Ethical Companies

An ethical company is a company that treats people well. Companies can sometimes be too focused on making money and end up hurting people along the way. However, an ethical company will try to minimize the negative impact that they have on people and maximize the good that they do while they operate.

Defining Ethical

The word ethical can mean different things to different people. However, there is a core concept in moral philosophy known as the Golden Rule – treat others how you want to be treated. Be kind to your fellow human beings. Don’t hurt them or pollute the air that they breathe.

How Can a Company be Ethical?

Companies can have lots of different impacts on people. These impacts can be good (ethical) or bad (unethical). A company can make money for their investors, pay their employees well, create a product that delights their customers, or donate to a local charity which helps their community. These are all examples of ethical actions that a company can take. On the other side of the coin, a company can defraud its investors, unfairly discriminate against some of their employees, sell a toxic product that gets its customers sick, or pollute the environment – these are all examples of company-related unethical behavior. Ultimately whether a company is behaving ethically or not comes down to how they treat the people that they interact with, whether those people are investors, customers, employees, or members of society more broadly. The question is – overall, is the company doing good things for humanity?

Quantifying a Company’s Ethical Value to Humanity

A challenge when trying to determine if a company is ethical is measuring and quantifying the impact that companies have on people. How much does it matter that an agricultural company is polluting our environment if it is helping to produce food for us in the process? What is the value of the positive impact of the food created, compared to the negative value of the damage caused to the environment?

To answer questions like these that try to compare and integrate different issues, the issues must be placed on the same scale and measured in the same terms. There is a readily available metric that can be used to measure the impact of these issues – the U.S. dollar. By measuring positive and negative impact in terms of dollars, all these different issues, from the value of food, to pollution, to discrimination, to tobacco etc. can be compared in terms of how much damage or benefit each is causing. Theoretically, if we can put a dollar value on every impact that a company has on people we could then value that company not just in terms of its profits, but in terms of its ethical value to humanity, or its Humankind Value.

Below is an estimate of the human impact of an agricultural firm called Bunge, which is primarily involved in food distribution and processing. Note the positive impacts in green, and the negative ones in grey. These impacts are shown to scale, meaning the relative sizes of the impacts in terms of their Humankind Value are reflected in the size of the space reserved for it in the chart.

Bunge Ltd.

(All values are in US Dollars, where M = Million, B = Billion, T = Trillion.)

By doing a Humankind Value analysis, as in the graphic above, we can see the relative value of the food that Bunge helps to deliver to us, compared to negatives associated with its business, including air pollution and greenhouse gas emissions that are intrinsic to farming, transport, and food manufacturing. While there is certainly room for it to improve, overall, we believe that Bunge is providing meaningful positive value for humanity, given that the positives outweigh the negatives.

Traditional Corporations vs Benefit Corporations

Traditional corporations typically have a mandate in their founding documents that prioritizes making profits for their investors above all other considerations. This can be a challenge when it comes to behaving ethically, as they may be forced to try and make $2 of profit for their investors while destroying $3 of economic value for everyone else. This is a bad trade from an ethical perspective (they are causing $1 worth of harm to humanity on balance). Yet, an action like that is totally consistent with a pure profits-driven focus.

Of course, it’s not impossible for a traditional corporation to behave ethically. Despite a pure profit focus, traditional corporations can still choose from a wide variety of actions to take that they believe will benefit their investors, while also benefiting other stakeholders as well. There is a theory that to be profitable in the long term, companies must treat all their stakeholders well, not just their investors. This theory is related to the concepts of karma, sustainability, and double materiality. The basic principle is – what goes around comes around. If a company treats the people around it well, then those people will want the company to continue succeeding, and the company will therefore be more likely to succeed. Traditional corporations that take this view may be able to behave ethically while technically keeping their investor’s interests front and center.

However, it is possible for companies to completely sidestep the contortions associated with trying to be ethical while maintaining a pure profits focus. There is a new kind of corporate entity called a Benefit Corporation, which can have a broader, more ethical mission than a traditional corporation. Benefit Corporations can have a mission that includes making a positive impact on their employees, customers, and society, in addition to making money for their investors. This corporate structure allows the company more freedom to behave ethically without needing to show that there is some immediate positive benefit for company profits. It essentially permits the company to do an ethical analysis to inform their decisions. For example, if a Benefit Corporation company board is informed that a certain corporate move will earn their investors $2, but will destroy $3 for everyone else, they can then decide that the single net negative $1 impact on humanity is reason enough for them to vote not to move forward with it.

Humankind 100 Companies

The Humankind 100 is a list that celebrates one hundred U.S. public companies with the highest Humankind Values, according to our research. In short, that means Humankind 100 companies work to create positive value not only for their investors, but also for their employees, customers, and society as well. Humankind 100 companies tend to contribute positively to humanity by, for example, providing access to food, clean water, healthcare, or free digital services. Meanwhile, companies that hurt people, for example by contributing significantly to climate change or selling toxic products, tend to not make it onto the list. 

Ethical Investing

Ethical investing typically entails finding companies that are ethical and including those stocks in an investment portfolio. Ethical investors may work to select a set of companies on their own that they believe to be ethical, or they may enlist the help of a socially responsible investment manager to help do the research into how their portfolio companies impact humanity. This can have more of a positive impact as more people invest in this way, because companies that are unethical may lose access to the capital that they need to operate, while ethical companies could be given greater access to capital to continue their good work. In general, if CEOs believe that there are lots of ethical investors out there, it may get them to change their companies’ behavior so that they can earn those investment dollars.

The practice of ethical investing can also include use of the power of stock ownership to positively influence the direction of the company. Ethical investors may try to influence the direction of the company on their own, or their investment manager may take on this responsibility on their behalf. This can be an effective way to make an impact on how companies behave because investors, legally speaking, have the power to influence how a company operates by voting the shares that they own to push for ethical changes at the company.

Conclusion

Ethical companies can be hard to spot. But by looking into how companies treat people we can better understand how ethical they truly are. Is the company following the Golden Rule? Is it being kind to the human beings that it interacts with? Answering these questions can provide much needed answers that help in determining whether we are dealing with an ethical company, or not.

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A company’s Humankind Value is an estimate of how much value the company creates for humankind, is published annually, and is current as of April 29, 2022. It is based on a quantitative analysis that calculates the comprehensive economic value of a company based not only upon its financial performance metrics but also on the costs and benefits to society from conducting its business. This calculation also attempts to take into account the Humankind Value of the company’s critical supply chain partners. The components of the calculation include: (i) Investor Value, which is the estimated value to investors on the basis of multi-year profitability; (ii) Consumer Value, which is the estimated value to customers based on the offering of a product or service; (iii) Employee Value, which is the estimated value to employees based on their salaries, bonuses and benefits; and (iv) Societal Value, which is the estimated unaccounted costs and benefits to society from the operation of the company’s business.

Humankind Investments LLC (“Humankind Investments”) calculates a single dollar value of a company’s Humankind Value, which is intended to capture the aggregate worth of a company based upon its economic impact on humanity, defined as investors, customers, employees, and society at large. It’s important to understand that this single dollar value of Humankind Value for a company is not a precise measurement of the economic impact that companies have on humanity – rather, it represents a best faith estimate based on our internal model of how these companies behave and what the estimated impact on humanity of their behavior is. In other words, we’ve created a simplified mathematical representation of the real world, and are using that to derive this single dollar value for a company.

This material is provided solely for informational and educational purposes. This information does not constitute an offer, recommendation, or solicitation to buy or sell any particular security or to adopt any specific investment strategy. The information herein has not been based on a consideration of any individual investor circumstance and is not investment advice, nor should it be construed in any way as tax, accounting, legal, or regulatory advice. Investors should seek independent legal and financial advice, including advice as to tax consequences, before making any investment decision. The information presented has been developed internally and/or obtained from sources believed to be reliable; however, Humankind Investments does not guarantee the accuracy, adequacy or completeness of such information. Past performance is not indicative of future results.