By R Paul Herman A Book Review
R. Paul Herman has written a highly practical book. It is also educational. He has developed a system for scoring the combined profitability and responsibility of a company. This is useful for investors who want to make decisions with conscience and also desire to grow their own security and wealth. What’s more, he bridges that gap by making it clear that what helps the social and ecological side of business, are the same things that help businesses financially. The research behind it gives us solid footing and confidence in its methods. HIP stands for Human Impact plus Profit.
Herman identifies five elements for scoring on the human impact side. It starts with the basis of healthy people. Customer satisfaction, employees’ satisfaction and retention as well as health, safety, wellness of employees, suppliers and stakeholders. Herman suggests these as good indicators of the ability to maintain a brand as well as a market. He takes Henry Ford’s axiom of, “paying a good wage to workers so they can buy his cars,” to the next level. You need a healthy community and workers to be your market. The business is valued and viable when its customers, workers and community can count on it.
The second element is wealth of the system. These are mostly familiar indicators but adding them into be measured as part of a scorecard to good investing is brilliant. Wealth is described as: Employee’s future savings and retirement; pay relative to peers in the industry; CEO compensation relative to average staff pay and investment made by the company in the community. The idea here is, that companies need to build wealth for employees and the community as well as themselves and seems to be highly correlated with profitability of the company.
The Earth is a more familiar ground for responsibility efforts. Herman gives us four main drivers he believes are good indicators for Earth impacts—the reuse of waste, water efficiency, energy efficiency and greenhouse gas emissions.
Equality is an interesting fourth arena for assessing the HIP company. Herman found correlations between diversity in customer base, Board makeup, employees and supplier mix, with that of financial performance. There has been a lot written on employee diversity and creativity, (also customer because it means you are less trapped in one niche) but having Board diversity added into this mix is new. It makes sense. It is amazing to see that having a mix of women and ethnic groups in the Boardroom makes a difference to profitability as well as ethical decision making. It confirms a lot of intuition.
The fifth arena is Trust. It was added after examining the oil industry more deeply and finding it wanting. Trust metrics include openness to being interviewed, and third party certifications for transparency. The other two indicators of trust are legal actions in which a company becomes embroiled and the degree and nature of their lobbying efforts. High levels of either of the last two categories, relative to revenue, are flags to call for more investigation.
That is the human impact framework on the system. The rest of the book is demonstrating how to build a portfolio that takes all this into account in making investment decisions. HIP Investor makes it clear how connected the positive human impact is to higher valuation of the company. Herman gives you sources for how to get the information you need to build a thoughtful portfolio based on his five elements. And to make sure it is understood as very doable, Herman sets up a handful of side by side comparisons of companies: Pepsi vs. Coke, Procter and Gamble vs. Colgate; J. P Morgan Chase vs. Bank of America; Verizon vs. Sprint; McDonalds vs. Starbucks; Chevron andvs.ExxonMobil; Microsoft vs. Apple; Wal-Mart vs. Target; Raytheon vs. Lockheed Martin; and finally Dow vs. DuPont. They are compared directly on the five human impact measured as well as the financial measures. You have to read the book to get the answers.
I highly recommend it not only for investors, but also for managers and executives to use in assessing themselves. That is, before their investors do it for them. There will be more from Paul Herman in a Q&A on what has happened since the book and how the idea for it emerged originally. Check back Friday.