The Philosophy and Research behind Conscious Companies

In the following clips and transcripts, from our ‘Investing in Conscious Companies Webinar,’ Rick Frazier discusses the investment philosophy and background of Concinnity Advisors, LP. He also discusses the research process behind the Concinnity Conscious Companies Index, which is tracked by the Global X Conscious Companies ETF (KRMA).

Frazier on Concinnity’s Investment Philosophy

Our main catalyst for embarking on this journey was the confidence we derived from firsthand evidence of a causal link between a well-executed multi-stakeholder approach and corporate performance, not stock performance, mind you, but global performance. As former management consultants, we spent a number of years focused on pretty tedious work of creating causal path models that involved building internal indices for companies, cultural index, employee index, customer index, and so on, and then tracking how the performances of those indices affected financial performance.

That relationship revealed itself in a significant way. We discovered that a multi-stakeholder operating system really does matter to corporate performance. There was a lot of supportive work we could point to that bolstered our confidence that this would be a worthwhile endeavor, most notably were the arguments put forth in a couple books, Firms of Endearment by Raj Sisodia and David Wolfe, and then more recently, Conscious Capitalism by John Mackey and Raj Sisodia.

The main argument of both books was that companies guided by multi-stakeholder operating system are more likely to flourish in today’s marketplace. That’s the sort of overarching argument. I think this is an important point, that we’re convinced the marketplace is demanding that companies operate this way ahead of any widespread investor demand that they do so. We think more and more companies, to various degrees, are recognizing this marketplace reality, that they can no longer afford to completely ignore the changing expectations that we have about the companies we buy from, work for, invest in, and that operate in our communities.

A number of different labels were all seen with regularity are indicative of this reality, whether it’s corporate social responsibilities, sustainable investing, responsible investing, whether it’s shared value, blended value, triple bottom line, doing well by doing good. All these labels are indicative of this new marketplace reality. Our basic premise is that it’s practically impossible for companies to meet the expectations embedded in any of those labels unless they’re guided by multi-stakeholder operating systems. That’s our basic premise. This is certainly the case with the conscious capitalism label since the multi-stakeholder operating system is one of its pillars.

We believe in multi-stakeholder operating system and mindsets becoming less of an option for companies. Managing the expectations of multiple stakeholders, despite potentially diverging and conflicting interests, is becoming an essential corporate competency. This is another reason we thought it would be a good idea and clean investment strategy based on identifying companies that are well down that path.

I feel this has been – this might seem like a rather long, winding way to explain our investment philosophy, but I think it provides some context for what would otherwise be viewed as a very common response; namely, that we want to identify well-managed companies. Who doesn’t, right? To us, a well-managed company in today’s world is one that believes meeting the needs of and aligning the interests of its core stakeholders is the best way to deliver long-term shareholder value. By core stakeholders, we refer to them as – our list of core stakeholders are our employees, customers, suppliers, the communities where they operate, and of course, shareholders.

Frazier on the Research Process behind the Concinnity Conscious Companies Index

One thing we concluded early on was that, in order to do this analysis well or right, it was going to require hundreds of people. As far as I’m concerned, we do have hundreds of people contributing to the effort. I’ll say more about that in a moment. Our first few years of existence was solely dedicated to building and testing a research process. We all agreed, at the time, that we’d abandon the project if we couldn’t come up with something we felt confident about. Once the framework was all in place, we had a pretty good handle on all the partners we would need to rely on to pull this off, and we had a pretty good handle on all the associated costs. Unfortunately, the costs were such that if we were going to evaluate, say, the Russell 3000 or even the 2000, we were pretty sure we’d end up with the most expensive research process the world had ever seen. This is what forced us to design an initial screening process. We needed to somehow create a universe of companies that seemed most worthy of being thoroughly evaluated, most worthy of the dollars it would require and the time it would require to thoroughly evaluate.

Our initial screening process uses about 40 different weighted information sources that we selected that recognized companies for achieving certain outcomes that you would expect form firms guided by multi-stakeholder operating systems. Now, a couple examples of those sources are sources that recognize firms as being ethically sound or great paces to work.

Now the initial process produces a universe of about 1200 to 1400 names. We only select the top ranked 700 to 800 names for further analysis. Those names are put through what we call our composite analysis. The composite analysis incorporates data, ratings, and insights from a number of specialists who provide us with assessments associated with specific stakeholder groups; customers, employers, suppliers, communities.

It also integrates ESG ratings, Environmental, Social, and Governance ratings, and multiple ESG ratings providers. Then we have other partners who provide us with reputational measures, management integrity assessments, ratings of intangible asset management proficiency, cultural proxies. We have this large stable of partners we have relied on to pull this off, and that’s why I feel we have, and have had, hundreds of people doing work on our behalf to make this possible. That whole stable of partners.

This composite analysis views each company through a number of lenses. A company needs to look pretty good across all those areas to make it into our qualified universe, as we call it. That qualified universe goes from, we start about 700, 800 names and we end up with around 300 names that are what we call multi-stakeholder operating system proficient as determined by the research process.

In some cases, we’re using specialists who have never even been approached by investment firms. The one that surprised me the most was our customer analysis partner. I mean, I was thinking what could be more fundamental to a company’s capacity to create future cash flow then loyal customers, and yet not a single investment firm had ever approached this company for their information about customer loyalty, customer perception of value, a whole host of very insightful indicators that gave us a good read on the quality of the relationship companies have with their customers.

Other partners are conducting audits throughout the world at factories and have real insights on which companies are doing a good job in monitoring potential disruptions in their supply chains, potential labor and human rights violations within their supply chains. Yet again, no one had asked this firm for their opinions on how companies are doing in that regard. We feel as though because we’ve had to build this intangible asset information system pretty much from the ground up, it required us to find partners who were potentially doing things that were associated with intangible asset-type indicators.

It just took us a few years to find everyone and put it all together. Obviously we’re still here, so that pact we made early on that we would abandon the project if we didn’t come up with something we felt confident in, means that we did because we were serious about stopping if we couldn’t.