Return on Karma Index – Following GRC Principles

Return on Karma in a corporate setting

‘Return on Karma’ (ROK) is a concept that describes how businesses can succeed over the long run, by behaving in a socially responsible way. Traditionally, it was thought that sustainable business practices had to be sacrificed, to generate large profits. In reality though, when stakeholders demand ethical behavior from businesses, the relationship between these two interdependent parties improves. In turn, this results in sizable, consistent profits and predictable growth.

Sustainable businesses can impact the environment and society as a whole positively. Also, businesses that take the wishes of their stakeholders into account tend to be more innovative, efficient and better at managing risk. This can help them to achieve better returns than their competitors. Therefore, ROK makes sense for investors and the wider community.

Over recent years, several businesses have suffered the negative consequences of failing to treat stakeholders properly. In 2016 and 2017, the Wells Fargo bank made the news due to account fraud. When the negative headlines started to hit it was easy for the media to highlight numerous areas where the bank had mistreated its regulators, staff and clients. Harm was caused to clients who had accounts set up without their knowledge, which affected their credit scores and incurred charges. This wrongdoing arose from the high octane work culture and lofty sales goals for staff, which forced them to take drastic actions to avoid being sacked. In the meantime, the bank’s initial handling of the claims made against it reflected contempt for the authorities.

The impact of this chaotic sequence of events on shareholders was horrendous. There were mass closures of branches, litigation/fines totalling billions of dollars, and a substantial reduction in revenue. Ever since this scandal, the shares of Wells Fargo have remained flat for the most part, trailing other American banks by over sixty percent.

Harming the environment to maximize shareholders’ profits is increasingly unpalatable to clients, staff and the broader public. This bad press could alienate clients and result in them boycotting a business, leading to lower profits. This will present challenges in hiring and retaining workers. Moreover, stringent fines or standards might be imposed by regulators.

Governance, Risk, and Compliance or GRC as it is abbreviated has popped up as scandal after scandal has showcased that companies that act in an honest and compliant manner will succeed in the long run. There’s been a series of software companies that help companies comply with GRC regulations across the globe. As there are so many moving parts and changing laws it’s been proven that there is a return on good karma when corporations do act in the best interest of the community not just shareholders.

Specialist biotechnology business, CSL Limited, develops, researches, promotes and manufactures products to prevent/treat severe medical problems in humans. In partnership with the pharmaceutical firm Seqirus, it is a major supplier of the vaccine for influenza. CSL Limited ensures that its business is sustainable over the long run, by investing in research and development consistently. This gives it a regular supply of life saving products that fulfill the needs of patients. Its proven history of commercial success and groundbreaking ideas reflects its commitment to social responsibility. In particular, its focus on safety, quality, and complying with regulatory audits. These elements are acknowledged by the market, with regards to sustained financial outperformance.

Return on Karma

Notwithstanding, financial markets can be influenced unduly by short term factors. Often, the forecasts for many businesses concentrate on their outlook for the next few years at the most, or even just the next six months. In addition, traditional financial forecasts struggle to take into account non financial elements, like stakeholder relations and corporate culture.

Scope 1 ESG Compliance

Companies that play dirty with the environment are often playing dirty with their shareholders as well. Try to find ones that follow and report on their scope 1 environmental, social, and governance statistics. If they can ensure that from scope 1 to scope 3 they are following a sustainable business model that is healthy for the environment expect strong returns from this type of company.

As a result, the broader market frequently underestimates the level of profits that ROK can deliver for businesses. This is good news for investors, because it allows them to take advantage of market mispricing. Then, they are able to cash in when these sustainable businesses perform better than the market expects.

Investors can play a key role in encouraging businesses to embrace the concept of Return on Karma. This will improve outcomes for people associated with these businesses, and for society in general. Investors should interact with businesses constructively, by speaking to managers if they are worried about how stakeholders are being treated. This might involve monitoring data about outcomes (unconventional and reported), then arranging subsequent meetings to check whether these worries are being addressed. In addition, business owners can use their vote at AGMs to indicate their approval or disapproval of policies introduced by management.