The Invisible Hand Up: Windfall Profits Await Companies Who Employ The ‘Unemployable’

In 2020, hedge funds returned 11.6%, according to Hedge Fund Research, which was their best performance in a decade but not enough to keep pace with the S&P 500, which was up 16%. Last month, the list of the world’s richest people was released, showing the combined wealth of the 10 richest men rose by $540 billion and America’s 614 billionaires grew their net worth by a collective $931 billion. Meanwhile, the Rescue Bill was approved to address one of the most economically disruptive crises in U.S. history, devastating the lives of the essential workers we depended on most during the trauma.

Among the urgent concerns now is the rising number of long-term unemployed. In January 2021, 4 million Americans had been unemployed for six months or more, accounting for 39.5% of the total unemployed.

This incredible income divide has grown unabated for decades, but there may be a light at the end of the inequality tunnel. If you are looking for something positive in the performance of the public markets beyond wealth creation, you will see momentum finally gaining for the social factors in ESG investing.

According to Morningstar, a record $20.5 billion was directed to ESG ( environmental, social and governance) funds during the final three months of 2020, double the previous record for a quarter. Importantly, this movement to ESG was not the result of token gestures to compensate for realizing outsized returns during a pandemic, but rather the growth is the result of outperformance.

Public impact funds going beyond simple ESG screening to contribute to actual solutions have outperformed benchmarks throughout the pandemic. Phenix Capital’s 2021 Impact Fund Universe Report showed that, over the recent six-month and one-year time periods, mid-and large-cap impact funds beat their targets by 3.4 to 4.4 percentage points.

Investors have long signaled the desire to align their investments with their broader societal concerns but, when push came to shove, fiduciary absolutism always prevailed. With market performance now supporting social investments, together with a pandemic, climate change and the movement for racial justice, we can anticipate a continuing acceleration in demand for socially sustainable businesses.

Let’s take a simple social justice strategy that can be implemented at any business the next day an entry-level is job available. Rather than interviewing to fill the position, you simply give the job to the next person through the door without judgment. You commit to making that person a success in your company regardless of their background, work history, or education. By embracing non-judgment, you have eliminated the entire recruiting and onboarding expense, eliminated any opportunity for conscious or unconscious bias, and developed a social justice model that squarely meets three of the United Nations 17 Sustainable Development Goals that are often the basis for ESG investment.

By embracing non-judgment, we do not give up the practices that have allowed us to succeed, but rather we question our attachment to certain longstanding practices that may actually be preventing much greater success in our businesses. Every business wants to improve productivity; that’s certain. What is less clear is how willing business leaders are to examine the effectiveness of their longstanding operating models and eliminate practices that may not only prevent better performance but also inhibit a move to social justice.

For the last 10 years, I have been on a business journey that will not be covered in any MBA curriculum. As the leader of one of the world’s most iconic social enterprises, Greyston Bakery, I experienced firsthand, every day, how non-judgment made the business stronger, more resilient and more profitable. By turning our human capital model on its head with our inclusive hiring model and by trusting in the potential of every person to be successful on the job, we unlocked millions of dollars in value and made our business stronger. Improvements in retention, productivity and employee engagement fell to the bottom line while each dollar in wages provided to a team member who might otherwise never find a job generated incremental value in our community.

Calculating a social return on investment (SROI) for inclusive hiring generates impact at many multiples above the wages paid to new team members. Investopedia defines SROI as a method for measuring values that are not traditionally reflected in financial statements, including social, economic and environmental factors. They can identify how effectively a company uses its capital and other resources to create value for the community. If you include the potential positive impacts on the children of the newly employed, you achieve SROI multiples that can be 10 times every dollar in wages.

Nonjudgment is not about lowering standards or accepting less. It is built on a fair chance, opportunity, mutual respect and a belief in the potential of people until proven wrong. Value creation from embracing nonjudgment is built by redirecting spending on practices that demotivate a workforce to investing in the success of each employee; from creating a stronger and more resilient culture of employee engagement; from tapping into the billions of dollars available from federal and state governments to support inclusive business models; and from building a brand based on the purpose that communicates to your customers and partners what you value as a business.

Francis Fukuyama, in his 1996 book Trust, portends social capital may be as important as physical capital, and that only those societies with a high degree of social trust will be able to create the flexible, large-scale business organizations needed to compete in the new global economy. “It’s a mindset shift from a control mentality of HR and employee management, which is hugely costly, to a model of trust and expectation of high standards, which is less costly.” Twenty-five years later, we are still chasing elusive control and spending millions of dollars to improve employee engagement when the solution may be to think differently about our team members, operations and industries.

Nonjudgment may be the greatest value creator in the next decade. Airbnb disrupted the global hospitality industry by the tireless and passionate belief in nonjudgment — not blindly trusting that people will always do the right thing, but rather cultivating a new way of operating through deliberate technical design and business model development so that people can leverage nonjudgement to their mutual benefit. In turn, AirBNB unlocked a $100-billion opportunity.

Warren Buffet’s investment strategy at Berkshire Hathaway often held up as the most successful of the last century, has trust as one of its core operating principles. Knowing that trust breeds accountability, Berkshire Hathaway will give subsidiary executives autonomy to deliver on their goals and the payback comes in the form of more effective leadership, lower cost of administration and other corporate efficiencies.

With Wall Street now joining consumers and employees in search of more businesses that embrace social change, the question being asked is, “How do we do it?” and “How do we do it with urgency?” Asset managers will be paying premiums for ESG investments as supply falls short of investor demand, so businesses successfully implementing inclusive hiring models, anti-racism KPIs and long-term strategies toward purpose will see their valuations increase. Public/private partnerships will continue to grow with businesses that improve communities as all parties recognize more needs to be done to reverse the declining quality of life for a majority of citizens. We will begin to see a myriad of answers as business leaders unlock value in their organizations by tapping into the converging interests of civic leaders, philanthropists and asset managers to create a more equal and just economy.

(Mike Brady is the former President and CEO of Greyston Bakery.)