A New Way to Address Racial Inequity Through Investing

Addressing diversity issues through the financial markets is challenging, but not impossible, so long as you use the power of the proxy.

That makes Nia Impact Capital a particularly qualified practitioner. Under founder Kristin Hull, Nia has proposed shareholder resolutions that advance gender and racial equity efforts, including prodding companies to abandon the use of non-disclosure agreements in employee contracts. That's led to successes with Fortinet (FTNT), IBM (IBM), and Apple (AAPL). Then there's her ongoing conversation with Elon Musk.

During Black History Month, we checked in with Hull about how Nia is practicing racial equity investing. She told us about it – as well as the charms of Flowers Foods (FLO), Xylem (XYL), and Amalgamated Financial (AMAL). Keep reading for more.

Leslie Norton: Why has it been difficult to address diversity issues using the public equity markets?

Kristin Hull: Because the status quo is so entrenched. Most of our economy is made up of corporations. They're large actors with huge influence over our society as well as our economy. Investors have a right and responsibility to engage with large corporations.

LN: Still, there are improvements made in diversity reporting and human capital management in the past few years. Why keep pushing on these issues?

KH: A lot of our larger corporations weren't founded on the alignment of diversity as part of their structure and ethos. It wasn't and isn't necessarily on most people's radar, and companies are out of alignment as understanding the benefits and using incentives. Yet the research really does show that diverse teams produce stronger financial returns, make better decisions.

Why Proxy Voting is Important For Racial Equity

LN: You and your firm are also known for your proxy initiatives.

KH: I came to public markets as an angel investor and venture early-stage investor. It's very common in our ethos to have a conversation with the initial founders, with the entrepreneurs, of the company. I brought that VC lens to public markets—we're going to get to know these people, why they're doing what they're doing, whether they're competent and sitting in the right seats. We understand the power and privilege of being an investor, and the right and the responsibility to have tough conversations with management. We want to make sure that these companies are doing the very best and positioning themselves for return on investment. For example, Nia has asked companies for scope 1, 2, and 3 carbon emissions prior to that emission data being a standard disclosure, to report on the use of nondisclosure agreements, or NDAs, in employee contracts, to examine the use of forced arbitration and its effects on company culture and racial equity efforts.

Many of these efforts are not being taken on by other investors. We are willing to go first and lead in some of these discussions with companies. We are honestly really happy when we can have constructive, win-win conversations with management behind the scenes because it means we're growing our relationship and making change happen. Absolutely we know that filing resolutions is a tool in our toolbox in the U.S.

LN: What are some of your successes in proxy voting?

KH: Fortinet, the cybersecurity company, in 2020. We saw a lot of men in a leadership and not a lot of attention to this area. We believe in the company and wanted to see them setting best practices as early as possible so it gets baked in the culture. Our resolution asking the company to report quantitative diversity data won 70% of the vote.

We asked IBM for diversity reporting. They weren't moving at a pace where we saw momentum. We need to see all our companies moving at a pace where there's momentum and authenticity. We began engaging with management in 2020 after [former CEO] Ginni Rometty stepped down. In 2020, Nia requested the release of IBM's consolidated EEO-1 form, which catalogs company workforce diversity and is required by all publicly traded companies in the U.S. to be submitted to the Equal Employment Opportunity Commission (EEOC). Nia considers the public release of EEO-1 to be the best practice for disclosures of workforce diversity data. IBM was reluctant, but the SEC forced IBM to place Nia's resolution on its proxy ballot. In 2021, IBM said it would support Nia's shareholder resolution to increase its own diversity and inclusion reporting. So Nia won this resolution with 94.31% of the vote.

We asked Apple, on the ballot, for them to conduct a report on the use of nondisclosure agreements in contracts that Apple asks employees or contractors to sign which would limit their ability to discuss unlawful acts in the workplace, including harassment and discrimination, or their personal experience at the company. We won with more than 50% of the vote. While proxy votes are generally nonbinding, any vote over 20% or so sends a really strong message to management and the board that investors are very concerned about this issue.

We were thrilled when Apple announced last December that they were removing NDAs from employee contracts. They credited our work for making that change.

Most people see arbitration in corporations as providing a relatively fast, cost-effective alternative to litigation. Its potential to entrench preexisting power imbalances is the issue. This plays out for sexual harassment, which is now illegal federally, and racial discrimination. The arbiters are generally retired judges, whose bills the companies pay, and who often side with the company. So racial discrimination is hidden from other managers, employees, the media, potentially exacerbating systemic racism and other issues.

Taking on Tesla

LN: Let's talk about Tesla (TSLA).

KH: We invested because of the battery play and because we saw the capacity to move and innovate. Tesla and Elon Musk have completely disrupted automobiles and manufacturing as we know it, but without a lot of concern or adequate respect for employees and humans. The last earnings call discussed the move toward robotics and AI, possibly at the expense of workers. As soon as he took over at Twitter, which is now called X, there were widespread layoffs of coders and other employees, and then they realised they actually needed these people and tried to hire them back.

We're working with Whistle Stop Capital and a group of investors to discuss possible actions. We wrote a letter to the Tesla board sharing our concern about the board not doing their job, being beholden to the CEO, and asked the board to step up as far as mitigating risks for the company and investors. One of the main issues we raised was Tesla’s lack of regard for human capital management, the ability to attract and retain top talent.

I've written open letters to Elon, and Nia also wrote the first investor statement condemning Musk for his antisemitic tweet.

We may also have played a role in the California suit. [Tesla is currently being sued by the state of California and by the US Equal Employment Opportunity Commission, which claim that workers were subjected to racial harassment at the company.]

During the pandemic, Tesla employees saw us speaking out and also filing our shareholder resolutions. So many reached out to us that I got a bit overwhelmed. I was an investor. What was my role? Attorneys were also coming to us to ask about forced arbitration. So we referred quite a few people to the California Civil Rights Department, and ultimately the state brought this lawsuit.

How to Invest With Racial Equity in Mind

LN: How do you invest around racial equity?

KH: Over the past 15 years, with the lack of diversity in leadership and with so many white male teams, building a product based on racial equity didn't seem possible. Now, that's changing, with our activism, the ability to look at products and services that are beneficial to Black and brown people, and the fact that George Floyd's death in 2020 put this issue on the radar of corporations. Of course, there's a backlash right now against all things ESG and DEI, but it's part of the conversation we can have with companies.

A growing set of investors, women, millennials, and beyond, want to see their investments aligned with their values. We get the economy we invest into, and these investors want to be a part of an equal justice-led economy. Separately, companies want to be the best they can be.

Our previous products have been global. But when it comes to racial discrimination, focusing on US companies is a strategic fit, given the history of slavery and treatment of Indigenous people. We use tools such as the shareholder resolution and proxy voting.

We start off with companies that address six sustainable themes through their products and services. These include sustainable planet, healthcare, natural and organic foods, sustainable transportation, affordable housing, and education, communications and financial services. We look to see which companies are benefiting Black or brown people in each theme. For example, we look in healthcare. The top ailments for African American Black people in the U.S. include sickle cell, heart disease, diabetes, HIV. We look at which companies are doing the best job to address these. Sometimes the research leads us to a privately held company. We may start a dialogue with the company, knowing there will be a merger, acquisition, IPO in the future.

Another important piece is diversity in leadership. We track all the Black and brown CEOs in the U.S. We track teams that have a high level of diversity on the board of directors and the executive team. To the extent we can get data, we look at hiring processes, recruitment. Which companies are going into local high schools, working with the previously incarcerated, thinking about employment for those who have been discriminated against and underserved?

As a minimum requirement, we look to see BIPOC [Black, Indigenous, and people of color] people in leadership in both executive management and on the board. That criteria alone eliminates many companies.

LN: Give us some examples.

KH: Flowers Foods has an interesting Black CEO. It's located in Georgia so we can see that they employ a large number of Black and brown people. They are building relationships with historically Black colleges and universities to recruit more diverse talent. Meanwhile, a number of their bakeries recruit formerly incarcerated individuals. Their Dave's Killer Bread unit has different programs for working with the previously incarcerated. We find Flowers Foods' shares intriguing at their current price points. This consumer defensive stock is growing its top line at 2% and offers a 3.9% dividend yield. Flowers, which historically trades at a premium to the market, is trading at 17.5 times normalised earnings, offering a 20% discount to fair value.

Another is Xylem, a prominent player in the global smart water infrastructure market. It's aiming to recruit formerly incarcerated individuals to the talent pool. It's growing the top line at an 8% compound annual growth rate, making it an appealing investment prospect. The stock trades at 24 times its normalised earnings per share, presenting an 11% discount compared to where the stock normally trades.

Also, Amalgamated Financial, which offers retail, commercial banking and investment services. It has a strong base in nonprofit and union deposits. It has been a vocal supporter of BIPOC rights and opportunities including shareholder proposals to eliminate slave labour in supply chains and contributing to affordable housing loan products to increase access to equitable housing. Amalgamated Bank has a three-year compounded annual growth rate of 20% and is trading at an 11% discount compared to five-year average P/E ratio.