Ethically run companies shown to outperform S&P 500 by nearly 10 to 1.

By: Dr. James D. Smith PhD/MBA Financial Advisor
(716) 221-0211

I welcome those who are receiving this long standing mailing regarding investing in the business of life for the first time. Its goal is to provide actionable sense-making observations that add value to your perspective.

Today’s topic notes that powerful and sustained returns are delivered by companies that follow the ethics of the stakeholder-centered management (SCM) model. In all business sectors and all business sizes SCM has been shown to deliver larger returns, higher growth, and better feelings to investors, employees, customers, communities and the other businesses that supply the ethical firm.

In SCM business ethics is a harmonic relationship among shareholders and stakeholders in pursuit of a shared vision to bring valuable goods and services to customers for a profit.

Is there really a trade-off between ethics and profit or are ethics and profit mutually supportive? Do you ever consider investing in companies that are ethical, sustainable, or in some way socially responsible? If so, read on. You will not discover a “double bottom line”. Instead, you’ll find the bottom line is simply “doubled”.

Recently, Harvard Business School published a record of this performance in a book titled Conscious Capitalism: Unleashing of the Heroic Spirit of Business. This is the gold medal in the Olympics of business. In this book, it was simply spelled right out which companies, how those companies related to stakeholders and how amazing they became in profit. A business ethics professor, R. Edward Freeman from Darden School of Business, University of Virginia, promoted this model stakeholder management It makes perfect sense…and works.

The most ethical companies are among the most profitable companies in the world. Why? The very same things that grow any company and its profits are the same values that people work for and pay to enjoy.

SCM companies are trusted. Trust means that they tend to be the first choice for savvy consumers and the focused entrepreneurs who desire to partner with great business partners. The shareholders who invest and run these companies find leaders who will keep the interests of all the stakeholders in the system optimized to create value for all. These are stakeholder centered company leaders. In the chart below, the steady growth of stock valuations of stakeholder companies (in blue) outpaced the S&P 500 (in red).

SCM companies start out with a vision and intent tor add value to their customers in a way that works for the business too. This is the type of relationship that makes a relationship a relationship. The relationship is based on shared values and mutual benefit.

Everyone a business and impacts is a stakeholder who desires success. The company’s vision is revealed by the products, services, people and behaviors the company manifests. These become its reputation and eventually, its revenues, growth, and profitability.

Ethical companies deliver great products consistently. They are safe, reliable, and priced for the market they target. The employees are very well trained and enjoy above average industry pay. These employees are the face of the company. and by virtue of these happy, engaged, consistently communicative and trained employees and great products, customers return and revenues grow.

Ethics is not reaching perfection while growing profits. Ethics is an intent that motivates actions that further lead to desirable outcomes. Yes, there are hiccups and failures. But awareness and learning bring actions back on track. Intent, action, and outcomes must align for integrity to exist. If and when the outcome is wrong, actions can be changed. That happens and must happen to grow and learn.

Investors are smart to put their money to use to create and invest in companies that not only care about their end products and employees but also work closely as partners with their suppliers. Great companies value the many other businesses that supply them with what is needed to do business.

Ethical companies are aware, or conscious, enough to resist the temptation to continually squeeze price concessions from suppliers. Instead, they work with their established suppliers in a way that is sustainable for both of them to grow together. Of course, as new innovations come along, suppliers must adapt or lose out. Growth and adaptation is never an option. But as much as possible, these two work to bring the best to the table everyday.

The smart, ethical, and conscious company is aware of the system of people that make up their economic well being. The key stakeholders are the customers, employees, suppliers and investors but there is more. There is the community and the environment.

Ethical companies make efforts to act as committed citizens in the communities in which they do business. This means paying taxes as applicable and operating within the regulations as required. Obviously responsible companies will work to influence the community in ways that lower or optimize tax revenues and support legislation that allows for economic growth. Ethical companies will work with schools and job training and other types of community outreach to help individuals find and enjoy their place of belonging in the modern world.

Stakeholder management works in small, large businesses and mid-sized business because money is a measure of what people value. Though people tend to value different things at different times, the consensus of the market is clear: companies that deliver great products with great passion, train and pay their employees well, treat their customers with amazing respect, partner with better suppliers for each others’ benefit and act as genuine citizens within their community do the best of all.

Ethics is an idea. The idea addresses which principles can help each person be the best that person can be and how they can add value to others. Money is a measure of that value. It is not the only measure. Yet, it’s a reasonable measure.It is important to remember along the way that no person or company is perfect.

Ethically enhanced performance reflects in the stock price. This is “doubled” (as in enhanced) bottom line performance. This is also where Buffalo First Wealth Management can help. I’ve worked with the stakeholder management style “conscious capitalist” companies since their official start  in Austin, Texas. However, we’ve been around a long time. So if you’re interested in sustainable investing, making a better world through great business and doing well yourself let’s talk.

If you’d like to learn more, and understand your options call me.

To your best investment,
Dr. James D. Smith PhD/MBA Financial Advisor
(716) 221-0211

The views expressed are the views of Dr. James Smith are subject to change based on market and other conditions. The opinions expressed may differ from those with different investment philosophies and are independent of Buffalo First Wealth Management. The information provided does not constitute investment advice and it should not be relied on as such. It does not take into account any investor’s particular investment objectives, strategies, tax status or investment horizon.

This material is for informational purposes only and does not constitute investment or tax advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor’s particular investment objectives, strategies, tax status or investment horizon. There is no representation or warranty as to the current accuracy of, nor liability for, decisions based on such information.

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