In this segment will turn from a consideration of the E to the S or the social factors in ESG. Once again, I'll survey several different social factors impacted by firms. Each time emphasizing how stakeholder actions or reactions to these impacts on these social factors can in turn cause harm to the performance and shareholder returns of these companies. The first set of social factors relate to employees and the amount they're paid. The conditions they work under and the composition of the workforce, as well as the broader effects of that composition. While it might seem that wages are a clear area, we're paying more to tracks from corporate performance and especially shareholder returns. A growing body of research suggests that simple relationship may not hold universally. Workers whose wages leave them unable to feed their family members are more likely to quit. They're more likely to work an additional job and they're less motivated when they do work, as a result they tend to be less productive. A classic comparison in the retail sector can be made between Sam's club on the one hand and Walmart on the other. The former historically paid more and as a result enjoyed higher labor productivity and lower churn. With Walmart seeking to catch up in recent years under their new CEO Doug McMillon. Similarly, Southwest Airlines pays its workers more than its competitors, but it also enjoys higher productivity and lower labor churn. Beyond the level of pay inequality in pay across and within job classes can also breed resentment and de motivate less well paid workers. To an extent that offsets the incentive benefits achieved by their higher paid counterparts. Next are the physical conditions of the workplace, beginning with the rate of accidents and negative health effects of employment. But extending to the use of child labor or other coerced labor. iWhile such conditions are typically highly regulated in industrialized countries, there still exists notable exceptions. Including the cancer rates experienced by employees of Koch industries, industrial plants across the United States. Regulatory inquiries and lawsuits can add additional costs to the health bills and costs involved in attracting and retaining workers to such facilities. In emerging markets, particularly among smaller tier two or tier three suppliers, regulations are less binding, easily evaded with a bribe or otherwise not enforced. Suicide rates and negative health events in apple supplier Foxconn are well documented. As they are in the cotton picking, rug manufacturing, apparel, and shoe manufacturing, as well as many other labor intensive industries here. The question of when the government may shift the oversight is uncertain as is the question of whether customers actually care enough to pay more for better working conditions. But periodic flash points after an activist campaign or a high profile disaster seemingly received from memory and a focus on cost minimization re emerges. Both trade agreements and social activism are however increasing the transparency of such violations. And the cost of having firms engaged in these practices within your supply chain, especially if you hope to sell to large retailers who themselves are pressured to act on these issues. Beyond the physical conditions of the workforce and their compliance with international labor and human rights law. There are also important ways in which the composition of the workforce. Particularly across gender, racial, ethnic, religious or other easily observable criteria can create tangible benefits and costs to accompany. Greater diversity, equity and inclusion and a shared sense of purpose. Can make members of these groups feel more connected to and engaged with their employer, which stimulates productivity. It can also send a signal to customers from the same group or suppliers who themselves have these characteristics with similar benefits. Can also affect customer willingness to pay supplier demands on price. Other studies report higher creativity and greater resilience for corporations with higher diversity equity and inclusion. Exemplar firms include the pharmacy CVS, which makes efforts to ensure staff diversity through specific initiatives. Like the health workforce initiative and its workforce and talent innovation centers. Another example is Marriott Hotel, which take care programs and respect for all platform reinforces an internal culture of diversity and inclusion. A third example is IBM who supports allyship, standing up for justice, fighting against bias and supporting every colleague to be themselves at work. The next set of S factors focuses on customers rather than employees. Customers who are directly harmed by a faulty tampered or inadequately tested product or service can seek recourse in the courts. And if the firm is ruled negligent can receive multiples on their actual financial damages incurred. Such harm can also trigger regulatory oversight and at the extreme the denial of the formal license to operate the business. Consider the costs involved For Boeing after the second crash of the 737 Max plane in Ethiopia, those costs were estimated at $12 billion. The canonical case of proactively addressing such risks and turning them into an opportunity was Johnson and Johnson's voluntary withdrawal and repackaging of Tylenol containers. After a product tampering case Led to a fatality in Chicago in 1982. This proactive reaction made Tylenol a more trusted brand than its peers in consumer surveys for decades. Some products may not be faulty, but can still cause physical harm or mental suffering. Consider the social costs of big tobacco, who's public health consequences are estimated to approach $2 trillion. Decades later, a legal settlement with the producers of these products known internally to be carcinogenic would lead $200 billion to be paid to the United States over 25 years. More recently, the Sackler family is seeking to settle lawsuits against it for knowingly deceiving the public regarding the addictive properties of prescription opioids. The settlement is for $4.5 billion, but the social costs of the opioid epidemic are estimated at $55 billion per year. Even more recently, the Facebook whistleblower has highlighted the internal studies within Facebook detailing the impact of Instagram on depression and suicide rates of adolescence. And fakebook's unwavering commitment to the algorithms that caused this social harm. In addition, Fakebook's algorithms rally extreme political forces of populism, nativism and racism in the United States, in Myanmar and multiple other countries. The social backlash in terms of customer regulatory sanction remains very much uncertain even within product lines that create positive health benefits. We can also seek to parse out the social benefits of some products relative to others. For example, within the pharmaceutical industry, the social benefits of Viagra are likely far less than the anti malarial vaccine. Despite that the industry spends orders of magnitude more on RND on the former rather than the latter. Next consider the means by which a company sells a given product, do customers understand and genuinely want the good or service? Or has the seller masked or even deceived the customer leading to weak customer attachment, regret or even resentment of the seller. Consider the efforts of Monsanto, Dupont and other agribusiness companies to restrict the labeling of genetically modified organisms, GMOs in food. On the one hand, they're technically or scientifically correct that the end product is identical to that grown in nature. But on the other hand, residues of the pesticide glyphosate are more likely to be found in GMO food products. Because they can be genetically engineered to resist it and many customers rational or not want to be able to choose GMO free food products. More sinisterly, Wells Fargo paid a $3 billion settlement for tolerating fraudulent conduct to boost sales by its employees. By creating higher fee accounts for their existing customers without their approval or even knowledge. Contrast these examples with a positive case of Nordstrom's and its policy that employees should be willing to say yes to customers every time. Even when they asked to return products that the retailer never sold them. Needless to say, customer loyalty recommendations and lifetime purchases are much higher for Nordstrom's than for Wells Fargo. The final stakeholder under the s dimension, is the community beyond the fence or the walls of a company's facilities. Do employees wear their uniforms proudly in the local bars or do they change before they head out? Are the ambassadors for the company or are they embarrassed by their employment? Do they recruit their friends and smooth over grievances? Or do they contribute to the challenge the company faces and recruiting and generating support in the local community? The answer to these questions is often a function of community relations programs from the onset of the construction of a facility to the current day. What consultations occurred regarding construction? At the extreme, did they give the community free prior and informed consent over whether and how the facility was to be built? What commitments were made by developers? Were they logged? Were they monitored? Were they met? What sort of complaint system is in place? And how regularly to senior executives and employees participate in community events? And writes, how often do they volunteer locally? In frontier markets, my own research shows that such efforts to secure the social license to operate. Can literally be the difference between having a gold mine where the oar sits in the ground forever due to protests, lawsuits and sabotage. And one that approaches its financial and operational targets. In less extreme settings, firms with better community relations have more satisfied employees. And easier subsequent negotiations for new permits, expansions of their existing facilities. As well as a better ability to manage the inevitable conflicts they'll have with the community. Beyond the community, firms still have an impact on the social and political systems in which they operate. Their choices of whom to hire, who to source from, who to promote and associate with have repercussions for society as well as for their firm. Such choices are particularly sensitive where group boundaries are defined by ethnicity, religion, culture, race, political ideology, class, gender, age or geography. Where such identity group boundaries are strong and salient, every choice the company makes, which seems to favor members of one group with economic benefits. Or even social and political status can ripple through the system of relationships with that group and alter the relations between group members. Both within and outside the community in which the firm is operating. CVS not only promotes diversity among its employees, but it also reaches out into the communities in which it operates. To bring members of disadvantaged groups into medical careers with a strong emphasis on pharmaceutical careers. IBM has led efforts to remove loaded terminology like master slave and blacklist from the lexicon of computer programming. After the Black Lives Matter protests in the United States, some companies joined efforts to enhance financial inclusion, like 90 to 0. Voting rights via the Fair fight program and Stand for Democracy or other programs that combating systemic racism in the criminal justice system, like Campaign zero, others remain silent. The choice between these strategies to make a positive versus a negative difference or stand on the sidelines begins with a sense of inclusion and belonging by a company's workforce. But extends to the customers and the community sentiment towards the company. In some cases, the sentiment of stakeholders from one group towards those and other groups at the societal level.
