Positive Alignment: Demonstrating Strong Servant Leadership

A company’s financial statements can’t tell you everything you’d want to know as a potential investor. There are components of a business that aren’t captured on its financial statement. Because these components can materially alter the risk of the company, it’s important to take those factors into consideration too.

In our January 2023 update, Beacon Wealth Consultants’ Chief Investment Officer Hillary Sunderland, CFA®, CKA® discusses how company leadership can impact a company for good or bad and why we seek to tilt our portfolios toward managers or companies that demonstrate strong servant leadership.

Watch our video to learn more!

If you have any questions about your financial situation, please reach out to your wealth advisor and we would be glad to address them for you. Thank you for being a valued client of ours.

Full transcript below.


Hi, my name is Hillary Sunderland and I’m the Chief Investment Officer of Beacon Wealth and LightPoint Portfolios. This is your January 2023 update.

When you invest with us, we seek to invest your assets in companies that you can be proud to own, those that are in alignment with your faith values. And while this means that we often talk about what we don’t invest in, our exclusionary screens, I think it’s equally important to talk about the positive screens on our portfolios as well.

Here’s a chart showing the five different areas we emphasize in terms of positive alignment, and you may be wondering what each of these categories mean and why we’ve chosen to emphasize them in our portfolios. So today I’m going to address the first one for you, which is “demonstrate strong servant leadership.” My goal is that each of these will be discussed at some point during the year.

Shining Light Companies

But first, why is positive alignment part of our process in the first place? Well, as a steward of the assets entrusted to our care, we believe that it’s part of our fiduciary duty. I’ve always liked this definition of stewardship: Stewardship is the process of intervention to make sure that the value of assets is enhanced over time, or at least does not deteriorate through neglect or mismanagement.

So we have always focused on managing risks and weighing risks against rewards. And we view positive screening as no different in principle because there are aspects of a company that can cause its financial deterioration that are not captured on a financial statement. When I was thinking about how to best walk through this, I recalled a story that I read about several years ago that has always stuck with me for some reason.

It was about a 61 year old man in Britain who struggled for seven agonizing years with a mysterious lung infection, and it left him short of breath, puzzled his doctors, and reduced his mobility to about 30 feet.

Eventually, it led to his death. And the part of the story that stuck with me is that just a few short weeks before his death, the doctors learned that he played the bagpipes daily. And if you know anything about bagpipes, you know that they need to be cleaned meticulously because otherwise they can be dangerous instruments due to what they can harbor inside. So the doctors took a serious look at his bagpipes just a few weeks before his death, and unfortunately discovered several different types of fungus as shown here.

Bagpipe fungus

Unfortunately, at that point, it was too late to help the man. For seven long years, the man was essentially poisoning himself daily due to something in his environment and the doctor’s did not and could not have known this simply by looking at his medical test results, there was something else going on that slowly led to his deterioration.

So how does that sad story relate to investing? Well, when you evaluate a company based solely on financial factors, you typically do this by analyzing a company’s balance sheet, which will reveal the firm’s assets, liabilities and owner’s equity, and the balance sheet combined with other statements such as the income statement and the cashflow statement make up the cornerstone of any company’s financial statements.

While these numbers can tell you a lot about how much the business is worth and how we develop an outlook for how the company may perform in the future, it can’t tell you everything. Just like the man’s daily activity of playing the bagpipe was not captured on any medical test, there are components of a business that aren’t captured on its financial statement. And it’s important, when these components can materially alter the risk of the company, to take those factors into consideration too.

It is our belief that good investment analysis will take the time to understand the non-financial factors that are material to the company’s wellbeing. Poor management of resources and human capital, product liability, or poor governance can expose shareholders to significant and potentially catastrophic risks. And that’s why we seek to tilt our portfolios towards stocks or toward fund companies than our view manage material non-financial factors better than industry peers.

So in terms of demonstrating strong servant leadership and what that means, this category emphasizes the company’s relationship to the employee. Servant leaders focus on the growth and wellbeing of employees and other stakeholders in their organizations. And when this is done well, companies that exhibit strong servant leadership are able to build strong teams. Employees are personally and professionally satisfied, and they’re able to contribute work that is of high quality. And I think the importance of this can be summed up by this quote from David Creelman, “Almost everything that can go wrong in the business has a human capital component.”

Managing human capital well

Managing human capital well is mission critical because when it is not done well, the following usually results. The first is complacency. Complacency comes from a place where “I don’t know and I don’t care”, run rampant. It can lead to underperformance, lower client satisfaction, and workplace accidents,

It can also lead to employee turnover. In companies with strong employee dissatisfaction, turnover runs rampant. There are direct costs to the company for that, such as separation costs, temporary staffing and training costs. And there are also indirect costs to the company: learning curve of the new employees, reduced morale, lost clients, lost knowledge, and lost productivity just to name a few.

And finally, catastrophic workplace events. When employers don’t treat their employees well, especially in terms of employee safety, the potential damage from catastrophic events can be staggering in terms of both human suffering and loss of brand reputation and hence company profits.

So overall, we believe that a company operates the most effectively when the workforce is positive and productive. This ensures that the cost of employee turnover, absenteeism, or strikes are reduced. And additionally, it allows the company to attract and retain key employees. This is why we seek to tilt the portfolios toward managers or companies that emphasize the dignity of all people through ethical employment practices directly or through the company’s supply chain, and also promote equal opportunities and workplace standards.

I hope this gives you a better understanding of one of our positive alignment screens. As always, please reach out to us with any questions that you may have.


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