Ep. 054 - Ethical Investing: Profiting with Integrity

Episode Transcript

Spencer
In this series of podcasts, we've been talking about ill gotten gain and how we can invest in a way that honors God and avoids that ill gotten gain, both avoiding the products and services that are problematic, but also companies that have practices that have problems. But this can kind of feel gray. Austin. So today we'll be diving into some specific examples that we see companies enact that are problematic from the way that they put together their practices.

Austin
So, Spencer, today, as we dive back into this idea of good practices versus bad practices, exploitative practices that companies can take on, we want to come back to this idea of where are we generating profits as investors, as we close companies and capital, how are then we profiting from their business practices? And again, with sometimes with products, it's easier to say, yes, this is a good product versus no, this is a bad product.

Austin
This product creates addiction or this product produces death. And I don't want to profit from that. Sometimes it is harder to say what is a good practice and what is a bad practice. And is God honored by me generating the profits and then pushing them back to him? Is he honored, by the way, that I'm stewarding the resources that he's given me?

Austin
Are these ways that he would use his resources? These are questions that I think are hard to ask sometimes. But as we think about the stakeholders, typically when we look at good practices, we want to think about how are they dealing with their customers. How are they dealing with employees, society, the environment, community at large suppliers, all those different pieces?

Austin
Are they looking outside of just themselves? And what's going to make them money or are they really looking? How can I be of participating in the flourishing of all people? How can I lift everybody up versus just do what is best for me? So we're going to look at a couple of different practices. We're going to look at bribery.

Austin
We're going to look at, what a company does if they make a mistake. And we're going to look at how companies treat their employees. And so you want to start us off with bribery and why this is maybe a bad practice.

Spencer
Yeah. Well, I think all of us would say, okay, I'm not going to get behind bribery. There's some challenges to that. It sets up just an adversarial, difficult relation ship with all kinds of different suppliers and such. But bribery is not something maybe that we look at in the West as much, because there's all kinds of different regulation and rules.

Spencer
And we know that bribery happens from time to time, but it's not the governing dynamic in business in the developed world, but it remains that way in far too many other parts of the world, particularly those areas that have regimes that are problematic. And that's where for many years, really, what launched us on this path of reflection, of how do we think about the practices of companies?

Spencer
You look at a handful of different companies and the way that they have interacted with North Sudan, with Myanmar, with some of these regimes that are genocidal. So, one of the things that we look at, again, particularly with respect to North Sudan and particularly respect to a couple of the main cities, there, of course, Khartoum being one.

Spencer
But Darfur being really the hot spot, that got so much international press. What happened was you have natural resources in North Sudan, and you have companies, two from China, one from, India and another from Indonesia, that they would pay the Northern Sudanese government for access to these resources to be able to harvest the oil, to be able to harvest those natural resources.

Spencer
And so we would look at it and say, okay, from a standpoint of the goods and services, you know, taking oil, whether it's from North Sudan or whether it's from Texas or whether it's from some other part of the world, from Saudi Arabia, that can bring a level of blessing. We need energy in the world to do, to live our lives the way that we have them.

Spencer
So it's not the problems so much with the good or service, but it is the way that it's being harvested. So tremendous payments made from these four different companies to different factions or the overall government within North Sudan, and then that government taking those resources and using it to kill a subset of its own people. So there's a level of bribery to have those, to have access to those, those resources and then using it in ways that are antithetical towards anything that's biblical, that's out there.

Spencer
So that's one of the practices. And, you know, it got a little bit of press over the years in the United States, but not all that much. So most people were not aware of really what was going on in the funding of genocide. Now, they may have said, okay, well, we understand that genocide is happening there in Darfur and it's terrible, and perhaps we're even aware of it and praying for, you know, people there and such.

Spencer
But it's the funding mechanism, that we really want to steer clear from, because most people had no idea that maybe that international mutual fund that has a thousand different companies in it has PetroChina. Yeah. You know, has Sinopec has Petronas has ONGC, these four companies that have been doing business with North Sudan over the years.

Austin
Right. And that's one where it is black and white. Genocide is is bad. And if a company is profiting from exploiting a country that is perpetuating genocide, I don't want to profit from that. This is what we come back to over and over and over. Do I want gains in my portfolio from a company who is actively participating in bribery with a country that is perpetuating genocide?

Austin
And at the end of the day, I don't want to profit from that. Right? We have to wrestle with where are those gains coming from? Is it ill gotten? And I would say, absolutely, when there is gain that profits from bribery that perpetuates genocide, it's wrong. And we should not try to bring that money back into the temple of the Lord.

Spencer
Right. And it's so interesting here because you have people that will push back and say, well, I'm not going to cast judgment on another culture and how they do business. At the end of the day, bribery is bribery. And, you know, having lived overseas, I wish I had seen people who would say no to that, who are business leaders who just say, I'm that's not a path I'm going to go down, even when that is a cultural difference with their own people around them.

Spencer
I was in, China and had a friend who, on principle just would not bribe. He was a banking leader and all of his superiors said, you're nuts. You're not going to be able to do your job. Well, actually, because of his stand. Everyone who interacted with him knew exactly where he was going to be, and they began to trust him much more than they would trust some of the other, competitors he would have, or even his colleagues, because they knew that this guy was going to shoot straight with them.

Spencer
He was not going to bribe them. He was going to look out for them and do the best that he could to make sure that everything was done fairly. But when we take that off the table, sometimes there is a dissonance within a particular area or culture, but it doesn't necessarily have to be bad for business. Yeah. There and, and we should have a tremendous amount of respect and we should be supporting those institutions that just say this is not good for anybody because those bribed the funds that are used for bribery, because they're not traced, they can be used for all other kinds of bad as well.

Spencer
You know, whether that's human trafficking or other just nefarious things that are off the radar screen, if we have a much more transparent culture, a level of accountability there, then that tends towards flourishing in a lot of other different.

Austin
Ways, right? Okay. So you've touched on bribery. Let's move over to investing in people. How do we think about being good to the employees that we that we employ. Because as owners of these companies, we are providing capital for them to then employ people. Right. And so how when we think about this good practice of treating employees well, give us some examples of what a good practice there could look like.

Spencer
Well, and this is not a publicly traded firm, but we would come back to just even fast food establishments. And you can't invest in chick fil A. But their practices seemingly, as a corporate over a corporation overall, are far more redemptive in many ways than a lot of the other fast food, chains, it would seem like.

Spencer
So, for instance, operator turnover. You know, one statistic. So the person who is managing a chick fil A versus the person who is managing there was a study that was done, people who are managing McDonald's, locations, chick fil A annual turnover. According to this study on workforce 5% per year. So, you know, you look at this and you're like 5% per year.

Spencer
Well, that's that's like 1 in 20. You know, that would be about the rate that you might find that somebody operates it for 20 years and just retires. I mean, almost nobody is getting out as a chick fil A operator. Yeah. By contrast, there's 35% turnover or seven times as much for McDonald's operators. And you look at this and there's a variety of different, you know, things associated with it.

Spencer
Some of it is the structure of the institution. But one of them is just the pay. You know, chick fil A historically has paid 2 to 3 times better for that operator of a store. The McDonald's has they've given them better career paths, typically to be able to grow from, you know, an employee up to a manager, up to an operator, you know, there's a career path, there.

Spencer
So, you know, when we when we look at it at the, the, the high end for chick fil A versus maybe, McDonald's and Wendy's, in that same report was even rated lower than McDonald's, there. So I'm sure that there's, you know, operations that are run well with a Wendy's or McDonald's. But again, this is the, I think a study of US operators, overall with these different institutions.

Spencer
It's even more pronounced, though, for people who are just coming in and getting their first start, you know, at, an institution, there are, for those at chick fil A, the people taking the order, when you walk in and and get your chicken sandwich, or whatever it is, 40% annually turnover for employees who take orders, who are on the front lines at chick fil A at McDonald's.

Spencer
That same study, said that it was, 125%. So they last less than a year at McDonald's. They tend to last on average, say, two and a half years at chick fil A. The study as well showed that, whether we were looking at the pay being a little bit higher for chick fil A on average, or the satisfaction that staff expressed in saying that the place is a great place to work, and they would refer other friends to also work there, or even being pleased with the actions of the CEO.

Spencer
All of those higher, you know, for chick fil A than we see their counterparts in McDonald's and Wendy's. So it's not to say that, you know, chick fil A does everything perfect. They don't. Yeah. But they have a set of practices that seem like they are giving people a path that they are, more engaged with work, they enjoy their work more, and, and they're paid better, you know, for it all across, you know, whether it's as an operator all the way on down to, person who was just hired.

Spencer
So that's how we kind of think about things. There's no perfect institution. But if we can look at that set of practices, do people enjoy coming to work? Are they given a path where they can grow? Are they are they compensated in a way that is kind of on the upper side, you know, of of what would be reasonable?

Spencer
And all of this, in spite of the fact that chick fil A is growing significantly and they're making a lot of money. Yeah. So it's not as though these are keeping them from making money. They are not a nonprofit institution. If you, you know, go there. You know, it's a stark contrast here, Kingston Pike, you know, you drive up, you look, if you're going eastbound, you look, there and you see McDonald's on the right hand side, chick fil A on the on on the left hand side, chick fil A is going to have, you know, four lanes of people, it seems like wrapped around their building, you know, like 100 cars

Spencer
trying to get, you know, services and, you know, there was one time that I needed to get something really quick about a year ago. And so I didn't go to Chick-Fil-A. I went over to McDonald's. There's nobody over there. Yeah. You know, and that's an anecdotal answer. You know, one example, obviously, McDonald's has a ton of people that eat there and probably plenty of listeners, enjoy McDonald's far more than chick fil A.

Spencer
But, it's not they're not sacrificing profitability. They're not sacrificing revenue in doing this. They clearly have a set of operations that's rewarding their employees. Well, giving them a path without, you know, constraining their business.

Austin
Right. Well, I think about this in the trickle down effects. When your CEO treats everybody that is on his board, everybody that is in his C-level suite with dignity and respect, then they're going to treat their other employees with dignity and respect, and it trickles down throughout the entirety of the organization. And so there have been studies done on Truett Cathy, the CEO.

Austin
But one thing that I know, we've got some friends that work at Chick-Fil-A corporate, and they start every single meeting talking about the culture that they want to create. They want it to be a place where it is a pleasure to work at chick fil A. It is ingrained in them that that is how they're going to treat their employees.

Austin
And you walk in and it is a different feel. It's a different environment, right? And you look and you see when you go through the drive thru, they've got tons of people out there. Yes, there may be churn. There's going to be churn in fast food. It's just the reality. People don't want to work in fast food for the entirety of their lives.

Austin
Most people, but they want to be there. The people that are there are delighted to be there. And it's they have gone to greater lengths at chick fil A to create a culture where it is where you know what you're expecting, you know what you're walking into. You know that you're walking into a place where the employees are going to smile at you, and they're going to thank you for being there.

Austin
You're they're going to say, it is my pleasure to serve you. You know, the reality is it creates a marked difference. Then when I walk into a Taco Bell or a McDonald's or these other places that just you can tell the employees are not treated with the same level of dignity and respect at a corporate level, because there's not that same warmth and that same, dignity that is there, that then I feel as the customer.

Austin
Right. And so when we look at a practice, when you treat your employees well, it then affects suppliers. It then affects the customers, it affects society and culture and everything around you. And so even though as we look at, yeah, this may be an isolation of employees, it affects the rest of it. It affects the rest of the corporation.

Austin
So let's take a look now, maybe at this idea of what a company does when they make a mistake. And there's two case studies here that we want to walk through, one with Johnson and Johnson and the other with Ford. So will you walk us through the Johnson and Johnson scenario?

Spencer
Yeah. So Johnson and Johnson, you know, maybe one of the most documented, most study, in terms of corporate communication cases in history, was the Tylenol response to having, many of its, jars, you know, laced with cyanide. So this was back in the 80s and Tylenol had had, come on the scene and it was responsible at the time for 19% of Johnson and Johnson's corporate profits during the first three quarters of 1982.

Spencer
So it was a significant part of what they were doing. It was, the absolute leader in the painkiller field and accounted for 37% of the market share. So, you know, you had, anacin Bayer buffering and Excedrin all as, kind of trying to catch up, you know, with Tylenol and, you know, you had one or more people in 1982 that started to lace these capsules with cyanide and, then resealing the packages or, you know, the seals weren't in the same way that, they are now.

Spencer
So it was much more easy to tamper with them. So you had people that started to die, you know, because they were taking these cyanide laced caps, capsules. So, you know, again, in this situation, they have a lot of different directions that they could go. They could say, well, how many people will really die from this? Is this really even really our fault?

Spencer
You know, it's clearly not coming from our manufacturing facility. So somebody if they came onto the scene and they started to lace these, you know, capsules with cyanide, you know, maybe there's ten people that will die and we'll say that we're sorry. I mean, that would be one way that a company would go through this. Johnson and Johnson did something different.

Spencer
What they saw was, is they had, they had the trust. They had the faith of their consumers. Maybe they hadn't done anything that was necessarily bad, but they realized that their capsules weren't as secure as they could be. And so in the span of just a few days, they got every one of those, capsules off the market.

Spencer
And, you know, you talk to people. And I talked with a guy who was at the time, he was, just a JNJ employee who then rose through the ranks and became one of their executives. But he just talks about what a formative time that was as a company, because from the top down, they said, okay, we have got to do something.

Spencer
They have a credo, a set of corporate values that they go back to, you know, as they make decisions. And that's been in place, going way, way, way back, decades and decades. And so they went back to that credo and they said, well, how should we act, you know, in light of our corporate values and said, well, we just need to get every capsule off, the counter.

Spencer
Yeah. And so what they did, of course, they tried to recall as many as they could through the, different institutions that they were selling through the pharmacies and the stores and such. But they also empowered their employees to go out and told their employees that they would reimburse them whatever the cost was to go out to all of those different stores and just buy them, buy them from the institution, get them off the shelf and you know it.

Spencer
It was a story that they ended up getting all kinds of different news, media, you know, about this? At first it was all negative because obviously people are dying and this is terrible. And it's from Tylenol, but they were able to use the media in such a way to say, hey, we want everybody to know that this is an issue.

Spencer
Do not buy it. But we're going to make this right. We're going to do everything in our power. And so because the the media outlets could see that, Johnson and Johnson was trying to make things right, they actually got a lot of, you know, media coverage on this. So instead of this absolutely destroying the company, what it allowed the company to do was to show that they were going to do whatever it took to serve the customers as best they could.

Spencer
So they came up, with a cutting edge from that point, tamper resistant packaging where it could not be tampered with in the same way without a, without a customer actually knowing. Because, you know, obviously anybody can take the seal off and then tamper and then put it back on the shelf. But if you've got that tamper resistant, you know, sealing there, then you're going to know at least.

Spencer
Okay. Buyer beware. Yeah. Here. Where is that did not exist prior. So a as a great example of a company recognizing that, they could do something, to, to be helpful to the consumer, to their customers making it right, doing it as quickly and as swiftly as they could and then seeing, you know, actually blessing, from that because they became the most trusted name in, those, those products and services that they were offering because, you know, customers had held them in such high esteem, you know, thereafter.

Austin
Right. When you think about products that have a name that symbolizes what they do, Tylenol is a medicine, but there's an underlying drug within it. But you just say, I need Tylenol, right? And so it has become a name brand to where you associate pain medicine with the word Tylenol versus ibuprofen or acetaminophen. Right. And I think that's the reality here is that they did whatever they needed to do.

Austin
And they suffered a loss because of it. Like it cost money.

Spencer
It's a tremendous.

Austin
Cost, a lot of money for them to take this step. But what they did was they said, it is more worth it for us to experience temporary pain, for us to experience this temporary loss because it is good for the other. It is good for our consumers, for us to say we admit that we made a mistake.

Austin
It's not looking out solely for the good of my profits, of my bottom line. But I need to make sure that my customers know that they are putting their health in our hands and we are going to do what is right for them. And that's again, when we think about what is a good practice. That is something that is a good practice.

Austin
It is honoring image bearers of God. Right. So what about the other case study here. Ford with the Pinto. Well, and.

Spencer
Before we go there, it's even so interesting that, you could boil this down what Tylenol did, what JNJ did. They are the gold standard. You know, they are the the, in all of corporate communications history, this is maybe the most cited case. Yeah. And when you boil it down, they just did what was right. Yeah, they just made it right.

Spencer
And and they did so without almost even caring. You know what other people thought? I mean, yes, they wanted to message it and say, hey, this didn't come from our manufacturing facility and such, but at the end of the day, they just applied biblical principles. They just they just did what was right, and they did it as quickly as they could.

Spencer
They acknowledge their mistakes. They, they, and they move forward. Yeah. You know, with it. So, the second side of things, though, is the exact opposite. Yeah. You know, we look at Ford and, of course, Ford has a great reputation in many ways, have done, you know, made wonderful vehicles for, for many, many years, obviously.

Spencer
But in this particular case, it was terrible. And it was with the Ford Pinto, you know, of the 1970s. So, the basics of the case are that they knew there was a design flaw. They knew early that there was a design flaw. They also knew that they were going to sell a lot of vehicles, a lot of a lot of Ford Pintos.

Spencer
So they knew not only that was there a design flaw, but that it it could lead to loss of life. And so what they did though was they basically calculated, well, if we need to pay off, you know, people because they could prove that, you know, the Pinto was designed poorly. And they lost their life. Well, you know, by the time we pay them off and pay our attorneys, we'll still, you know, have a much greater profit than we would have if we just recalled all of the pintos.

Spencer
Now, you know, if you know, the Ford Pinto, basically you had the fuel tank in the back, and so you get rear ended, and the car blows up. Now, not a good outcome. You know, kind of an idiot design process, you know? Really. I mean, you hate to say that, but, like, what were they thinking?

Spencer
You know, putting the fuel tank in the back where, you know, when you get hit, it's not protected, right? You know, in that way. So, you know, over 900 people lost their lives because they're driving Ford Pintos and they get hit rear ended sometimes not even all that bad. And the car explodes. Yeah. Well, Ford did not actually at at they did not recall the vehicles.

Spencer
They did very little to address the issue other than have to pay their lawyers and pay some, people off, you know, but a remarkably small amount, really, compared to the amount of loss of life, in this situation, it it just so sad overall that they they made bad decision after bad decision, kept the cars on the market, kept, you know, people continued to die.

Spencer
And you know, when we look at actually the amounts, there, you know, estimates are that they saved about $90 million, you know, by not, recalling all the vehicles, they ended up having to pay out about $15 million in today's dollars and probably had to pay their attorneys, if I'm guessing some amount, maybe a third of that or half of that or some amount there.

Spencer
So they made money, you know, from the decision potentially if you took that in isolation. Yeah. But it cast a stain, you know, on Ford for decades to come. The law, the loss of trust that consumers had in Ford, that they would actually make a vehicle that didn't blow up, you know, and would also make it.

Spencer
Right. And, you know, were, you know, 50 years since then, but there have been so many laws that have come about from that particular case that regulators now say, well, the Ford is not going to do right now. We're going to have to step in. So now we have more governmental oversight over all these different areas. Whereas, you know, one could think about maybe a different path of Ford to take in if they had just been a standard unto themselves and they'd never allowed that product to be released, or if it was released and a few deaths happened and they pull it immediately and they do what they need to do to to change

Spencer
things. Maybe you don't have that, you know, regulatory need. But, because of their level of greed, now you have all all of the car companies have to abide by certain standards. You know, when we look at this, because there were a lot of people that died, they didn't need to. Right. There's just just a pure matter of not making things right.

Austin
Right. So as we think about this and wrapping up, thanks for walking us through this case studies, I think the reality here is we have to look at this in short term versus long term. Oftentimes when we cut corners, whether it's with employees or our design practices or the ways that we handle crises or bribes, if we're only looking at short term, then oftentimes people can feel taken advantage of.

Austin
They can feel adversarial in an adversarial relationship with that corporation. And we really have to ask, is that a company that I want to clothe capital with? Is that somebody I want to invest in and say, you are seeking the flourishing of the community around you, or you just seeking to cut every corner so that you can maximize your revenue.

Austin
And oftentimes, the companies that we see that really invest well in their employees and their customers and their suppliers are ones that do generate long term profits. And so hopefully you guys enjoy this episode. We look forward to talking through good profits with you next time.

Spencer
We want to thank our friends at the Eventide Center for Faith and investing. Jason Meyer and his team did a fantastic job helping us to grapple with the biblical wisdom on investing. Many of the quotes and thought leaders that we cite come from their original research.

Austin
If you found this episode valuable, share it with a friend and subscribe on your favorite podcast platform so that you don't miss the next episode.

Disclosure
This content was provided by Second Half Stewardship. We are in Knoxville, Tennessee and you can visit our website at www.SecondHalfStewardship.com. The information in this recording is intended for general, educational and informational purposes only, and should not be construed as investment advisory, financial planning, legal, tax, or other professional advice based on your specific situation. Please consult your professional advisor before taking any action based on its contents.