By: Beth Parish Issue: Vision Section: Business
And Why It Will Help Society
Nor-profit organizations in the United States make money providing goods and services needed and wanted by the consumer (Madura, 2007), with the publicly traded company traditionally focused on using the profits to increase stockholder wealth. While a company has fiduciary responsibilities to the holders of its stock, companies are also frequently pressured by the stock analysts, public, television talking heads, financial journalists, and boards of directors to meet quarterly earnings goals, where the complex profit equation comes down to the simple concepts of income minus expenses. Potential investors may also use this simplified look at profits to evaluate the success of a company, choosing where to place their money based largely on the bottom line numbers.
With this singular bottom line focus, a greater reduction of company expenses leads to more profits being delivered to the bottom line, and greater potential to increase shareholder wealth, or at least so goes the argument. While reducing expenses sounds smart theoretically, in practice, expense reduction can happen in ways that have a significant human and profit impact. Derek Scarth, Managing Director of Inspire Capital Partners (Inspire) says that oftentimes when a large, stable, corporation announces a layoff or reduction in employee benefits or training, the company’s stock price often rises as the market anticipates the salary savings moving to the firm’s bottom line. Noting this trend, Scarth openly wondered, “As an investor looking to increase personal wealth, are we encouraging companies to fire people? As an investor, as a participant in the U.S. Free Market economy, is our vision of the world one that centers on maximizing shareholder wealth through collateral damage that includes layoffs and a view that employees are merely expenses of a firm, and not key resources that should be invested in?”
Long before the spread of the Occupy Wall Street movement started, where consumers and the general population challenged the greedy behaviors of traditional investment firms and corporate America, Inspire Capital founder Rick Wynn and his partner Derek Scarth knew that a traditional approach to investing failed to consider many of the of the profit-enhancing attributes of for-profit corporations. Focusing on the simple equation of income minus expenses and centering solely on the shareholder and his or her wealth, leaves out some of the most important aspects of what makes a business financially stable and successful. Wynn and Scarth—two renegades who have 30+ years of combined investment experience—have a vision of how they can positively impact the investment industry, and how investors and consumers can build and support businesses that are looking beyond the shareholder towards all of a firm’s key stakeholders, including the greater community.
Not ones to sit and complain about the greed of Wall Street, Wynn and Scarth went searching for businesses that delivered financial success, but did so through a systems-thinking approach where the firm itself was committed to creating wealth for all stakeholders—including customers, employees, and suppliers, investors, and the community—not just shareholders. Inspire’s investment strategy is supported by academic research from the Wharton School at the University of Pennsylvania, as well as empirical research from the Great Place to Work Institute and Bentley University.
A New *Inspired* Vision
Prior to founding Inspire Capital in September, 2008, Wynn had worked for over 12 years with large investment managers Putnam, Berger Associates (now Janus Funds), and Eagle Asset Management (now Raymond James Financial), where he managed both public and private equity portfolios. Unlike many of his investing peers, prior to working as an advisor, Wynn spent five years in the environmental and process instrumentation business with a venture-funded start-up. Wynn’s unique combination of corporate, public, and private equity experience gave him a unique perspective on firms’ success factors. He got tired of the market’s obsession with short-term earnings and drew on his experiences to develop an investment strategy that actually could enhance financial returns, while investing in more purposeful companies. After successfully liquidating the private equity portfolio he was managing for TH Lee, Putnam Capital, Wynn immediately founded Inspire Capital Partners.
Early on, he found important academic and empirical support for his new investment approach and made connections with thought leaders from around the world in various industries. Studies from these institutions provided the quantitative support for Inspire’s new investment mandate—those that have high employee engagement and satisfaction rankings and consistently generate superior risk-adjusted returns for investors. Sadly, Wynn’s timing could not have been worse. During Inspire’s first six months of existence, the market was down 40 percent and the Bernie Madoff Ponzi scheme had just hit the press. Undeterred, Wynn forged ahead, attracting additional thought leaders to support Inspire’s fundamental strategy. Wharton’s Alex Edmans and Amy Lyman, co-founder of the Great Place to Work Institute eagerly joined Inspire’s advisory board.
Wynn also became a regular attendee at the “Conscious Capitalism” conferences and was a participant in the 2009 Summit on the Future of the Corporation, as well as the 2010 Aspen Institute Summit, where he met with industry leaders to discuss the problems and possible solutions for investor short-termism. Wynn approached friend and former colleague, Derek Scarth to consider joining him at the company. Scarth accepted, and in August, 2010 they invested their own money to create an investment performance track record for Inspire. Now in early 2012, Inspire’s top-tier performance is proving out the theory—investors can earn superior risk-adjusted returns by owning purposeful, employee-centric firms.
Before joining at Inspire, Scarth spent over 12 years as an equity analyst and portfolio manager for several Denver-based investment management firms, most recently as a partner and portfolio manager for Denver Investment Advisors (DIA). Prior to that, he was the manager of investor relations for Newmont Mining, a large, publicly traded company in the S&P 500. In early 2010, Scarth left DIA, frustrated with the traditional investment industry model and longing to find more purpose in his career. Wynn asked Scarth to read Firms of Endearment and other research pieces that formed the basis for their investment strategy. And, in July, 2010 Wynn and Scarth began the process of taking Inspire from an investment concept to an operating investment firm. Eighteen months later, the company has fulfilled Scarth’s hopes—enabling him to find purpose through investing in and supporting purposeful, stakeholder-driven firms while simultaneously leading the investment management industry in much-needed change.
Companies That Have The Vision
Any consumer who has walked into a Whole Foods Market (NYSE - WFM) knows the store feels different from a traditional grocery store. This different feel may be a result of the stakeholder approach advocated by Whole Foods founder and CEO John Mackey. Mackey advocates that corporations should “create value for all of its constituencies” not just the stockholder. Focused on all stakeholders—the employee, the consumer, the community, suppliers, and the stockholder—Mackey grew Whole Foods from $290,000 in sales during the first year of operations to over $9 billion in sales during fiscal year 2010 (Datamonitor, 2011; Hamel & Breen, 2007). While total sales are certainly a measure of success, Whole Foods also topped the competition when measuring profit per square foot (Hamel & Breen, 2007).
Although the Whole Foods stakeholder approach may be familiar to both consumers and investors, there are several other examples of companies who are investing in employees, involved with the community, and considering suppliers as they take a systems approach to doing business and delivering a profitable bottom line. For example, looking at retailer Costco (NASDAQ - COST), Richard Galanti, the company’s CFO shared with Scarth and Wynn that investing in employees contributes to the bottom line. In the case of the warehouse giant, healthcare is just one example. Costco pays a higher percentage of employee healthcare costs than peers, but overall, pays lower healthcare costs per employee and experiences less sick time. Interestingly, Wall Street analysts have criticized Costco for years, saying that they are too generous with their employee benefits packages, based on traditional analysis of financial ratios. Costco executives, however, understand that this analysis misses the mark. Inspire does too—chuckling at the mentality of Wall Street’s short-sided research—but loving that it creates an opportunity for Inspire investors.
Inspire’s target companies, those that look beyond the shareholder and the bottom line, expand beyond U.S. consumer and retail firms. Another long-term Inspire holding is pharmaceutical manufacturer Novo Nordisk (Novo) of Denmark (NYSE - NVO). Discussions with Novo, the global leader in treatments for diabetes and hemophilia, have shown the link between purpose and profits. Novo integrates a stakeholder approach to their patient-centric business model, especially in their commitment to making diabetes care available globally, at prices that are affordable in every market. Novo incorporates a low-priced insulin strategy to those low and middle-income regions where resources are limited. This differentiated pricing model allows greater access to life-saving treatments around the world, and incorporates a pricing structure that slides. For example, Novo can offer insulin in underdeveloped markets at or below 20 percent of the average price of insulin in developed areas. This strategy is highly motivating to employees, as they experience a deep sense of belonging and purpose by working for the firm. From 2009 to 2012, Novo has been on the Fortune 100 Best Companies to Work For in America listing, and the company, or its global divisions, have appeared on the Great Place to Work annual country listings an astonishing 89 times.
Vision For The Investor
Individuals have a moral code by which they live their lives. This code can be influenced by family, community, schooling, religion, and associations. For many, this code has not influenced their investment choices. As Scarth says, “Often the investor has separated their money decisions from how he or she chooses to spend their life.” They may be a teacher, who invested in Enron, because the profits were great, or a police officer who has his or her pension money invested in a private equity strategy that is inherently not supportive towards employees. The work of Inspire is enabling investors to align their investment choices with their values in ways that can be profitable personally, and to the larger community. The investor who wants their values to align with investments, should not sacrifice on financial return. In fact, over the long run, financial returns should actually be better. Prevailing wisdom is that investors pay a feel-good premium, in the form of sacrificed returns, to invest in companies that do well for employees and society. Inspire is trying to change that perception and educate investors that they can have their cake and eat it too. According to Wynn, “Investors that ignore key company attributes, such as employee satisfaction, are likely leaving money on the table.”
Wynn and Scarth note that while their research and investments consider environmental, social, and governance criteria, they do not consider themselves socially-responsible investors (SRI). According to Wynn, there is a key difference between Inspire’s approach and many SRI firms. “SRI firms often seek to avoid negatives whereas Inspire focuses on positive identification of firm behaviors.” For example, many SRI firms will merely avoid companies with human rights violations, assuming that all remaining firms are “good.” By contrast, Inspire proactively identifies firms that are explicitly committed to creating great workplaces for employees. “The mere avoidance of a problem is not a compelling reason to invest at Inspire. We are looking for true greatness on a global basis,” says Wynn.
Proof That The Vision Works
The investor saving for the future will be the first to admit that he or she cannot sacrifice in order to support the stakeholder approach, if the stakeholder approach does not deliver. Wynn and Scarth agree, and state emphatically that the academic support for their strategy strongly suggests that investors can, and should, earn a higher risk-adjusted return by employing a stakeholder approach. They draw their academic and empirical support from several sources including a well researched article from Alex Edmans of the Wharton School of Business. Dr. Edmans article, “Does The Stock Market Fully Value Intangibles? Employee Satisfaction And Equity Prices” in the Journal of Financial Economics (2011), details the positive relationship between employee satisfaction and stock performance. And, in their book Firms of Endearment: How World Class Companies Profit from Passion and Purpose, authors Rajendra Sisodia, David Wolfe, and Jag Sheth highlight numerous companies that have delivered financial success by focusing on a shareholder approach to business.
Investors wishing to do their own homework on this strategy can access these resources to learn more. Edmans concluded that, over the 25-year period from 1984 to 2009, investors would have earned a 3.5 percent annual risk-adjusted return premium over the market by investing in the list of publicly traded companies on the 100 Best Companies to Work for in America. While Wynn and Scarth agree that an employee focused company is a wise investment, Inspire does not just invest passively in the complete Best Companies list. The Inspire strategy is to actively select employee-centric firms around the globe who trade at significant discounts to their estimate of fair value.
Moreover, Wynn and Scarth’s investments align with their personal beliefs and support a new vision for what the market can be. In fact, their first 18 months of results support the premise that the investor does not need to sacrifice profits in order to support the community, the employee and the stakeholder. As seen in the chart below, the financial returns are impressive: Although these results come with the standard disclaimer found below, the hope is that investors will see that personal values do not need to be misaligned from investment strategies. Investing does not need to follow the bottom line focused status quo, there is value to the investor, the community, and the greater society of a stakeholder approach to business that values the employee, the consumer, the supplier, the environment, society and the shareholder.
This article was assembled by Beth Parish, a candidate for an Ed.D in Organizational Leadership; her research is focusing on how social mission impacts consumer purchase behavior.
Derek Scarth and Rick Wynn from Inspire contributed their research, stories, and personal missions to this work. Inspire can be reached at email@example.com and Beth can be reached at firstname.lastname@example.org Datamonitor, (2011, May 13). Whole Foods Market. Retrieved from www.Datamonitor.com through ebscohost. Edmans, A. (2011), Does the stock market fully value intangibles? Employee satisfaction and equity prices. Journal of Financial Economics, doi:10.1016/j.jﬁneco.2011.03.021. Friedman, M., & Mackey, J. (2009, March). Two views on the social responsibility of business. Excerpts from 'The social responsibility of business is to increase its profits' and 'Rethinking the social responsibility of business: Putting customers ahead of investors'. Social Education, 73 (2), 89-91. Hamel, G., & Breen, B. (2007). The future of management. Boston, MA: Harvard Business School Press. Retrieved from http://common.books24x7.com.dml.regis.edu/book/id_23568/book.aspx. Madura, J. (2007). Introduction to business (4th ed.). Mason, OH: Thomson South-Western. Sisodia, R., Wolfe, D., & Sheth, J. (2007). Firms of Endearment: How World Class Companies Profit from Passion and Purpose. Prentice Hall. Performance Disclaimer: Inspire Capital Partners, LLC is an Investment Advisor registered with the Commonwealth of Massachusetts and the State of Colorado. The performance data quoted represents past performance and does not guarantee future results. Current year-to-date performance may be lower or higher than the performance quoted. The performance presented here is that of a representative account. The performance of the account is presented gross of fees. Gross of fees performance returns are presented before management, custodial fees, but after trading expenses. A return in this investment would have been reduced by the advisory fees and other expenses it may incur. A fee schedule for Inspire Capital Partners, LLC’s services is available in Part 2A of Form ADV. Fees are collected quarterly, which produces a compounding effect on the total rate of return net of management fees. Risk is inherent in this type of investment, and future performance may involve the possibility of loss. The U.S. dollar is the currency used to express performance. All performance data were calculated using Fact Set Research Systems’ Portfolio Analytics.