Business and Markets

Money Talks: Can Business Decisions Align with Social Needs?

June 1, 2017  • Mark Popovich

“They were the best of times, they were the worst of times…” This epic opening to A Tale of Two Cities, written by Dickens in the mid-19th century, could just as easily be used to describe America in the 21st century. Stocks soar, but the economic recovery is weak. Globalization yields amazing gains, but it also engenders social and financial instability. The top 10 percent gain enormous wealth while the bottom half struggle and fear diminishing prospects for their children. Our economy is certainly generating jobs. But too many are low-quality, and too few are good jobs that offer livable earnings and opportunity for advancement­—let alone satisfy our desire to contribute and find meaning.

Markets are bound to be flawed when desired outcomes like these are mere externalities. But can market-oriented approaches actually drive toward social goals? Can systems develop to allow economic actors—businesses and investors—to do both well and good?

There’s a strong case emerging that we can do better. Some investors and lenders are tilting toward “good jobs,” which means employers will have more incentives to make good jobs a higher priority. The recently launched Good Companies/Good Jobs Initiative within the Aspen Institute’s Economic Opportunities Program is developing tools and materials to bolster the movement.

Does it serve either business leaders or investors to have rules so tilted against doing right by the workforce?

The capital market in the United States is huge—$28 trillion in publicly traded equity alone, and over $8 trillion in traditional debt financing. That finance system is a powerful influence on business decisions. The data and factors important to lenders or investors become essential issues for businesses that want capital. New software start-ups were a good example: many investors preferred businesses that could show them explicit strategies to minimize costs. Even firms with long records of success must respond to the preference of investors to minimize employee expenses in the headlong pursuit of short-term profits.

Traditional financing prompts borrowers to count worker compensation, benefits, or training as costs. But this can preclude reasonable investments. A company that closes a plant worth $100 million, for example, must write off a loss of capital value. But if the same firm cuts workers who would earn $100 million in the next year, it is also losing experience, skills, and a commitment to productivity and quality. The firm gets to post immediate cost savings—and never accounts for the real loss of human capital.

Does it serve either business leaders or investors to have rules so tilted against doing right by the workforce? Laurie Bassi, David Creelman, and Andrew Lambert write in an article for CFO.com, “Finance has long worried about the cost of human capital. But there is much to be gained by flipping that and looking at how organizations can harness human capital to drive growth.”

In fact, there is good evidence that “good job” companies tend to outperform their peers in business results and return on investment. For example, a portfolio of stocks reflecting Glassdoor’s “Best Places to Work” from 2009 to 2014 yields a 243.3 percent return, compared with 121 percent from a benchmark of S&P 500 picks. This real-world investment guidance is also buttressed by a 2015 Harvard Law School Investor Responsibility Research Center report: “Our survey of … 92 empirical studies on the relationship between HR polices and financial outcomes … concludes that there is sufficient evidence of human-capital materiality to financial performance to warrant inclusion in standard investment analysis.”

There is already a $9 trillion segment of the US capital market that incorporates environmental, social, and governance factors into investment selection. While the environmental component is the most-developed (our initiative takes lessons from the “green investing” movement), and governance issues lag somewhat behind, the social element is the least defined. Within the social criteria, “job quality” is garnering high attention—but it is still developing. The market size and a lack of adequate tools define both the key challenge and the large opportunity for our new program.

There is evidence that “good job” companies tend to outperform their peers in business results and return on investment.

Some investors are increasingly ready and willing to consider human-capital factors. After all, the business experience and research evidence supports this direction. But moving from theory to action entails overcoming a few challenges. Capital sources and the organizations that support them need rigorous approaches for implementing these intentions.

There is a concerted effort by field organizations, investors, and advisers to set the definitions, tools, assessments, and rating systems necessary to move this approach into the mainstream. We’re aiding that evolution toward better people practices through the Economic Opportunities Program’s Good Companies/Good Jobs Initiative. We’re doing this in part through software tools and analytics developed to serve both businesses seeking capital and investors or lenders. Our tools facilitate easy and secure reporting of very reliable data already held by businesses. Akin to credit scoring, data is analyzed and benchmarked with a final scorecard issued to both the reporting firm and the potential lender or investor. This helps all involved measure success and identify opportunities for improvement in both job quality and the bottom line. Our system will also provide investors the tools to gauge how human-capital outcomes correlate with the return and risks of their portfolios. Our Good Companies/Good Jobs software is one approach to giving a market better information and new services in pursuit of a social good.

America needs to work. It needs more businesses to succeed. And it needs millions more good jobs. Investors and lenders could remain content with traditional strategies that push against those gains. Or they can opt in to the emerging alternatives that can deliver good financial and business outcomes and higher job quality. Public policy and traditional nonprofit sectors must play their roles. But to address the economic dissatisfaction and disruption of our era, more is needed. Individuals and institutions that make investing decisions should help fuel the economic success of main-street businesses and their frontline workers.

Money talks. And money will either continue to be a part of the problem or become more a crucial element of a practical solution.

Mark G. Popovich is the director of the Economic Opportunities Program‘s Good Companies/Good Jobs Initiative.

Does it serve either business leaders or investors to have rules so tilted against doing right by the workforce?