright Future Beyond the Backlash
Are you concerned about the growing pushback around ESG and stakeholder capitalism? And on the flipside, what are you most hopeful about?
The pushback is a good thing. There are valid criticisms in there, and I have written many of them when it comes to metrics and measurement. Valid criticisms are actually improving you, much like when you’re an athlete – if your coach is always telling you’re doing everything right, you’re never going to improve.
But even when those criticisms are invalid, the fact that they exist is a good thing, potentially. It’s a sign that ESG is having real impact. I remember a time when nobody wanted to talk about ESG because it was irrelevant, frankly. It was a very niche topic that wasn’t really affecting an organization’s ability to attract talent, or compete, or attract capital, and so forth.
I wouldn’t say that I’m concerned, and I would say that I’m more on the hopeful side that there is a tremendous amount of talent that is going into the broader ESG space. It’s all about how we can have an economy in which people feel that they can bring their own individual purpose to their workplace and that they feel that they have the agency to create change within an existing organization, as entrepreneurs in organizations that they create, and as allocators of capital.
There is a tremendous amount of energy, I can tell you that. I have the pleasure of observing hundreds of young business leaders every year from my position at Harvard, and I have witnessed a tremendous amount of enthusiasm to exercise that agency and ask themselves, “How can I have more impact throughout my career?”
Depending on how you prioritize and define your theory of change in terms of impact, you might want to join organizations that are perfectly aligned to begin with, or you might want to join organizations that are not perfectly aligned but where you could create change. What makes me very excited is that if we can create more transparency in the system around those impacts, more and more talented people are going to be able to unlock their innovative and creative capacity in that whole space. And I think that is extremely important.
With inflation in the United States at 9.1% in June, the highest level since November of 1981, it would seem counterintuitive to invest in wages right now – but that’s exactly what some companies are doing. And, when looking at our latest polling and historical data, it’s not only a popular decision, but a savvy one.
As we approach the end of summer, we’re in a particularly interesting economic moment. Economists, investors, and analysts are hotly debating whether or not we’re on the brink of a recession or even already in one, and the tech industry has generally taken a significant hit. For the average American family, high gas and grocery prices are stretching paychecks. But we’re also seeing Americans continue to benefit from a very tight labor market and leverage their influence over current or existing employers. With all of this in play, it can be confusing to get an assessment of how Americans are experiencing it.
We turned to our Survey Research team to get an idea. Due to the timeliness of the data, we’re previewing here our upcoming intensive polling report on worker issues in America. Drawing from a diverse pool of Americans, we found in June that large majorities are looking to corporations to meet the challenge of inflation through investments in their workforces.
What Americans are expecting from the country’s largest corporations
The survey found that 87% of Americans say large U.S. companies have a responsibility to regularly increase wages to keep up with the rapidly rising cost of living, and 84% believe companies have a responsibility to pay full-time adult workers in frontline jobs enough to make ends meet.
Digging deeper, we had respondents compare two hypothetical companies – one that increases wages above the rising cost of living, and another that increases wages but at a rate that is less than the cost of living. The company that provides the real raise in wages was rated by vast majorities of Americans to be:
Taking this into consideration, it’s important to recognize the difference between nominal wage increases, those that are unadjusted for inflation, and real wage increases, those that are. As the U.S. Bureau of Labor Statistics reported last month, average weekly earnings may have risen 4.2% from June 2021 to June 2022, but real weekly earnings decreased 4.4% in that same time period.
Two recent examples can show how this plays out. In May, Bank of America announced that it was raising its minimum hourly wage to $22 from the $21 hourly wage it had previously announced in October 2021. For hourly workers, wages increased by 4.8%, but when adjusted for inflation, there was a real wage loss of 0.9%. Back in March, Santander Consumer USA Holdings also raised its minimum hourly wage, for a 16% increase to $20. Adjusted for inflation, this was roughly a real wage increase of 6%, meaning Santander lifted wages beyond the level of inflation.
How companies are already responding
With the debate continuing over the contribution wage increases are making to inflation, any wage increase at this moment is still a strong signal to existing and potential employees, from low wage to high wage earners, that the company is invested in them.
Over the past few months, companies like Walmart, ExxonMobil, Microsoft, and T. Rowe Price have raised wages, offered higher bonuses, and increased benefits, with some specifically citing the challenges of inflation.
This approach not only benefits workers who may suddenly find themselves struggling to maintain their cost of living, it’s smart business. There is a wealth of peer-reviewed research over the course of years that has found both that investments in workers’ wages and benefits can lead to higher productivity, and, perhaps even more importantly in this economic moment, while estimates may vary it is commonly understood that the cost of replacing a worker is significantly higher than what it would take to retain them.
As the economic story unfolds JUST Capital will continue to track inflation’s impact on American workers and how large corporations are responding.
For the past two years, the Securities and Exchange Commission under chair Gary Gensler’s leadership has pursued bringing clarity to the ESG (environmental, social, and governance) investing movement as billions of dollars increasingly flowed into funds with the label, and as executives made it a go-to term in earnings calls.
Last June, the SEC took into consideration a range of factors on what standardized ESG reporting, similar to what is already in the European Union, could look like for the United States, and JUST Capital weighed in. This March, the commission finally released a robust set of disclosure standards around the “E” and voted to make them open for public comment.
At JUST Capital, we have supported the standards because, put simply, there is overwhelming demand not only from investors for such standards, but from all stakeholders. ESG has become a buzzword for companies and fund managers, but our analysis has shown the tremendous lack of transparency around these issues, and even for the companies that disclose the most, their data is often reported in a way that makes it difficult to compare. In the comment that we submitted, we point to our latest data that shows why we believe these reporting standards would benefit investors and the market as a whole.
Of course, there has also been backlash. Republican politicians have argued the SEC is overstepping its jurisdiction with the proposal, and Nasdaq came out ahead of the deadline, June 17, to argue it would be an unnecessary and costly burden on companies and investors alike.
The SEC is about to embark upon an intensive review session where it will consider both friendly and hostile critiques, in order to determine which elements of its proposal will become policy and which may be adjusted or removed. You can see where we are coming from in our submission is below, addressed to SEC Secretary Vanessa Countryman.
Dear Ms. Countryman:
JUST Capital welcomes the opportunity to comment on the U.S. Securities and Exchange Commission’s (“SEC” or “Commission”) proposed release, The Enhancement and Standardization of Climate-Related Disclosures for Investors, Release Nos. 33-11042; 34-94478 (“Proposed Rule” or “Release”). We appreciate the Commission’s ongoing efforts to modernize corporate reporting and improve the overall quality and utility of disclosures provided by issuers to the investing public, including critical information to understand and assess the risks and opportunities presented by a rapidly changing climate.
In our view, the Proposed Rule represents an appropriate step toward ensuring investors have access to high-quality, decision-useful information, consistent with the Commission’s tripartite mission to protect investors, ensure fair and efficient markets, and facilitate capital formation. Accordingly, we are pleased to support the Release and provide data and insights from JUST Capital’s work that may be productive as Commission staff finalizes the rule.
JUST Capital is an independent nonprofit, co-founded and chaired by Paul Tudor Jones, that inhabits the intersection of business, finance, and civil society to build and support a more just market that works for all Americans. As part of its efforts toward fulfilling its mission, JUST Capital has surveyed over 160,000 Americans through our annual survey to identify which issues they believe U.S. companies should prioritize. We then rank Russell 1000 companies across these issues, grouped into five stakeholder categories: Workers, Communities, Customers, Shareholders, and the Environment. As part of this process, we collect more than 250,000 data points each year across the Russell 1000 index to understand and assess how well the largest publicly traded U.S. companies perform on these criteria; the top 100 companies are featured in our annual JUST 100 Rankings. We also use the data and results to promote the investor case for just investing through our product, data licensing, and index partnerships, including powering the JUST U.S. Large Cap Equity ETF (awarded the Bronze Morningstar Analyst’s Rating in 2021) and the JUST U.S. Large Cap Diversified Index, providing data-driven interactive tools and market insights, and identifying the tangible steps companies can take to create greater, shared value for all stakeholders, including investors.
JUST Capital’s research shows clear public demand for standardized data more generally, and higher-quality climate data in particular.
The strength and stability of the U.S. capital markets system largely rests on the availability of high-quality, decision-useful information investors rely on to understand and assess a company’s business, risks, and prospects, in order to make critical decisions about how and where to direct capital. This broader allocative function ensures the efficient movement of capital to its most productive use, while lowering the cost of capital for firms that are best able to mitigate risk and seize opportunities to effectuate superior performance. It is thus critical that this information remain reliable, clear, comparable, and decision-useful.
JUST Capital believes that mandating disclosure on environmental performance through a standardized reporting structure is necessary to accurately assess the financial impact of companies’ actions on investors, including the quality of a company’s financial positions and results in light of their relative preparedness for climate change and the transition to lower-emissions energy strategies.
Data collected and published by JUST Capital in February 2022 supports this view. According to our survey research, 90% of Americans say it is important for companies to have common reporting standards, while 86% support federal requirements for corporate disclosure on climate metrics specifically that would standardize reporting and analysis across companies and/or industries. Our research found 87% of Americans agree it is important for companies to disclose greenhouse gas emissions. Further, two-thirds of Americans believe that companies can have a high or moderate impact on climate change by tracking and publicly reporting their progress on climate goals. JUST Capital’s stakeholder research further shows an increasing interest in corporate climate stewardship among the American public, with 60% of respondents stating environmental issues are more important to them in 2022 than they were in 2021.
U.S. public issuers currently report some Scope 1 and 2 data, but Scope 3 emissions disclosures remain elusive.
Despite Americans’ support of federally mandated corporate disclosure, our research shows that just companies have a long way to go. Today, only 10.6% of Russell 1000 companies have made commitments to achieving Net-Zero greenhouse gas emissions in their operations by 2050. According to our recent report detailing the state of environmental disclosure, 57% of companies currently disclose Scope 1 and 2 emissions, but only 10% report Scope 3 emissions from sold products, 30% report emissions from business travel, and less than 14% disclose criteria on air pollutants including nitrogen oxides, sulfur dioxide, and particulate matter. Of all Russell 1000 companies, more than one-third did not disclose any of the 13 environmental metrics we track.
By mandating climate disclosure, the SEC’s proposed rule will make it increasingly possible for investors and other stakeholders we serve to accurately assess whether companies are on the correct trajectory to meet their targets, ensuring that management is effective in deploying investors’ capital and that boards of directors are providing strong risk oversight to protect shareholders’ interests. In our rankings data, companies with lower environmental impacts outperform their peers: companies scoring in the top quintile realized total returns of 3.96% over the trailing year, versus -1.47% for the lowest quintile.
The lack of clear, consistent, comparable, reliable, and decision-useful issuer climate disclosures creates substantial costs for investors and other market actors, including data providers.
As noted above, JUST Capital’s mission depends on the collection of high-quality data that is used to power investable products, market insights, and index partnerships. Accordingly, JUST Capital employs a team of data scientists to collect and analyze corporate disclosures across a wide range of sources, including issuer regulatory filings, corporate social responsibility and sustainability reports, corporate websites, and other media. Still, it took a team of two skilled data analysts over 420 hours to collect data across 25 environmental metrics at 1,112 companies. Smaller retail investors may not have the resources – in time or money – to devote to finding the data, while professional investment managers may pass these costs on to clients. We believe better standardization of data could mitigate many of these transaction costs, ultimately lowering costs for investors and freeing up more capital to deploy into the markets.
We appreciate the opportunity to provide the Commission with our views. If you have any questions, or need anything further, please do not hesitate to contact us.
Sincerely,
Martin Whittaker
CEO, JUST Capital
Investors and regulators are increasingly looking for greater transparency and accountability from corporate America on environmental, social, and governance (ESG) issues. The U.S. Securities and Exchange Commission’s (SEC) recently proposed rules on standardized climate-related disclosures and ESG fund labeling come alongside a record amount of ESG-related shareholder proposals this proxy season. And these are moves that JUST Capital polling shows a majority of the American public across the political spectrum support – as partisan attacks on ESG continue to rise.
Against this backdrop, JUST was thrilled to welcome Cambria Allen-Ratzlaff to our team this week as our new Managing Director and Head of Investor Strategies. Cambria will be leading JUST’s investor stakeholder and financial markets strategy, cultivating industry partnerships and initiatives with key market actors in the asset owner, asset manager, and sustainable and impact investing communities. She comes to JUST from the $63 billion UAW Retiree Medical Benefits Trust, where she served as Corporate Governance Director and led the Trust’s global liquid markets portfolio corporate governance program and global proxy voting program.
Cambria has also co-chaired the Human Capital Management Coalition (HCMC) since 2013. The group of 36 institutional investors with over $8 trillion in assets under management works to elevate human capital management as a key driver of long-term shareholder value – advancing human capital on the SEC’s agenda and providing reporting guidance for companies among other efforts. Through this role, Cambria got to know JUST and followed our work from our very first poll of the American public to our recent analyses of human capital metrics disclosure.
We sat down with Cambria to hear her perspective on the growing focus on human capital in a shifting labor market, the future of ESG investing, and why it’s “becoming increasingly irresponsible” for investors to ignore ESG factors.
One of the topics we’ve been looking at closely is the evolving dynamic between labor and management over the course of the pandemic. Given your career, how have you been seeing it?
I’ll start with the investor perspective. That interest had already been growing among shareholders, but investors hadn’t really been vocal about how they were increasingly viewing human capital as a source of value creation in the firm versus merely a cost to be minimized. Unfortunately, we were seeing this posture toward the workforce play out in some of the companies we owned.
To us, this disconnect didn’t make sense, as the sources of value in companies – that is, the ways public companies create value for investors – has shifted tremendously over the past 50 years from property, plant, and equipment (a company’s physical assets) to intangible assets derived largely from human capital, which we define as the knowledge, motivation, skills, and experience of a company’s workforce. In 1975, intangibles accounted for less than 20% of the total market capitalization of the S&P 500. In 2005, seven years before we launched the Human Capital Management Coalition, we were already at 80%. Fast forward to 2020 – already, before everything shut down due to the pandemic, we’re now at 90%. And if you think of many of the types of companies that dominate the list of the largest companies in the U.S., you’re looking at companies where nearly the entire value of the company comes from intangible assets. So if human capital constitutes most or all of many of our largest investments, and we rely on the returns from those investments to pay workers’ pensions and healthcare, the relative success or failure of a company to manage its workforce well is going to matter to us. A lot.
Unfortunately, if investors aren’t vocal about what they want and what they expect from companies, it’s just not going to happen. In the U.S. markets, shareholders still reign supreme at the firm, and if investors and the market infrastructure around them are saying, “Hey, we want you to focus on quarterly returns,” then that’s what you’re going to get. You don’t study what’s not on the test, right? And the investor voice was the one that was missing here.
At the same time, we realized that the lack of information coming out of companies about how they were managing their people meant that we needed to better understand what was happening at our portfolio companies. How is management actually managing their talent?
So we took the time, and in 2017 filed the petition for rulemaking with the SEC urging higher-quality information on human capital metrics, policies, and processes as a way to jump-start the conversation on a regulatory level, as well as publicly state the investor case for why good human capital management is critical to investors and the overall economy. Ultimately, those efforts, along with those of other investors, members of Congress, the SEC’s own Investor Advisory Committee, and numerous other stakeholder groups, led to broader engagement on human capital. Really, we were educating the market and asking some pretty basic, commonsense questions.
And then COVID hits. Some folks – those who have jobs that can be done remotely, and that are traditionally higher-paid – are home and, faced with this very real and visceral reality of a pandemic, are thinking about whether their current work is truly working out for them. You have people working in health care, many of whom had already faced staffing reductions that were increasing workloads, increasing health and safety risks and stagnant wages, and now they’re basically our front line. We don’t make this through it without them. And then you have the other “essential workers” – the people who have been working in low-wage, low-agency jobs – but jobs that provide us with food and critical supplies. And many of them are working with limited or no access to PPE. And finally, you have folks who are out of work altogether, many of whom were also working low-wage, low-agency jobs. So COVID has created this massive shock to the economy and our entire social fabric, and now we’re beginning to expect more out of our employers.
I don’t have data for this – I’d love for JUST to do this – but my guess is that companies that always treated their employees well have performed better during the pandemic on a number of workforce factors like retention – which translates into financial performance – than companies that were “low-road” employers. Either companies were prepared in that way or they weren’t. I’d imagine a lot of this has been a huge driver of the so-called “Great Resignation.”
Where do you see ESG investing headed? Do you think ESG is going to remain a niche investing strategy or become the norm going forward?
We’re certainly at an inflection point, and I think what we’re seeing is just a lot of frustration all-around. We need to make sure that investors are front and center and talking about this, and that incorporating information that may look novel to some traditionalists into the investment process is just a normal part of the process. They’re probably doing it already, and there’s really nothing special about it. In fact, it’s increasingly irresponsible to ignore these factors.
If you’re a bond analyst, for example, and you’re looking at utilities and not looking at environmental factors that could impact the performance of that utility in the context of risk, you’re probably not a great bond analyst. If you’re an asset manager focusing on oil and gas companies and you decide that you’re not going to incorporate climate risk analysis in, say, trying to understand whether the valuation of long-lived assets is reasonable or not in deciding between allocating capital to OilCo A or OilCo B, I don’t know if I’d want to leave my money with you. Probably not.
When folks typically use the term “ESG,” I think they’re really thinking more about the “E” and the “S,” and the conversation seems to have really forced a broader group of people to really focus more on the externalities – really, how does a company behave in the business environment in the face of all of these risks (and opportunities). It’s data that should go into analysis. It’s like, “OK, companies, are you going to have stranded assets in the future? The asset you say is going to be worth something in 40 years, if it’s underwater in 10 because of increased flooding, then it’s not worth anything to us.” We need that information to be able to make decisions. When we all took Econ 101, what was the textbook example of an externality? Pollution. Why? Because pollution creates costs that are not always borne by the producer, and there can be major financial risks associated with this. So what’s the issue?
I think that ultimately that perspective will prevail. Will people keep using the term ESG? I don’t know. You can argue that some people don’t like “sustainable investing,” some do, and some people don’t like “responsible investing,” some do. Perhaps we need a better and shared sense of what ESG means.
The world is not the same as it was 50 years ago. The sources of value are not the same. The risk profile is completely different. Technology was not as advanced, and the internet wasn’t a thing. So why would we cling to the past when the whole point of investing is to make informed decisions about what we expect will happen in the future?
What role would you like JUST to play during this inflection point?
One thing that I love about JUST is really leaning in on the workforce data and having a better understanding of what companies can be doing to create value for shareholders through investing in their workforce. It’s also being able to operationalize a lot of that data JUST is collecting and making sure that it is matched with where the demand is from the investor/owner perspective. That’s one of the main reasons I found JUST so attractive, and I feel coming from an asset owner background I’m bringing in that perspective.
I’m thinking about ways that JUST can really be a leader among asset owner and asset manager communities, and continue to raise JUST’s profile and just educate a broader group of investors and stakeholders about who we are and what we bring to the table.
When Jack Welch retired as chairman and CEO of General Electric in 2001, he ended a 20-year tenure that took GE from a valuation of $14 billion to $600 billion, making it the most valuable company in the world. Over those two decades, his brash management style, ruthless cost cutting, and creative financial engineering set a new standard for what a CEO could and should be. Fortune captured popular sentiment across corporate America when it named him “Manager of the Century” as he transitioned into retirement.
Two decades later, in a moment when American business is increasingly rejecting business norms of the past 40 years, New York Times writer David Gelles is arguing that we should reconsider the legacy of what he deems the single most influential corporate leader of that era. The title of his book pulls no punches: “The Man Who Broke Capitalism: How Jack Welch Gutted the Heartland and Crushed the Soul of Corporate America – and How to Undo His Legacy.”
Given our focus on guiding corporate America toward a stakeholder capitalism model supported by the majority of the public, we were of course interested in Gelles’ argument. We sat down with him to discuss why he thinks Welch’s career, and the norms he established, were so harmful to the country, and how exploring that story can illuminate the path we should instead pursue.
The following transcript has been edited for length and clarity.
When I first saw the title, I thought, “Oh wow, that’s a hot take, putting this all on Jack Welch,” but I did see as I was going through it, that OK, I see your point and the tremendous influence that he had and how he fit into this. But you also recognize that there were so many different factors – philosophically, politically, legally, societally – that went into this shift that we saw in capitalism and developing a new norm for corporate leadership. Can you give me your overview of where Jack Welch fit into all of these different factors that reshaped the way we do business in America and then the world?
Well, as you acknowledge, the moment right around when Jack took over was a period of immense change in the American economy and the global economy at large. There’s no doubt that the last two decades of the 20th century were going to be a heck of a lot different than the 50 years that came before, but there’s a difference between ideas and action. You alluded to some of the philosophical and economic and ideological changes that were afoot, in the form of some of the Friedmanites and the Mont Pelerin Society, people reevaluating the role of business in society, those questioning Keynesian Economics.
But it was only when Jack took over GE that we actually saw what that ideology looked like in practice. He was the one with his singular mix of ambition and a sense of impunity, and control of one of the largest and arguably the most influential company in the country. He was able to not only radically transform and reset norms at GE, which was this standard bearer, but because of that influence, also bring the rest of the economy along for the ride, essentially setting a new standard by which CEOs and executives were evaluated.
When you’re looking at this period leading into the ‘80s, you had stagflation and you had the rise of globalization. Clearly the preceding singular moment of what could be considered a “golden age of capitalism,” that was always going to be temporary, along with America’s role in the world during this postwar boom. Companies and business in general could seem great for those that were actually allowed into that sphere, but things were changing and had to change. Was there a moment where things started to correct too much or swing too much to the other side?
Jack recognized that things needed to change, but I argue that he radically overreacted. And if it was the case that companies did need to become less bureaucratic, less thick with middle management, his solution was simply to fire people en masse. If it was the case that American industry was inevitably going to begin outsourcing, he went whole hog. He went and started putting factories on trucks and sending them down to Mexico as quickly as he could. It’s important to remember that while we’re talking about these large abstract economic forces, ultimately what we’re talking about are the decisions made by certain men and their effects on real people.
And when I think about it in those much more human and practical terms, it’s easier for me to entertain a counterfactual and imagine a world where yes, Welch made a company like GE more efficient, but he did it without laying off 120,000 people in his first three years.
He didn’t do that because he had to, it was not because the company was unprofitable – GE had just recorded a billion dollar profit the year before – but because he wanted the company to be more profitable. He wanted to boost the EPS [earnings per share] and thus began the game that unfortunately so many companies and CEOs are still playing, which is just this exercise in trying to do whatever they think Wall Street wants to see, to keep the stock price going up. That, sadly, is the world we still live in today,
A quote of Jack’s from his retirement, and it was even in Lynn Stout’s “The Shareholder Value Myth,” is when he said, “shareholder value is the dumbest idea in the world.” How did he square his worldview with that statement?
The context of course, is that through his actions, Welch became essentially the apotheosis of the CEO who seemed to be obsessed with shareholder value above everything else, and he made statements to this effect during his time as CEO. In his autobiography, he effectively parrots Milton Friedman and says, “The purpose of a business is to increase its profit.”
When the Wall Street Journal asked him what he was most proud of upon his retirement, he said that making GE the most valuable company in the world. This was a guy who throughout the course of his career was relentlessly focused on the stock price and did everything he could to drive it upwards. Then there came this moment in 2009, when in conversation with my former colleague Francesco Guerrero at the Financial Times, he said shareholder value is the dumbest idea in the world.
That to me was one instance, but by no means the only one, of his grand campaign to shape his own legacy in retirement. And by that point, because of the financial crisis, I think it was clear to him, even if he might not say it in such stark terms, that an economy that focused on shareholder value above all else was having a hell of a lot of problematic consequences in the marketplace. I think we can look at other statements he made in retirement and also take them with a grain of salt. He tried to refashion himself as a management guru who prided himself on his emotional intelligence, and you can ask just about anyone who worked closely with him and that’s not the terms in which they’d describe Jack Welch’s management style. He understood that people would be assessing his legacy and I think this was one example where he tried to maybe walk back some of his most nefarious contributions to the economy we live in today.
There’s a section in the book where I was familiar with a lot of the stories in isolation, but when they’re brought together, it was striking that when you follow all of his acolytes’ later careers as CEOs, inevitably the majority of them just tanked the companies they were leading when they tried to mimic Welch’s management style. Going back to Welch himself – let’s take a hypothetical situation where he doesn’t retire and doesn’t age, and stays on as CEO beyond 9/11 and goes through the financial crisis and its fallout. Would GE still have crumbled under him the way it did under his successor Jeff Immelt, or did he have a magic ability to keep everything under his spell, essentially?
These are great thought experiments. I recently had an almost identical conversation with Andrew Ross Sorkin. Andrew believed that Welch did have a unique ability to read the moment in a really special way, and believed that given the opportunity, Welch might have been able to meet the moment, in a way that Immelt didn’t. We won’t know, but what I would say, is without knowing exactly how Welch would’ve navigated the 2000s, it’s important to note that some things that were fully out of his control changed right around him, notably, Sarbanes-Oxley, and it was right after he handed the reins to Immelt, that all of a sudden you have Enron, WorldCom, and Tyco.
The result of that is investors, analysts, and regulators taking a much, much closer look at exactly what’s going on inside these big, complex companies, especially ones with big, complex financial operations. Immelt talks about the fact that after Sarbanes-Oxley, all of a sudden, there’s a whole lot more scrutiny. It became much harder for GE to do that earning smoothing that it was so famous for and that plenty of executives acknowledged that they did during Welch’s heyday. (Plenty of people pointed this out – Bill Gross goes off and essentially questions GE’s trustworthiness.) But in 2009, GE settled with the SEC over sweeping accounting fraud charges, for the years just after Welch retired and they made clear that under the scrutiny of serious contemporary financial diligence and regulation, [its financial arm] GE Capital just couldn’t hold up.
When you explore the financialization of corporate America, it almost seems a bit bizarre being like, “Well, what are these companies even existing for anymore?” It seems so far away from a company’s purpose. Was that also an inevitability, or is this only an extreme extension of a philosophy?
Well, I think you used such an important word there, which is “purpose.” This is a book about a man, but it’s really a book about a system. And to me, the system has changed, because the way executives think about the purpose of a corporation has changed and if we take it back to the “golden age of capitalism” or whatever you want to call it, and compare it to potentially whatever we’re getting closer to now with the emergent stakeholder capitalism, Robert Wood Johnson and Larry Fink would agree that the purpose of the corporation goes well beyond making a profit.
When executives and we as a society think about the purpose of our corporations as contributing broadly – making quality goods and services, but also paying workers a fair wage, contributing to communities, and taking decent care of the environment and their supply chains – that leads you to one set of outcomes. Understanding the purpose of a corporation to be like a game, where you maximize profits with whatever tools you happen to have, is going to lead you to another set of outcomes.
Leo Strine has always been such an interesting figure to me, because his writings both establish in Delaware law that a corporate board’s decisions must be made to benefit shareholders and that if they’re not doing that, they’re not upholding their responsibility as a corporation, but he has also come out as one of the biggest proponents of stakeholder capitalism. As you’re considering these structural shifts, how are you squaring those elements?
What law? There’s no law that says companies have to maximize short-term shareholder profits.
Well, it’s the responsibility to shareholders in the sense of creating value for them.
Fine, but that definition leaves room for wide interpretation and one of the great cons of the last 40 years has been the perversion of that statement into the belief that the responsibility of CEOs is to maximize short-term shareholder profits, often in the form of return of capital programs, which is garbage. That’s not the law. The law serves as a necessary, but obviously insufficient and extremely vague guardrail, to say companies should not flagrantly destroy value, they can’t be burning money.
And sure, in extreme cases, you might argue that a company could be willfully destroying its value, but when a company is investing in research and development, when a company is paying its workers good wages in an effort to retain them and have a strong, committed, and loyal and stable workforce, I don’t see how that can possibly be interpreted as somehow destroying shareholder value.
Yeah, I guess I teed that one up for you, because that’s essentially where we’re coming at it, too! Something related to all of this is where ESG [environmental, social, and governance investing] is headed. Under Gary Gensler, the SEC is very clearly working to reduce and also police “greenwashing.” The movement has definitely progressed significantly in the last few years. How do you see it tied to everything we’ve been talking about?
Oh, we have a story on the front page today about the backlash against ESG.
It’s begun. Something has shifted in the business world over the last, call it seven to five years. The emergence of stakeholder capitalism or conscious capitalism, the arrival of ESG, CSR [corporate social responsibility], DEI [diversity, equity, and inclusion] – the acronyms that are trying to signal that companies are looking out for more than their bottom line. All of that amounts to a meaningful shift in the posture of big business and I think that will endure. Not because I believe that CEOs are woke and Trojan Horse progressives trying to implement AOC’s worldview on the world through their corporations, but because I think a lot of employees, especially younger employees, actually expect their companies to stand up for causes they believe in and to represent their values.
Now, that’s not going to mean every company takes the same position. And big companies especially, there’s going to be a vast diversity of views inside, and that’s where you get to these tricky damned if you do, damned if you don’t situations for CEOs. But beyond the most extreme culture war flashpoints that many CEOs have to deal with, the enduring parts of stakeholder capitalism and ESG I believe are going to be some of the things I’ve been talking about throughout this conversation, which is a recognition that corporations need to take better care of workers than they have been on the balance for the last 40 years. That means in practice paying marginally better wages, improving benefits, and increasing the amount of upskilling that’s available. You already see many companies doing this, because they see it’s in their self interest.
It’s a competitive job market all of a sudden, and they need employees who are going to be loyal, engaged, and able to keep up with a changing environment and changing technology. I think it also means, whether or not Republican lawmakers and state treasurers may appreciate it, an enduring commitment to climate action. Hundreds and hundreds of companies have now pledged to go net zero by 2040 and I think thousands have said they’ll do it by 2050. That alone isn’t going to solve the climate crisis, but it signals that executives, corporations, boards, investors, and real institutional capital are recognizing the gravity of the challenge ahead of us when it comes to dealing with climate change. I don’t think even the backlash that we’re starting to see from Republicans right now is going to change that.
To me, there are parallels between this and the rise of shareholder primacy, in the sense that even when Friedman and others first started writing about this in the ‘50s, for example, it was laughed off as extreme or unserious the same way that the birth of ESG and conscious capitalism and all of that could be easily laughed off 20 years ago or so by many people.
Shareholder primacy as an idea then later shaped regulations and politics, and now stakeholder capitalism is in a similar situation now. With shareholder primacy, it went to extremes very quickly. Do you think that there’s maybe a scenario where some of the stakeholder-driven changes could be going maybe too far away from what companies should be focusing on? I often think of when they’re saying, “CEOs, we need to give them a stronger voice in society,” that seems to me, well, we’ve had that before and that’s not always been the best thing for our country!
Plenty of people would argue that we’re already there, and that’s where you see the backlash against “woke” capitalism. I understand the pressure that CEOs are under, to address some of these very contentious social and political debates, but no one elected them as our moral authorities. I don’t want to take my values advice from the CEO of McDonald’s! The whole part of this, of us looking to billionaire executives for sound judgment or a philosophical compass, it’s just laughable and that to me is indicative of what a polarized and unmoored society we live in today, where we don’t have political or religious leaders who could provide that kind of role for us.
But in the same breath, I think it’s important to acknowledge it’s really hard for them to ignore calls from employees, and customers in some cases, to get out there on these issues.
You made the point about how it was a long journey, to get from Keynesianism to the world where Jeff Bezos, Elon Musk, and Mark Zuckerberg control some ungodly amount of the wealth in this country, and the way I think about it is, it was a pendulum that swung over a long arc and I feel like we’re right at that moment where the pendulum is at that moment of pause, right before it comes back.
And if that is where we are, I’d be heartened, because it would suggest that maybe some of the worst excesses of corporations might be over, in some broad way, for the time being. But I can’t lose sight of the fact that if that’s the case, it’s also going to be a long journey to go back in the other direction. I think you rightly said that it happened gradually and then suddenly, when we were moving in the direction of shareholder primacy. I think it’s going to happen gradually with much resistance to the other direction, because listen, there’s enormous, entrenched economic interests that aren’t going to want some of the reforms we’re seeing. Republicans don’t want this to happen, so they’re going to lobby to quash it.
At the end of the book, you point to companies and actions that are heading in that new direction. One of your suggestions is getting worker representation on boards, and of all the suggestions in there, that to me seems the one that would have the most resistance to it in America. Do you actually see any movement there or is that more of a wishlist?
That is my wishlist in that part of the book, but listen, there are real policy proposals from elected Democratic representatives at the national level who are pursuing that and, as I point out, this is not a pipe dream. This literally happens today across the pond in Germany, at most major companies and in fact, it did happen here in the United States, when the head of the United Auto Workers was on the Chrysler board, even when Lee Iacocca was the CEO.
This is almost the most important thing for me: These are choices. We as a society get to choose how we run our economy, and it’s big and it’s messy and it’s a lot of people making different choices, but in the same way that there is no law that says you must maximize short-term shareholder profits, there is no law that says workers and employees don’t get a say in how the companies they work for are run.
I’m just encouraging people to have some imagination as we think about what we want the next 50 years of our economy to look like, especially as we take a real hard look at what the last 50 years have been like.
