4 Ways for Investors to Spot Conscious Companies

By Jeff Cherry and Daniel Dworkin

"Collectively, we are evolving 
the way we make decisions about the businesses we 
want to buy from, work for, partner with, allow into our communities, and invest in."

There is a new era dawning in the world of capitalism 
and free markets. Massive societal forces - the aging of society, the influence of the Millennial generation, and hyper-transparency driven by social media and Internet technologies - are shifting the landscape for companies
in every industry. In his book “Firms of Endearment,” 
Raj Sisodia profiled 28 conscious companies that outperformed the S&P 500 Index by a factor of 10.5 
from 1996 to 2011. Why? Collectively, we are evolving 
the way we make decisions about the businesses we 
want to buy from, work for, partner with, allow into our communities, and invest in. As Darden School of Business professor Ed Freeman describes, the shareholder-centric business model of the past is giving way to a more holistic stakeholder theory of business operations. Quality and service excellence are quickly becoming commoditized. Culture, purpose, and mission are increasingly the real differentiators.

Understanding this new socioeconomic environment
is critical for investors. But assessing the depth of an organization’s “consciousness” demands a different type of analysis - one that uncovers what companies value and how they think and behave. The mosaic of information necessary to certify conscious companies is complex and the current disclosure regime for public companies leaves much to be desired. Organizations like the Sustainability Accounting Standards Board are pursuing a long-term transition towards more transparent reporting practices that speak to “extra-financial” performance. The degree to which such efforts will be successful is unclear. In the meantime, investors must leverage proxies to assess 
the degree to which companies are truly managing 
for stakeholders. While such third-party indicators are imperfect, they do provide signals to guide smarter investment decisions. Here are four focus areas to begin your conscious company search.

  1. Employee Engagement and Culture

According to a Gallup study, companies with high employee engagement enjoy 72 percent greater earnings per share than those with low engagement. Unfortunately, most organizations do not disclose engagement metrics. Fortune’s “100 Best Companies to
 Work For” is one place to build your understanding of where the most engaged employees work. The Great Place to Work Institute, which surveys about 250 firms yearly, helps Fortune pick the winners. Its methodology takes into account management credibility, job satisfaction, camaraderie, pay and benefit programs, hiring practices, methods of internal communication, training, recognition programs, and diversity efforts. Glassdoor, the online job board that collects data on how employees feel about management is another valuable resource to use to gather insights into engagement and culture. Although the information accessible via Fortune and Glassdoor is incomplete and subjective, it does begin to clarify how companies relate to their team members.

  1. Customer Loyalty

Loyal customers are among the most powerful determinants of the ability to generate sustainable cash flow. There are a number of solutions available to investors willing to pay to better 
understand how various organizations
 drive customer loyalty. Satmetrix 
provides benchmarks of Net Promoter Scores (NPS) [a metric for measuring customer loyalty data] by industry. wRatings takes NPS a step further by analyzing how more than 3,300 companies across 12 industries meet customers’ emotional and technical needs.

If you are not willing or able to invest in these services, another option is to explore the percentage of capital that companies spend on marketing to their customers - information that is accessible via many analyst reports. Anecdotally, stakeholder-focused companies invest less capital in persuading customers
of the virtues of their products and services. For example, grocery chain Trader Joe’s spends less than 1 percent of revenue on marketing. Since customers of conscious companies are such passionate supporters, they are more likely to be vocal word-of-mouth advocates. So, another way to assess the nature of customer relationships is through examining the volume and tone of social media posts related
 to the brand. The social analytics company Verifeed provides one way to do so. Combining these methods could be a path to understanding how customers feel about the companies in your portfolio.

  1. Environmental, Social, and Governance Ratings

Environmental, Social, and Governance (ESG) ratings offer another area of potential analysis. Many “social” or “impact” funds and a number of mainstream fund managers are exploring ways to integrate the multitude of data from ESG ratings agencies such as Sustainalytics and MSCI. This data is necessary when considering how companies manage risk. Good ESG practices generally mean a lower probability of big environmental blowups and financial shenanigans, but they do not necessarily signal consciousness or a belief in the stakeholder model. The environmental pedigree of many of these agencies, the difficulty of attaining metrics for social performance, and a tenuous connection between some of the governance measures and the outcomes they purport to achieve make these ratings insufficient consciousness indicators. We suggest that investors consider this data while acknowledging its limitations. A more robust analysis might also include information on reputational risk and management of intangible assets. The work of Steel City Re and the Reputation Institute provides a place to begin this process.

  1. Supply Chain Practices

A thorough review of supply chain practices is a very powerful way 
to build an understanding of how companies manage for stakeholders. As organizations move up the supply chain maturity ladder and develop mutually beneficial relationships with suppliers, they eliminate headline risks. And when companies treat suppliers well, we can surmise that they also build strong bonds with other stakeholders (like employees), who are often seen as more “core” to their missions. North Carolina State University professor Robert Handfield does excellent research on the impact of supply chain maturity. His work demonstrates how long-standing and evolved relationships with suppliers not only indicate stability, but can also signal companies that are fair, honest, and transparent in their business relationships - all key components of conscious business practices.

The best-performing, most sustainable businesses of the future 
will be those that adopt the tenets of conscious capitalism. Yet spotting conscious companies is not as easy as we would like.
 The mix of quantitative and qualitative measures necessary to determine an organization’s consciousness makes for a messy research effort, and most analysts simply do not have the time or patience to do the work. Today, many investors direct their capital towards organizations that embrace some aspect of positive social and environmental impact. Various sustainability- and corporate- responsibility-oriented funds already exist, and that is a good thing. We should continue to support companies that are responsible community members and good stewards of the environment. But there is an opportunity to go deeper - to think more holistically about how to enable and benefit from deeply conscious businesses through investment decisions.

Daniel Dworkin is a Partner with Schaffer Consulting, where he helps organizations unlock capacity for dramatic, lasting results. Daniel also serves as a project leader for the Rapid Results Institute, which tackles complex global development challenges. He is on the leadership team of the New York City Conscious Capitalism Chapter.

Jeff Cherry is the Founder and Executive Director of the Conscious Venture Lab, an accelerator and venture capital fund for conscious entrepreneurship. He is an evangelist for the transformation of capitalism, attempting to bring whole-brain thinking into the realm of business creation and a more human-centered form of investing. www.consciousventurelab.com


This article appeared in Issue 3 | Summer 2015

To read more inspiring articles from Issue 3, including our cover story featuring Eileen Fisher, as well as inspiring stories featuring John Replogle of Seventh Generation, Pantheon Enterprises, Transatomic Power, gDiapers, and more - purchase a copy of Issue 3 online!

Buy Issue