13D asks ‘What is the next big thing?’

July 25, 2019

Reproduced from What I Learned This Week by kind permission of 13D Global Strategy & Research

What is the next big thing?  Over four decades, 13D has identified the next big thing well ahead of others.  The next one that’s coming, in our opinion, is the upending of shareholder primacy.

In 2006, we drafted an outline for a new book to be titled, Compassion is Good for Business.  We understood then that America’s singular, short-term focus on the bottom line was good for the economy short-term, but devastating long-term.  13D was founded at a time when the pendulum was at the opposite end of the cycle – entrenched managements weren’t acting in the interests of the shareholder and we did our part with 175 of our recommendations being taken over between 1983 and 1986.  But now, its 35 years later and times and generational priorities are changing.  The evidence of these changing priorities are omnipresent with a global populist movement, rising wealth divide and a new generation coming to political and economic power that believes the current system is rigged against them.

This observation transcends partisan politics.  It is a theme that is going to affect the investment climate in the coming decade regardless of the party that controls Washington.  Investors should pay close attention to these developments.

Milton Friedman’s 50-year-old notion that the only responsibility of business is to maximize profits is starting to be rejected in favor of a model that cares equally about all stakeholders—employees, management, community, environment and shareholders alike.  As we have documented in these pages, a growing share of the global population —led by women, the beneficiaries of one of the largest wealth transfers in history, and millennials—increasingly want to work for, buy from and invest in companies that have mission, impact and sustainability at the core of their business models.

Looking farther ahead, it is possible that the corporate world could evolve into values-based and principles-based long-term thinking based on creating shared value.  This would revitalize the middle class, ensuring the creation of broad-based prosperity.  This will also entail a shift in what form of corporate leadership is most highly valued in society.

Scores of companies now tout their diversity and sustainability practices.  “ESG” (environmental, social, governance) principles are frequently applied to corporations and investments.  But customers and investors are increasingly not convinced.  They want companies that do more than talk about the impact they are having; they want companies that walk the talk.

Enter the antidote to greenwashing—the benefit or B Corp.  Unlike traditional corporate governance that requires maximization of profit above all else, B Corp governance expands the fiduciary duty of directors to balance the interests of all stakeholders, not just shareholders, when making decisions.  Profitability is defined by long-term goals aimed at benefiting the three Ps of sustainability: people, planet and profits.

While B Corp status is no guarantee of financial success, early signs are promising.  As Michele Gidden, a partner at the UK-based impact investment fund, Bridges Fund Management, recently noted about UK B Corps: “The idea is that over time, the B Corp stamp of approval will help companies attract new customers/ employees/ PR/ investors—while also creating a community whose members can learn from each other.. .the UK arm of the B Corp organization reported earlier this year that UK B Corps which had been certified for at least two years were growing at an average rate of 14% p/a.  Roughly one in three of these companies said they had reached new audiences since certification, and almost half said their B Corp status had helped them attract new staff.

Not surprisingly, certified B Corps, on average, have much higher rates of employee ownership, health and wellness initiatives, gender-pay equity and paid primary-caregiver leave compared to other businesses.  As Jay Coen Gilbert, co-founder of the B Corp movement, observed recently for Forbes: “Benefit corporations are able to execute on a long-term plan, not react to short-term market pressures. . .That is something every CEO, every long-term investor, and everyone with a 401 (k) should want to see more of in other publicly-traded companies.”

Critically, B Corps are reevaluated every three years by the certifying organization B Lab to ensure they maintain the standards of the program, which looks at the impact on communities, workers, customers and the environment.  Every aspect of a business is analyzed, from supply chain to facilities to ingredients.  Not unlike Moody’s or S&P ratings, but for the impact of a business on society.

B Corps are no longer a niche.  Launched in 2006, there are now over 2,750 certified B Corporations across 150 industries in 64 countries, including the likes of Patagonia, Allbirds, Athleta, Warby Parker and Triodos Bank. Companies and capital markets are paying attention.  Among the recent developments outlined last week by Gilbert for Forbes, consider the following:

  • In February, TowerBrook Capital became the first mainstream private equity firm to certify as a B Corp. A month later, Swiss private bank Lombard Odier became a Certified B Corp. Lombard Odier believes sustainability is nothing less than an economic revolution, representing “the most fundamental shift in the history of humanity” and “perhaps the single biggest investment opportunity in history” as well.
  • In May, Avon agreed to an all-stock sale to Brazil-based beauty brand Natura valued at $2 billion. The combined cosmetic entity will be the fourth-largest pure-play beauty group in the world, boasting 6.3 million representatives, 3,200 stores and about 200 million consumers. As Gilbert points out:
    Missing from almost all of the reports of the purchase was a deeper story on emerging business trends: by voting to approve an all-stock sale to Natura (B3-NATU3), Avon’s directors became the first directors ofan existing U.S.-listed, publicly traded company (NYSE-A VP) to vote to upend shareholder primacy by adopting a corporate governance structure that’s purpose is to create long-term value for all stakeholders, not just shareholders.
    Five years earlier, Natura became the world’s largest B Corp in the world by promoting transparency and sustainable business practices across the board. At about the same time, it also became one of the first companies in the world to share an Environmental Profit & Loss to account for the natural capital it uses throughout its business value chains and their societal impacts.Conducting and sharing an EP&L gives both Natura and its investors better ability to manage and plan for the long-term transition to a lowcarbon economy—a significant advantage looking forward as consumers, investors and central banks increasingly stress the urgency of dealing with the planet’s climate emergency. Not coincidentally, since adopting the B-Corp model, Natura’s share price has doubled from roughly R$27 to R$56.
  • In June, global giant Unilever acquired Olly Nutrition, joining Seventh Generation, Ben & Jerry’s, Sir Kensington’s, Pukka Herbs, Mãe Terra and Sundial as the seventh B Corp in Unilever’s portfolio.
  • Two weeks ago, Saitex, the Vietnam-based sustainable denim manufacturer became the only apparel manufacturer in Asia to achieve B Corp status.  The company produces an average of 18,000 pairs of jeans every day—feeding the denim demand of American brands like Everlane, J. Crew, Edwin USA, Target, and Eileen Fisher, among others.  Saitex claims its manufacturing process recycles 98% of the water used during production, reducing water consumption for each pair of jeans from 80 liters to one.  Its LEED-certified, zero-waste factory in Ho Chi Minh City is powered by renewable energy, including solar and biomass.Following the success of the Vietnam factory, Saitex is planning on opening more facilities in the U.S.  Many view Saitex as the turning point for the B Corp—a sign that manufacturers are thinking about the same levels of accountability as the consumer-facing brands selling their products.

Back in 1978, the original supply siders—Jack Kemp, Jude Wanniski, Art Laffer, Robert Mundell and Bob Bartley—kept quoting Victor Hugo: “Armies cannot stop an idea whose time has come. No army can stop an idea whose time has come. Nothing is as powerful as an idea whose time has come. There is one thing stronger than all the armies in the world, and that is an idea whose time has come.”