When Values Create Value

Shareholder value is the ultimate yardstick in capitalism, no doubt. But what happens when a company's value creation mechanism is directly aligned with a mission that resonates and that is rooted with a greater social aspiration?
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Most of us can spot a company's mission statement from a mile away. They communicate the values of a company. We've seen mission statements emblazoned on the walls of our workplaces, the products we buy and the websites we visit. When a mission goes beyond just a statement, is executed upon and embedded across a company's operations, it becomes a key force in value creation. Shareholder value is the ultimate yardstick in capitalism, no doubt. But what happens when a company's value creation mechanism is directly aligned with a mission that resonates and is rooted in a greater social aspiration? The company and its investors have the potential to make more money, that's what.

Ben & Jerry's, Patagonia, Toms, Warby Parker, Honest Company, Vital Farms, Etsy, KIND Snacks, Tesla Motors, REI, Grameen, IndieGoGo, etc. All of these have well-known direct links to tangible social missions. These companies and their brands also command a significant price premium. But why is that? Short answer: A great product or service combined with a mission that is believable helps deliver a superior customer experience. That superiority translates to value creation, for the company, its customers and its shareholders.

A mission should be timeless and persist across a customer's experience with a company and its products. A mission is a big idea synthesized into a few words. That big idea should drive all aspects of a company's operations. Consistently delivering on the big idea creates significant value. In Wall Street talk, it delivers 'alpha', the measure of an investor's incremental actively sought return on capital when compared to a suitable market or indexed benchmark.

Apple, with a 10-year annual return of ~29 percent vs. the consumer electronics ~16 percent or the S&P 500's ~7 percent, has created alpha. Tesla Motors has been public for less than 10 years but looking at its 5-year annual return of 59 percent vs. auto manufacturers ~4 percent and the S&P 500's ~11 percent, also illustrates alpha. The market rewards a company with alpha when, among other things, it executes consistently on its mission. The very best missions are those that are: Credible + Aspirational + Unique + Simple + Executable = CAUSE.

The emotional side of our brains, the side that connects with a company's mission, tips the scale in almost every single decision we make. This connection is value enhancing and profit generating if the walk matches the talk. When the walk matches the talk, investors, including those that pursue profit-with-purpose via impact strategies, generate asymmetric alpha. I argue that impact investing done right has the potential to deliver higher returns to shareholders, not lower as perceived.

Back to one of the companies I mention above, Ben & Jerry's, a B Corporation and a wholly owned subsidiary of Unilever. It is one of the most famous and profitable socially conscious companies. It also commands one of the highest prices per unit of any comparable. Below are prices for cookie dough flavor at Walmart:

Ben and Jerry's: ¢24.8/fl oz
Dreyers: ¢8.3/fl oz
Breyers: ¢8.2/fl oz
Blue Bunny: ¢5.3/fl oz

Is part of the reason for this 298-468 percent premium the company's mission? I think so. The company and its brand personifies value creation by pursuing a social good, not just value creation in and of itself. In my humble opinion, the product is actually better than the competition's and this superiority combined with the mission delivers extraordinary value -- lets call it, CAUSE-enabled-alpha.

Ben & Jerry's actual social mission is: "To operate the Company in a way that actively recognizes the central role that business plays in society by initiating innovative ways to improve the quality of life locally, nationally, and internationally." And its product mission: "To make, distribute and sell the finest quality all natural ice cream and euphoric concoctions with a continued commitment to incorporating wholesome, natural ingredients and promoting business practices that respect the Earth and the Environment."

How much of Ben & Jerry's incredible premium can be deconstructed into its component parts, one of them being the social mission of the brand itself. Maureen Kline, sustainability chief of Pirelli North America recently wrote an article which she led with the following two sentences: "We have passed a tipping point and the business community is embracing sustainability. But we won't make the shift to sustainable growth on a large scale unless the investor community decides to pivot away from its focus on short-term profits -- squeezing financial gain out of companies on a quarterly basis -- at the expense of longer term, sustainable prosperity."

She mentions a study by the Institute for Sustainable Investing at Morgan Stanley. The study, which looked at over 13,000 mutual funds and separately managed accounts, shines a light on the fact that sustainable investing meets, and often exceeds, the performance of comparable traditional investments. Sustainable funds had equal or higher median returns and equal or lower volatility than traditional funds for 64 percent of the periods examined. Additionally, on the passive side, the long-term annual returns of one index comprising firms scoring highly on environmental, social and governance criteria exceeded the S&P 500 by 45 basis points.

Another example of a finance nameplate putting their money where their mouth is: Goldman Sachs, a social impact bond pioneer. Its asset management division's decision to buy Imprint Capital and not build all of its impact capabilities from scratch could be a shot across the bow for other asset managers to pursue a similar route. Money is being made and you bet that this would not have happened otherwise.

Blackrock, Generation, Bain Capital, JP Morgan Chase and The Carlyle Group are all examples of principal investing and financial services firms pursuing different but related flavors. Is the multiple bottom line equally or more profitable than a traditional and single-focused financial bottom line? More than 1000 CEOs from around the globe think so. 76 percent of over 1,400 CEOs PWC interviewed for its annual survey "define business success by more than financial profit". My guess is that the best among them are delivering higher returns to investors and connecting more meaningfully with their customers.

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