The “S” in ESG is for the ill-defined “social,” a catchall for nonfinancial factors not related to governance or the environment. A subset of the S is rapidly emerging as a key factor in sustainable investing—how companies manage their “human capital.”
The relationship between stock performance and how companies recruit and treat their employees was gaining attention even before the pandemic and protests; now it stands as a defining factor in environment, social, and corporate governance, or ESG, considerations. “Our entire economy is shifting to an information economy, and therefore people are ever more important to company outcomes,” says John Streur, president and CEO of Calvert Research and Management.
Unlike governance and environmental factors, social pillars—including human capital—are tough to track. Companies aren’t required to disclose data on workforce composition, gender, or ethnicity, but that could change. In 2019, the Securities and Exchange Commission proposed mandating human-capital disclosures for publicly traded companies, and SEC Chairman Jay Clayton has said this is an area where the SEC should move forward.
“There’s no line item for the treatment of a company’s human capital, but we’ve learned that how a company treats what is likely its largest asset determines the success or failure of that firm for the long haul,” says Malcolm Ryerse, head of stewardship at Columbia Threadneedle Investments.
Best Buy
Indeed, a growing body of research draws a tight connection between employee happiness and company performance. In a synthesis of more than 200 academic studies, happiness researcher Shawn Achor found direct causality between more-positive mind-sets and improved productivity and revenues.
It might be a lot to ask employees to be happy, particularly in light of the pandemic, but still other research shows that engaged employees tend to be more productive—and they’re more apt to stick around. Companies pay a high toll for turnover. The Work Institute estimates that voluntary employee turnover costs U.S. companies more than $600 billion a year, or about $15,000 for the average hire.
Diversity, equality, and inclusion are critical parts of retention and overall performance. “In general, we know that diverse teams are more innovative—stronger at anticipating shifts in consumer needs and consumption patterns that make new products and services possible, which can create competitive advantages,” says Dan Rourke, an ESG senior research analyst at Calvert.
It’s difficult to make apples-to-apples comparisons between companies, and no organization is perfect. “You need to triangulate the information,” says Rob Wilson, a research analyst at MFS Investment Management, which has been nudging companies to improve voluntary disclosures. Yet many companies, including these three, have taken steps in the right direction—and have already seen measurable results.
An Early Equality Initiative
When Best Buy (ticker: BBY) opened its first Teen Tech Center in Minneapolis, in 2013, the initiative was purely focused on community impact: Give teens from disinvested communities access to tools and training to be prepared for tech-reliant jobs of the future.
Today, there are more than 30 such centers around the country, each serving 250 to 300 youths every year, and Best Buy has plans to bring that number to more than 100. The centers are a launch pad for jobs, internships, scholarships, and the Geek Squad Academy, a free summer camp for youth in disinvested communities. They also go beyond computer and internet access and now offer resources for filmmaking, music production, and design, and include collaborations, such as with Sony.
Nvidia
Verizon CommunicationsThe initiative has evolved, and is as much part of the company’s corporate strategy as it is a philanthropic side project. “It’s now one of our signature programs,” says Andrea Wood, Best Buy’s head of social impact.
Though the intent is to provide resources and opportunities for teens, it offers a double bottom line. “There’s an economic benefit to the company by effectively expanding its potential client base and employee base,” says Columbia Threadneedle’s Ryerse, who is based in Minneapolis, near Best Buy’s Richfield, Minn., headquarters. “The data continue to show that, particularly among younger generations, people are attracted to firms that have values that are consistent with their own.”
The company sees the tech centers as a great way to develop and recruit talent and further engage existing employees, many of whom want to work for a company that is making an impact. “When we talk about stakeholder capitalism, this is probably one of the best examples because it touches on customers, employees, and the community,” says Hellen Mbugua, ESG senior research analyst with Calvert.
These efforts also help win customer loyalty and keep Best Buy relevant at a time when other retailers are reeling. “They are basically the last bricks-and-mortar electronics store still standing,” says Mbugua, adding that Best Buy is competing head-to-head with Amazon.com in its key categories. “One reason they’ve been able to do this is by focusing on their people.”
When the pandemic closed doors to foot traffic, Best Buy shifted to a curbside-only operating model and retained more than 80% of last year’s sales over the last six weeks of first-quarter fiscal 2021. Customer satisfaction stayed high, and Best Buy’s domestic online sales grew 155%.
Giving Employees the Resources to Think Big
Many tech companies offer perks aimed at keeping employees at their desks—bottomless cold-brew coffee and in-house concierge services—but accelerated-computing company Nvidia (NVDA) wants to keep them happier for longer, via employee benefits and career development.
“We’re trying to solve challenges that no one has solved from a technical standpoint, whether it’s through autonomous driving or artificial intelligence,” says Beau Davidson, vice president of human resources. “To do that, you need to create an environment where people can do their life’s work.” The company’s core business is in graphics processing units used in gaming, cryptocurrency, and data visualization, but new projects, such as in artificial learning and deep thinking, can take years to materialize.
Even before Covid-19, the Santa Clara, Calif.–based company was a perennial top performer for rankings on innovation, inclusion, and workplace benefits. Its family-friendly policies are considered particularly exceptional: unlimited benefits related to adoption and fertility, including egg freezing; up to 22 weeks of fully paid leave for pregnancy and birth, and 12 weeks for adoption; plus eight weeks of flex time so new parents can ease back into work.
When Nvidia moved most of its 17,600 employees to home offices earlier this year, it set up a single resource center to provide answers and support for a wide array of potential issues, be it technology or mental health. The company even hired a professional storyteller and created children’s programming to help parents entertain and educate their cooped-up kids. “They are always connecting back to their employees as their most valuable resource,” says Allison Shenoy, an analyst at Calvert who follows Nvidia.
Nvidia’s turnover is just 5.6% for all employees, less than half that of the typical technology company, based on a LinkedIn survey. “We are not a hierarchy-driven company, and that means we need people to really get our culture,” says Davidson, a 16-year veteran of the company. “We have a saying here: The project is the boss.”
Culture, along with policies and benefits, must evolve to reflect the needs of employees, customers, and society. For this, Nvidia’s seven employee-resource groups—representing minorities, women, veterans, LGBTQ individuals, and people with disabilities, among others—serve as a conduit for that change. They meet quarterly with CEO and co-founder Jensen Huang so he can hear directly from employees on where the company can do better. These and other reasons have earned Huang a spot on Barron’s list of Top CEOs (see page 18).
Walking the Talk on Diversity
It’s not enough to focus on diverse hiring or antidiscrimination practices. Companies interested in being truly diverse need to actively recruit and cultivate at every level. This is a philosophy that Verizon (VZ)—which has 135,500 employees—has embraced since the telecom giant was created in 2000 via the merger of GTE and Bell Atlantic.
“From the very beginning, we realized that we need to look like and understand our customers,” says Beth Sasfai, the company’s chief ESG officer. “If we do not represent a diverse viewpoint, we will miss our mark.”
This starts at the top. Out of nine directors, four are black or Hispanic and two are women. The number of women is lower than usual, says Sasfai, because one of the female directors, Carol Tomé, left to become the CEO of UPS in March, and another chose not to stand for re-election.
Diversity continues to be a priority in recruiting and selecting directors, she says, though doing so requires going beyond the usual hunting grounds of sitting CEOs at the largest publicly traded firms. Indeed, among Fortune 500 companies, there are just four black CEOs and 37 women. Companies also need to be more flexible about board size. “If someone is a good fit, you may need to recruit them when they become available rather than waiting for the perfect time,” she adds.
The payoff? “A large body of academic evidence shows that a collection of perspectives leads to better board decision-making and therefore better business outcomes, but it takes time,” says Columbia Threadneedle’s Ryerse.
It also requires taking that perspective beyond the boardroom and developing diverse talent and leadership at every level. Verizon’s previous CEO, Lowell McAdam, was outspoken on the topic of diversity, and his successor, Hans Vestberg, is following a similar path. Out of his nine direct reports, four are white men. That leadership team, in turn, is responsible for recruiting and developing the next level of diverse talent. In 2019, people of color and women represented more than 31% and 34% of Verizon’s U.S. senior management, respectively—and Verizon is tracking those stats and looking to make improvements, Sasfai says.
Still, diversity is more than a numbers game. Verizon, like a lot of large companies that are focused on improving employee engagement, offers several programs designed to improve its pipeline of talent. Verizon’s adfellows, for example, is an eight-month fellowship that rotates participants through Verizon, agency partners, and brand partners (such as American Express and Walmart ) to promote diversity of thought in the marketing industry.
It’s also important to keep tabs on employee sentiment, which is why more large firms, including Verizon, are using online surveys to routinely check in with employees and track their progress. Sasfai and her team are also looking at ways to measure and track results of the surveys. “You’ll definitely see more from us on this in the next year,” she says.
And probably many other companies, as well.
Email: editors@barrons.com
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