The rise of conscious capitalism

If there’s anything good to come from the COVID-19 pandemic, it’s that many companies have responded to the crisis by doing what they can to help.

This so-called ‘stakeholder capitalism’ is a system where companies look to take on greater social responsibilities for the good of all. In other words, companies with a conscience.

The pandemic has allowed us to pause and reflect on the type of world we want to live in as a society. Customers, employees and investors are all becoming more discerning about the companies they wish to be associated with.

A company’s approach to its people, the planet and innovation matters a lot.

From the environment to philanthropy, tech advances and workplace safety, these issues are now higher up the boardroom agenda. Similarly, more intangible assets such as brand recognition, data and intellectual capital are not only determining the perception of a company but also driving profitability and growth.

Why culture is key to this new form of capitalism

One thing seemingly binds these successful businesses together – a strong workplace culture. It’s the secret sauce; an increasingly powerful engine for defining purpose in the new world.

Those companies that have recognised this are not only often better positioned to navigate the risks that this journey will unpredictably present but should also enjoy the opportunities that will arise.

Increasingly, a new breed of company is gaining success¹– one which embeds a long-term culture that responsibly assesses the impact of every decision on the world around us, seeking to maximise outcomes for all stakeholders.

Take Amazon’s ‘door desk’ policy, which became a signature of the company in its early days back in 1995. The company famously used doors as desks to create a constant reminder to focus on cost-cutting that can be passed on to customers. More than 20 years on, thousands of Amazon employees worldwide still work each day on modern versions of those original door desks.

In stark contrast to Amazon, Apple’s spectacular US$5bn Infinite Loop headquarters was built to foster a culture that would create beautifully designed high-end products².

These two distinctly different cultural decisions have both had their successes. Hard to define, the intangible strength of corporate culture can make or break a business. Through design, corporate culture defines how employees make decisions when no one’s watching. When successful, it gives purpose to what a company’s trying to achieve, permeating through every level of the organisation.

Companies with powerful cultures

Here are what some of the other companies held by our Sustainable Total Return Strategy are doing to improve company culture. All companies referenced were held by our fund as of 31 December 2020. Reference to specific companies is not an opinion as to their present or future value and should not be considered investment advice or a personal recommendation. They’re included in the article to demonstrate the positive impact companies can have.

Croda, a specialty UK chemicals company, took the decision to embed sustainability into its culture years ago. The company provides value-add ingredients to end markets which include personal care, healthcare and agriculture. Products include the active ingredient in sunscreen, bio-based detergents or excipients for vaccines.

It recognised that its customers would increasingly want ways to enhance the sustainability credentials of their own products, so focused on ingredients that would be climate, land and people positive. With a culture underpinned by a social purpose, Croda has even taken the extraordinary step of exiting profitable business lines that aren’t net positive for the world, solely because this is the right thing to do.

Similarly, Nike – whose history is rooted in using innovation to progress sport – now recognises that it faces the broader challenge of protecting the future of sport itself. It does this by promoting a culture of diversity, sustainability and equitable access to sport. While Nike was somewhat tarnished by the supply chain challenges it faced in the 1990s when it was still a young company, its actions are now defined by this new purpose.

Its aspiration to be a leader in diversity and inclusion can be seen through its ‘Until We All Win’ campaign. Nike is prominent across several social injustice causes, including Black Lives Matter³, investing heavily to promote equality in the communities in which it operates. Nike also maintains 1:1 gender pay⁴, and has been named the best place to work for LGBTQ+ equality by the Human Right Campaign Foundation for 19 years in a row⁵.

Across its complex supply chain, the company has moved to improve transparency by becoming the first company in its industry to disclose its entire third-party manufacturing facility footprint⁶. At the same time, it’s widely-used anonymous supply chain worker survey sees over 270,000 workers annually give insight into working conditions – leading to greater facility oversight⁷. With a supply chain of over 500 third-party factories⁸this can be a challenge.

However, these actions help to improve visibility and allow for greater independent observation.

Its ‘Move to Zero’ programme reflects its journey to zero carbon and zero waste. Nike is the industry's largest user of recycled polyester⁹, while technologies such as Flyknit¹⁰– a durable and flexible fabric – minimise material wastage. Designers are encouraged to promote sustainable product innovation through their Materials Sustainability Index, which scores 57,000 materials on their sustainability credentials¹¹.

This is all underpinned by a culture of driving sporting excellence, attracting some of the world’s top sporting talent.

Polishing your green credentials

Corporate culture starts with the leadership of a business. To embed sustainability into a company’s purpose and drive environmental and social change, you first need effective governance. This includes long-term commitment to incentivise executives based on their management of sustainability criteria.

Colgate-Palmolive, which has been one of our portfolio holdings, is an example of this. For nearly a decade, management compensation has included environmental, social and governance (ESG) performance as a factor¹². This has helped embed the environmental and social impact of their actions into decision making.

It’s not a coincidence that the company launched the world’s first fully recyclable toothpaste tube in January 2020¹³. This was no mean feat. Toothpaste tubes – made from a combination of aluminium and plastic – were previously thought to be impossible to recycle. It’s estimated that around 20 billion toothpaste tubes are still thrown away every year¹⁴.

But Colgate-Palmolive has demonstrated its commitment to sustainability by making the designs publicly available to drive global change – in a bid to bring this number down considerably.

Of course, instilling a culture in a large company can be anything but straightforward. The larger a business, the harder it can be to achieve as organisations often have very different sub-cultures within individual managing teams or office floors. For example, at Amazon, the practices of senior management and software developers may seem far-flung from the logistics centres.

Colgate-Palmolive also took steps to ensure that sustainability didn’t just apply to its flagship products – but it was a way of life throughout the business. The organisation focused on designing and constructing environmentally friendly manufacturing and technology hubs, warehouses and offices.

They were awarded the world’s first LEED Zero certification for their New Jersey manufacturing facility for net zero carbon, energy, water and waste¹⁵. Colgate-Palmolive now has more TRUE Zero Waste certified projects on more continents than any other company in the world. In short, embedding sustainability into their culture presents Colgate-Palmolive with several opportunities which have seen it being recognised widely for its efforts¹⁶.

Evolution and revolution

As companies grow and their objectives change, so too must their culture. Failing to keep a culture relevant can see negative traits become entrenched to the detriment of company performance. This was an issue that Microsoft faced before being completely turned around in one of the most successful cultural transformations in corporate history.

In the years running up to Microsoft’s appointment of Satya Nadella as CEO in 2014, the company had developed a siloed and uncollaborative reputation. In his first message to employees, Nadella made his intentions clear. He would break these silos down, replacing them instead with a culture focused on collaboration, empathy, diversity and inclusion¹⁷.

Combined with the advent of artificial intelligence (AI), which democratised technology, this cultural revolution allowed people across the organisation with no engineering experience to come up with new ideas, be encouraged to discuss them with colleagues, and bring them to fruition. This led to an explosion of innovation.

By placing a cultural emphasis on empathy, teams were encouraged to collaborate and make each other successful. The creation of a more diverse and inclusive workforce also brought about diversity in thought. People with disabilities were encouraged to view it as a strength¹⁸. This then drove innovation in accessibility tools for the 900 million users of Windows 10¹⁹.

This included AI-driven subtitles in Teams, video call background blurring for deaf lip readers, and the ‘Accessibility Checker’ (next to the spell check button in the software)²⁰. It makes sure that content is easy to read and edit for the 180 million people of all abilities who use Office 365²¹.

There are over one billion people in the world who have a disability²². By promoting a culture of diversity and inclusion, Microsoft has been able to identify accessibility challenges and build transformative innovation to promote a more inclusive society.

Looking to build back better after COVID-19

Those that have focused more on their ESG performance appear to be emerging from the pandemic strongest – better positioned for the long term and better prepared for any uncertainties.

And those companies that have redefined their culture and purpose to reflect this new world – to maximise value for all stakeholders – should also be able to attract better talent, mitigate risk and capitalise on the incredible opportunity sustainability presents.

Of course, there may be risks for some and opportunities for others. But companies should be embracing this brave new world of conscious capitalism.

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