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There has been a lot of talk this week about Tonga and the unexpected, rare eruption of an undersea volcano in the Pacific that seemed to catch everyone by surprise. Meanwhile, businesses have been dealing with their own tsunami of sorts: trying to figure out how to stem the tide of workers leaving their jobs. This week, the world’s largest investor, Blackrock’s CEO Larry Fink, in his annual letter to the companies his firm is investing in, touches mightily on the subject:
“Workers demanding more from their employers is an essential feature of effective capitalism. It drives prosperity and creates a more competitive landscape for talent, pushing companies to create better, more innovative environments for their employees – actions that will help them achieve greater profits for their shareholders. Companies that deliver are reaping the rewards.”
It’s well recognized that the growing labor crisis is real with an unprecedented 4.5 million workers quitting their jobs in December alone, leaving many companies without enough needed workers to maintain normal operations. As executives scramble to throw resources at the problem of attracting and retaining employees, including everything from increased contributions to 401Ks to unlimited vacation days to pet insurance, there is recognition that this could, at last, be an opportunity to deal with the more significant issues in the labor market, such as paying a liveable wage, closing the wage gap among different segments of employees, or offering paid sick leave. Even the use of contract workers is under review by many companies, as the higher turnover rate and the resulting business model and societal implications of relying on third-parties become better understood.
For values-aligned and ESG investors, these trends are worth taking note of. As Fink’s letter points out, combined with a growing body of industry data, focusing on employees’ well-being and satisfaction is simply good for business and for the bottom line.
News You Can Use
- Crushed your December performance review? So did the 2021 ESG and Sustainable Fund — outperforming major indexes and delivering strong and “competitive returns.” This comes on the back of a multi-year dramatic growth of capital flowing into ESG ETFs, and debunks claims that investing with both financial and sustainable goals is “concessionary.”
- Cost of recycled plastic has doubled in the last year, given the demand created by a wide range of companies like Coca-Cola, Nestlé and Danone that have pledged to increase recycled content of their packaging by 2025.
- State Street Global Advisors, one of the world’s biggest asset managers, updated its policies, requiring all companies in which it invests to have at least one woman on their boards to gain the firm’s support during the upcoming proxy season. This expands their previous policy, which only applied to investments in companies represented on major stock indexes, and signals a trend that more and more companies, no matter their market or size, will be expected to increase board diversity.
- In 2021, only 2% of all investments from US Venture Capital firms went to companies founded by women. When women teamed up with men, these companies received 15.6% of all capital raised last year. While the total amount of investment capital that went to women led startups increased, all-male teams received over 82% of all the VC capital invested last year.
- In an effort to topple the “pyramid effect”—where the number of women shrinks as one looks higher in the corporate ranks—a new non-profit named Journey has been launched. Anchored by 25 leading female executives, from Ariel’s Mellody Hobson to GM’s Mary Barra and Goldman Sachs’ Dina Powell McCormick, Journey will pair up-and-coming female executives with influential female leaders to give them the tools they need to (hopefully) break down many of the barriers that can hinder promotions and more diversity in the C-suite.
Siri, please explain “private equity”
The proliferation of Initial Public Offerings or IPOs, has been a big story over the last year, and frequently mentioned in previous issues of FWIW. IPOs represent that important moment in the lifecycle of a business when the “public” can buy shares of stock in previously private companies.
Why is this a big deal? Because this gives not only institutional and accredited investors the opportunity to participate in the potential upside of a company as it grows, but also allows you, the individual investor, to invest. And with the growing number of financial platforms (think Vanguard, Fidelity, and Robinhood), more and more people are buying shares (or even fractions of shares) in companies soon after they go public.
So what about private companies? You guessed it … private companies are private. The widest definitions would include every company that is not listed on public exchanges— from your favorite neighborhood nail salon to companies like Gallo Wine or Land O’Lakes. These companies don’t have the disclosure requirements of their public counterparts, making it harder for individual investors to assess the real investment risk. For this reason, the Securities and Exchange Commission only allows accredited investors to directly invest in these firms – effectively locking out the majority of individuals who don’t qualify under the accredited investor rules.
Since they cannot tap public markets, private companies often get the capital they need to grow from Private Equity (PE) firms. These firms pool together money from large investors, known as Limited Partners (LP), and buy shares in private companies. They charge their LPs fees and provide businesses in their portfolio with capital and expertise. The main purpose of PE firms is to increase the value of the companies they invest in. They make most of their money when a company they back “exits” — usually through a sale or by going public.
PE funds that make these investments have started to turn to public markets for their own source of growth capital, including Blackstone, KKR, Apollo Global Management and Carlyle Group. Yep, you got it … this is private equity turning to public capital for growth. When a PE company goes public — as TPG did last week — individual investors have a roundabout way to participate in the private equity market. Shareholders receive a cut of the fees – which sometimes run into the billions – collected by the firm from LPs.
Despite headlines that make one think that the Sorting Hat would immediately place everyone who works in PE into Slytherin, some companies (like TPG and KKR) have strong ESG track records, pushing many of the private companies they invest in to transform their practices and diversity leaders. For values-aligned investors, it is important to note that buying shares in these firms represents an investment in the parent entity, not in their specific ESG or impact funds or companies. Not perfect, but something to watch.
An apple a day …
At a time when CEOs say that retaining and attracting workers is their #1 challenge, paid medical leave can be a new tool to deploy as an added employee benefit for some companies. While hard to believe, in 2021 the US Bureau of Labor Statistics reported that only 33% of the lowest paid workers are able to earn paid sick days, as compared to 95% of the highest wage workers. This issue is even more critical in the middle of a pandemic that can require a worker to stay home or isolate for multiple days.
So, what is a values-aligned investor to do with this news? As just one of the many workers’ rights issues in focus during the Great Resignation (or as some are now calling it, the Great Reshuffle), paid medical leave can be used as a key metric for investors focused on a company's commitment to workers, in recognition (as noted above) that this can be good for business. Announcements of expansions of paid medical leave over the past two years could be good news to look for. Lists, such as Glassdoor’s Top 25 Highest Rated Companies for Vacation & Paid Time Off and JUST Capital’s searchable “benefit and work-life balance score” —which includes paid medical leave policies for each of the 954 companies they reviewed this year—could also be valuable resources on these topics.
Before you go -
After People Magazine named her as one of their people of the year, we started asking if Dolly Parton also might be the next spokesperson for “Profit and Purpose”! In the article, she says that as CEO, “I try to rule with love and compassion,” two traits that the CEOs we often look to for leadership may be wise to emulate.