Trust in the aftermath of COVID-19
Kim Catechis and Will Baylis, Portfolio Manager, Martin Currie Australia discuss if trust in companies, brands and governments is going to be a major issue post COVID-19, and what that means for investors and stakeholders.
Trust relates to sustainability, which relates to future economic returns. Companies that behave in a holistic manner will be valued in a more proper manner going forward.
Kim: Hello and welcome to another edition of the AFTERMATH. Thanks for tuning in. Today I propose the meaty subject of trust, and to help me parse through it, I have Will Baylis from our Melbourne office. Will, really good to see you.
Will: Thanks, and you too Kim, thanks.
Kim: So Will, the way I think about it is, where are at this juncture where citizens around the world almost regardless of what country and political system their in, have got accustomed or been brought up on the idea of some kind of social pact. You’re a good citizen, you pay your tax, you obey the rules and in exchange for that, the state provides you with stability, you know, economic opportunity, education for your kids and healthcare security amongst other things. Now, in exchange for that at the time of a pandemic you would expect absolutely rock solid support for a government. That’s not what we are seeing, and it can only be because a lot of governments from around the world seem to have dropped the ball, at least in their citizens eyes. So, when we think about this as investors, that background is a pretty powerful dynamic, how would you frame trust from an investment perspective and why is it important?
Will: It’s important because trust relates directly to the integrity of a company, its board, its management and ultimately its staff who interact with their customer base and their suppliers. It’s really interesting to look at the Edelman Trust Barometer, they have been surveying this issue for 20 years, and their most recent survey shows a lot of people are rating income inequality as the number 1 issue, risk of unemployment is a big issue, and there has been a significant break down in trust between people and their government, and interestingly enough Kim, people are looking much more to companies in terms of that compact, or that contract or that trust agreement that’s so important to them.
Kim: In that framework, what do you think companies should be doing?
Will: Companies need to think about ethics, clearly, and ethical behaviour could be how well they actually analyse the risk of modern slavery with the goods that they purchase. But it also relates to the competence of the management team and the board, and in particular their duty to their employees.
Great example is if you’re a long all edge trucking company and you’re employing thousands of people to drive transport over long distances. Technology is moving so rapidly that you might actually find that those people are displaced, and you have automation. Question for a company that’s running that type of business is - how are they going to retrain those staff, how are they going to win their trust that they will actually have a future when technology takes over those positions by way of example.
The other clear example is the whole issue around climate change. So, Microsoft spend a lot of their own profit on analysing how to mitigate the risk on climate change and their staff expect that. In fact, the CEO of Microsoft has recently described his role as CEO as actually being the voice for his employees, and setting out a range of principles that apply to their company and how it interacts with its staff and suppliers and its community. So, companies need to be a lot more granular in terms of their behaviours to win the trust of their stakeholders.
Kim: So, you started mentioning some business models, talk to me a little bit about companies or brands that you think are relevant as examples.
Will: So, I think I’ve given the Microsoft example. Coca-Cola Amatil, which is an Australian company, part of the Coca-Cola empire if you like, their key focus now is on using containers, particularly plastic bottles that come from fully recycled PET. Their advertising is all about waste mitigation, so recycling plastics, you know waste not going to landfill but waste being recycled. So, the whole focus is on caring for the environment.
Now, interestingly enough they do that through advertising, but they also do it factually and they do it very accurately and they report on this. They also collaborate with the other Coca-Cola bottlers around the world and they share their expertise in this area with other Coca-Cola bottlers. So that’s a great example, of where a brand is associated with really good behaviour, but it needs to be very factual and detailed, granular and its exactly what Coca-Cola and Microsoft have done in relation to climate change.
The other good example is British Petroleum, BP, they brand themselves as being a big investor in renewable energy, or clean energy, and that’s quite remarkable given the history of BP being very much an oil producer.
Kim: Yeah, these are great examples, I think it helps bring it to life, so you know when I started out Will, and I dare say when you did as well, nobody told us that trust should be part of the analysis of a company, just the P/L balance sheet and cashflow statement. Where does it fit in going forward? How would you put it?
Will: It’s going to be a very important aspect about measuring and assessing the sustainability of any company that we invest in. What I mean by that is, if you’ve got a company that acts really well with its community, with its stakeholders, with its suppliers, with its staff etc., if you’ve got a company that gives clear evidence about the issues, the principles that it cares about, and many of them will revolve around climate change and they will revolve around waste mitigation etc., if you’ve got a company that actually explores amongst all of its stakeholders those key issues, there will be a much higher level of trust between, the stakeholders and that company. And so shareholders will be looking for evidence. Customers will be looking for action. Suppliers will be very aware that the company has a very strong lens on where they source their materials or services from. And companies that actually behave in that manner, in a holistic manner, will have a very defined degree of principles like Microsoft does, they will be valued, Kim, in a much more proper manner going forward than if they simply relied on a profit or a return on capital. So, trust relates to sustainability, which relates to future economic returns in those companies that we may invest in.
Kim: Will, that’s really well put, the only thing, I think, left for me to add is that if we look out ahead over the next decade, it’s pretty clear that good companies, good practitioners, good corporate citizens are going to be the ones that over time prove their mettle and I have absolutely no doubt your last point is well taken, valuation will reflect it.
Thanks again Will for your time and for tuning in. Thank you for listening, and let’s pick up again next week with something completely different.
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