Wall Street Firms Slash S&P 500 Price Targets As ‘Concerned’ Analysts Warn Of Earnings Slowdown

A handful of Wall Street’s biggest firms are slashing their S&P 500 forecasts for the year, predicting lower stock market returns thanks to a difficult quarterly earnings season ahead as companies wrestle with surging inflation and rising interest rates.

With the stock market down roughly 20% so far this year amid fears of a looming recession, there are “lots of reasons to be concerned” about upcoming corporate earnings—with an incoming “flurry of downward revisions,” Bank of America warned in a recent note.

Though quarterly earnings season has just started, Wall Street analysts are slashing forecasts—with seven out of 11 S&P 500 sectors facing reduced earnings estimates, according to FactSet data. UBS on Monday slashed its earnings forecasts due to slowing economic growth and rising costs, with the firm also reducing its year-end price target for the S&P 500 to 4,150—down from a previous estimate of 4,850.

Evercore ISI also cut its year-end S&P 500 target the same day, to 4,200 from 4,300, as analysts sounded the alarm on corporate margins and earnings being “under pressure as prospective recession scenarios develop.”One of Wall Street’s biggest bears (who has also warned of further downward earnings revisions) is Morgan Stanley chief strategist Mike Wilson who is maintaining a year-end S&P 500 target of just 3,900, while also predicting the index could fall as low as 3,000 if a recession hits.

Even some of Wall Street’s most optimistic strategists are slashing their S&P forecasts somewhat, including Oppenheimer chief investment strategist John Stoltzfus, who reduced his estimate to 4,800 from 5,330 amid “palpable risks of recession.”

Despite the gloomier forecasts recently, most Wall Street firms still predict a market rebound by the end of 2022, with the majority of price targets implying modest upside from the S&P 500’s current level of around 3,850. UBS and Evercore ISI’s most recent forecasts for the benchmark index both imply roughly 8% upside from current prices, while Oppenheimer’s price target suggests the market will rally nearly 25%. Even Morgan Stanley’s bearish outlook of 3,900 would mean stocks post a slight gain by the end of the year..

Even as recession fears remain front and center, not all Wall Street firms are forecasting an economic downturn. Analysts at Credit Suisse, for instance, also slashed their S&P 500 price target (to 4,300 from 4,900) but argued that the economy’s current slowdown is not recessionary. “Recessions are most accurately characterized by a meltdown in employment accompanied by an inability of consumers and businesses to meet their financial obligations,” Credit Suisse analyst Jonathan Golub said in a note on Tuesday.

“While we are currently experiencing a meaningful slowdown in economic growth (from extremely high levels), neither of the above conditions are present today.” UBS strategist Keith Parker similarly sees slowing growth “but no recession,” with modest gains for the stock market ahead as he predicts high inflation will eventually subside.

Investors remain “nervous” about the upcoming inflation report on Wednesday, with experts predicting that consumer prices for June will surge higher than the 8.6% recorded in May.

I am a senior reporter at Forbes covering markets and business news. Previously, I worked on the wealth team at Forbes covering billionaires and their wealth.

Source: Wall Street Firms Slash S&P 500 Price Targets As ‘Concerned’ Analysts Warn Of Earnings Slowdown

Critics:

The S&P 500 Index (US500) has reacted to the US Federal Reserve (Fed)’s ultra-hawkish stance by shedding over 20% in the first six months of 2022. 

As Fed chair Jerome Powell puts his foot on the pedal and accelerates quantitative tightening, investors now fear that decreasing money supply will push the US economy into a recession. Analysts remain divided on the likelihood of a recession as they await economic data, which remains key in anticipating the severity of rate hikes in the second half of the year.

S&P Global summed up the current market sentiment in its third quarter US economic outlook report: “We expect that the Fed raising interest rates and reducing its balance sheet will be enough to eventually begin to tame inflation and help restore real wage strength and purchasing power. The question is whether it will push the US into recession as well.”

After hitting its lowest level since December 2020, the S&P 500 rebounded by over 6% in the fourth week of June, breaking a three-week losing streak in the process as short squeezes caught bears off guard. Jefferies called the current market sentiment “extreme” in a note dated 27 June, having seen net S&P 500 futures turn to net short, according to the Commodity Futures Trading Commission’s (CFTC) S&P 500 speculative net positions data for week ended 24 June.

“Thoroughly depressed sentiment, an extreme in short positions and rising cash levels are creating a vicious short squeeze,” said Sean Darby, global equity strategist at Jefferies. Despite seeing a recent rally in prices, the S&P 500 posted losses of close to 9% in June. As of 6 July 2022, the US benchmark index has lost close to 20% year-to-date (YTD).
In comparison, the tech-heavy Nasdaq Composite Index has slumped nearly 30% in the same period, while the Dow Jones Industrial Average index has shed about 15%. Based on the 5 July close of 3,831.4, the S&P 500 remains below its 200-day exponential moving average (EMA) of 3866.9.  After dropping to near oversold zones on 16 June, the index’s 14-day Relative Strength Index (RSI) has risen to a near-neutral zone of 56 points, as of 6 July.

The Jefferies report said that “investors are now holding high levels of cash after one of the worst drawdowns in modern history”. The report showed that the S&P 500’s 12-month forward price-to-earnings was “just above” its long-term average.  “The multiple correction has been driven by long rates and not necessarily earnings revisions,” added Jefferies. As of 6 July 2022, the S&P 500 index was about 20% away from its all-time high of 4,818, which it reached on 3 January 2022.

By Mensholong Lepcha

Related contents:

S&P 500 Loses Over 1% As Investors Brace For Shaky Earnings Season, Looming Inflation Report

Stocks Fall After U.S. Economy Adds Back 372,000 Jobs In June

Federal Reserve Prepares More Big Rate Hikes Amid Risk That High Inflation Could ‘Become Entrenched’

Stocks Close Out Worst First Half Of A Year Since 1970

Wall Street Chooses an Odd Time to Be Upbeat About Growth Stocks 

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Thinking Strategically Will Help You Get Ahead and Stay Ahead

Strategic thinking is a critical skill in life. Interestingly, a lot of us hear about it for the first time in our lives through our managers “You are great at execution, but you need to start thinking strategically.” Previously considered a blatant corporate mumbo jumbo term, strategic thinking wasn’t a popular concept in the early years of my career. I kind of assumed that strategic thinking was reserved for corporates and people higher up in the company who needed to make crucial decisions around the future of an organization. It never occurred to me that thinking strategically isn’t a skill you acquire when you reach a certain position, it’s a skill you build to get to a certain position.

Strategic thinking is a critical skill in life.

Interestingly, a lot of us hear about it for the first time in our lives through our managers “You are great at execution, but you need to start thinking strategically.” Previously considered a blatant corporate mumbo jumbo term,strategic thinking wasn’t a popular concept in the early years of my career. I kind of assumed that strategic thinking was reserved for corporates and people higher up in the company who needed to make crucial decisions around the future of an organization.It never occurred to me that thinking strategically isn’t a skill you acquire when you reach a certain position, it’s a skill you build to get to a certain position.

I also believed that when I was ready to climb the corporate ladder, my manager would give me the training to help me build my strategic thinking skills and the opportunities to practice those skills. Call me naive, but that was the corporate world I lived in back then. Much has changed since, but one thing has remained constant: Strategic thinking is as important now (and may be even more) as it was many years ago.While universally, everyone is expected to have strategic thinking skills at some point in their career, no one is taught to think strategically at work, in college, or at school. Much of our education system is structured around a curriculum and how to fit our minds within a box.At school, we are praised for sticking to conventional wisdom and not asking too many questions. The trend continues in college.

In the early years of our career, we are rewarded so much for our speed of execution that we fail to realize that our journey ahead is less about doing things and more about deciding the right thing to do.When a large part of our life is spent executing someone else’s idea, it isn’t easy to break out of that mold and rewire our brain to think above and beyond. But strategic thinking is not a skill you can develop without practice.

Strategic thinking is a muscle that we all need to build because using it right at work can be a strategic advantage in your career growth as an individual. Much like a rubber band, you need to stretch and exercise your thinking. It requires crossing the boundary of the comfort zone to think about an idea to its extreme without mental guardrails to put it down. It requires uncovering new insights that moderate thinking would never surface.

Getting started on the strategic thinking mindset

Before we jump to the strategies to embrace a strategic thinking mindset, here are a few questions to kick-off your thinking. You need to ask yourself these questions from time to time. Write them down if you want them to be more effective:

  • Where do you stand right now?
  • Where do you want to be next year and the year after that?
  • What skills do you need to get there?
  • How can you practice those skills?
  • How can you increase your chances of success?
  • How can you use your time effectively and maximize it for impact?
  • Who can help you validate your ideas and give you feedback to expand your thinking?

Once you are able to spend some time thinking deep and hard about these questions, you are ready to embrace a strategic thinking mindset. Follow these 4 key strategies:

  1. Challenge and Question Assumptions

Many parents and even teachers are annoyed with kids who ask too many questions: “Why do I have to go to school?” “Why do I have to sleep early when you can be awake till late?” “Why can’t I play video games?” “Why do I have to finish my homework?” You may have not gotten all these answers as a kid. None of us did. But not getting these answers as a child shouldn’t stop you from asking questions as an adult. Curiosity and the ability to express that curiosity constructively is a great skill to have at work.

One of the biggest problems I see in organizations is how people do certain things because they have always been done that way. Emailing a report every morning to hundreds of employees that no one cares to open. Spending hours and hours of meeting time in planning discussions when no one cares about those plans a few months down the line. Far too many inefficiencies creep into the corporate system over a long period of time.

One big component of building a strategic thinking mindset is to challenge how certain things are done in your organization – not with the intent to put someone down or establish your superiority, but to identify ways to do them better. Ask targeted questions on specific problems within your organization or your line of work. Learn from how others respond or think about these problems. Different points of view on these problems will not only expand your own thinking, they will give you a direction on the areas that are worth investing your time in.

  1. Observe, Interact and Draw Connections

The hustle and bustle of getting things done, moving faster, quicker and making things happen can prevent you from noticing and investing in activities, ideas and projects that are more important in the long-term, but need your attention right now. We have all fallen for the lure of attending to the urgent while pushing the important stuff to the side. The instant gratification from solving the problem in the short-term is always more alluring than the prudent decision. We may optimize for a small gain in the moment without analyzing the potential impacts of our decision in the future. Building a strategic thinking mindset requires delaying that gratification. It requires living with a small, unimportant problem and putting all your energy and focus on other important ideas and activities that require long-term planning and execution.

Create mental space for new ideas to kick-in. Without the quiet time to sit with your thoughts, facing the uncomfortable silence, and letting your mind wander away, you cannot draw useful connections. It will not happen the first time around and probably not even the second time. But if you are persistent in your efforts, without digital and other distractions of daily life, you will start to notice new patterns of thinking. New ideas that you never thought about before will start to surface.Another great strategy is to not restrict yourself to knowledge within your current scope of work.

Spend time learning about your business and industry. Meet with other functions within your organization to understand how they operate, what their challenges are and how they make decisions. All of this knowledge will enable you to apply different mental models to connect ideas from different domains thereby expanding your circle of competence and building your strategic thinking skills.Remember, building strategic thinking skills involves looking beyond the obvious and now to prodding and shaping the uncertain future. You can’t do that without the willingness to face a little discomfort in the present to build the skills you need in the future.

  1. Put it Into Action

Now, to the most important part. I have discussed this before. In any organization, both big picture thinking and nitty-gritty details are important. Strategic thinking requires the right balance of thinking ahead while actioning in the now. It’s the perfect amalgamation of what the future holds to what must be done now in the present to make that future possible. Strategic thinking not only involves the long-term view into the future, it also involves the choices you need to make to make that future possible. It requires determining which path to take and which to abandon. It requires evaluating the cost and making the trade-offs. Doing something will always come at the cost of not doing something else.While a good strategy is important to get started, a strategy by itself won’t get you anywhere.

You need both strategy “the intent” and tactics “putting that intent to action.” Break down your strategy into the specific things you need to do.Plan what day of the week, and what specific time of the day you are actually going to give life to your strategy. To make sure you don’t let things slip by, or fail to grab the right opportunities, plan these activities on your calendar. Don’t let lack of time or other excuses be the reason for inaction. Plan your time to make things happen.

  1. Craft and Communicate

Finally, to embrace a strategic thinking mindset, don’t work in silos. Find people around you that you can trust, respect or admire. Exchange your ideas with them, request them to challenge your thinking, enable them to ask you tough and uncomfortable questions.By answering these questions, you will not only expand your thinking, you will open your mind to consider new possibilities. Instead of sticking with your original conclusions, you will be willing to challenge your assumptions.

Strategic Thinking is an Ongoing Process

You can’t build a strategic thinking muscle unless you audit your outcomes, inquire about other opinions and adapt to the changes around you. The world is changing very fast and you need to adapt your thinking to the demands of the tomorrow and not the expectations from the past.

To adapt your thinking, follow these 3 practices:

  1. Audit:

Make it a habit to review how you are doing against your goals. Typically a brief review every month and a quarterly deep dive should be sufficient to get a handle on your state of affairs. Examine your strategy from time to time and audit it to ensure you are still leaning against the right wall.When things are going well, put your strategic thinking hat to determine how you can do better:

  • Does an area seem more promising than you originally envisioned?
  • Does it make sense to invest more resources in that area?
  • What kind of changes can you foresee based on market shifts or other industry trends?
  • How can you make sure you aren’t biased in your thinking by relying only on confirming pieces of evidence while rejecting data that contradicts it.

When things aren’t working out as expected, ask yourself these questions:

  • Is it a specific tactic that’s causing your strategy to not work. Should you reconsider another tactic?
  • If the tactic is not a problem, do you need to reconsider the strategy itself?
  • Is it possible that external circumstances beyond your control are causing your strategy to not work?
  • Has something changed since you implemented this strategy that you have not considered yet? Is it possible that change is making your strategy ineffective?
  • Is your ego getting in the way and making you invest in a failed cause? Can you look past the sunk costs into other better opportunities?
  1. Inquire

It’s easy to get muddled up in our own thinking and assume we are making the right decision even when we are not. Others can clearly see what we are sometimes not able to see ourselves.Seeking an outside opinion and encouraging different perspectives that challenge our viewpoint is a great way to uncover our blind spots. Strategy for your personal life? Seek feedback from close family and friends. Strategy for an organization? Seek inputs from colleagues and other coworkers.Don’t stay with your opinion unless you have solid data and people to back up your thinking. Ask others these questions:

  • What’s the one thing wrong with my strategy?
  • What’s the one thing I can do better with my strategy?
  • What would you do if you were in my place?
  • What would you not do if you were in my place?
  • What circumstances or events would cause you to evaluate other options?
  1. Adapt

Finally, use the inputs from your audit and inquiry to adjust your strategy. Adapt your future strategy based on the learning from your past. What worked? What didn’t work? What mistakes did you make? Strategic thinking is as much about the future as it’s about learning from your past. Visualize your future. Look at your past. Adjust the gap with the changes you need to make to build that future for yourself and others. You don’t need a breakthrough idea, just the simple choices that will move you forward one step at a time in the direction of your goals.

Many people make the mistake and assume they aren’t thinking strategically if they don’t come up with an innovative idea. Strategic thinking is less about innovation and more about the ability to make the right connections.

Summary

  1. Strategic thinking: The ability to visualize the long-term while planning the short-term to align with the long-term is a critical skill in life.
  2. Much like other things in life, strategic thinking is a muscle that gets better with repetition and practice.
  3. To get started on your strategic thinking journey, start with challenging and questioning assumptions. Identify new ways to do small things at work.
  4. Make time and space to allow your brain to form new connections. Learn about your industry, business and other functions in the organization to expand your thinking beyond your current scope of work.
  5. Give life to your strategy by putting it into action. Break down your strategy into tactics, the specific things you need to do to implement your strategy.
  6. Don’t be rigid in your thinking. Open your brain to new possibilities by seeking others’ opinions and encouraging them to challenge your assumptions.
  7. Finally, strategic thinking is an on-going process. You need to audit, inquire and adjust your strategy based on your learning from the past and the demands of tomorrow.

By Vinita Bansal

Source: Thinking Strategically Will Help You Get Ahead and Stay Ahead | HackerNoon

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How Do Experts Know The Causes Behind The Stock Market’s Ups and Downs


Listener Katy Davis asks:

When reporters say, “The markets are down today based on XX,” sometimes it is something really obvious like a recent jobs report or a surprising boost to the economy. But sometimes it is something that seems so vague, like “based on fears about the situation in Greece.” Anyway, how do they know that? Are they calling traders and asking? Guessing? How can an entire day of trading be summed up like that? 

Sometimes the experts actually don’t know for sure. When asked how confident he is about his assessments, Commonwealth Financial Network’s chief investment officer, Brad McMillan, said:

“Not very. At the end of the day, this is an almost infinitely complex system.”

Some days, the drivers are more obvious than others, with news items like, yes, a recent jobs report. The Russia-Ukraine war. Or inflation numbers, like we saw Friday. The prices of consumer goods jumped 8.6% year over year in May, the highest rate since 1981. That showed inflation hasn’t slowed down, and it sent the Dow Jones Industrial Average plunging almost 900 points. 

McMillan, who writes a Commonwealth blog, said you can draw a direct link between market movements and anything that “materially either changes or directly confirms expectations.” But it can get complicated. McMillan said he’ll look at various investment commentators’ second and third reactions to news that happened earlier in the week.

“For example, if the [Federal Reserve] raises rates, the initial reaction might well be, ‘Oh, my goodness, rates are higher. That’s bad for stocks,” he said.  But in the following days, the reaction might become: “If they raise rates, in the short term, that might increase the probability they’re gonna have to cut rates in the longer term. So on balance, that can be positive,” McMillan said.

There are multiple events happening at a given time, and McMillan has to parse which factors may be the most important. So right now, he’s paying attention to interest rates.  That’s because they strongly influence stock valuations. In recent blog post, McMillan explained:

“Lower rates mean higher valuations for stocks, which explains the market rally we saw during and after the pandemic, as rates were cut to zero and stocks soared. With rates rising again as the Fed tightens policy, we are seeing valuations adjust down, bringing down the market.”

There are also non-obvious factors that influence stocks, like the U.S. entering an election cycle. During years when there are midterms, McMillan said, the market performs worse. And because it’s something we expect, it can actually become a “self-fulfilling prophecy, to some extent,” he explained.

Sometimes there are factors that led to market upswings or declines that analysts hadn’t accounted for at the time. For example, analysts tend to underestimate corporate earnings growth, McMillan said.  Back in 2015, global markets suffered amid fears of a possible Greek default on the nation’s debt. Vague, as listener Katy Davis pointed out. Investors and financial experts explained to news outlets at the time that investors don’t like political risk.

John Blank, the chief equity strategist at Zacks Investment Research, delved into that problem. “Fears — of loss of capital — inside a country can be quantitatively expressed by other asset classes: by wider bond credit risk spreads, capital outflows that depreciate the domestic currency, higher lending rates, depressed activity. One would expect at least some of these to accompany a down stock market, in that case.”

Blank, who writes commentary for the firm, said analysts and experts can look at FinViz.com, a site that displays major stock indexes, stocks by market capitalization and “top gainers” or “top losers.”  Analysts can then tell how a specific sector, like health care, for instance, performed after an announcement from the government or another influential event, he explained.

Blank said sometimes it’s difficult to figure out what’s going on in the markets when there’s no obvious news that day, and an analyst might flag important upcoming news to help investors prepare.

By: Janet Nguyen

Source: How do experts know the causes behind the stock market’s ups and downs? – Marketplace

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What Is ESG’s Significance To Business Leaders?

No matter where you sit in a business, you’ll likely have heard of environmental, social, and governance (ESG). Your peers in finance, legal/compliance, and risk will have heard of it a lot. And we’ll all be hearing a lot more about it in the coming years. But ESG can mean a lot of different things, depending on who is saying it and the context in which they’re saying it, which leads to confusion.

What Is ESG?

Essentially, ESG denotes the qualitative and quantitative data that either:

  • describes a business’s environmental status, societal characteristics, and corporate governance (thus ‘E’ for environment, ‘S’ for social and ‘G’ for governance) or …
  • … reflects a business’s or sector’s or investment’s exposure to, and management of, environmental-, social-, or governance-related risks.

The data points can vary, but the World Economic Forum and Sustainability Accounting Standards Board provide common lists.

The Significance For Businesses

Interest in ESG started with arguments such as those of Harvard economist Michael Porter that businesses (and capitalism as a whole) benefit from thinking about value generation beyond the purely economic — that is, businesses should focus their value generation on all of their stakeholders (including communities, employees, and customers), not just shareholders or owners.

This broader interpretation of value would provide for longer-term competitiveness, profit, and business health, because it both drives down risk and makes the most of scarce resources. In fact, it was the investment community that coined the term, as they sought to widen their analysis to nonfinancial factors

This broader understanding of value generation has worked its way into the echelons of corporate management; even the cradle of Milton “profit is everything” Friedman, the University of Chicago Booth School of Business, teaches ESG.

ESG performance, the managerial decisions that drive it, and the data points that reflect it have become a form of proxy measurement on the quality of a business’s management, right alongside its financial data. Naturally, they have then become a matter of board attention, leaders’ attention, and operational discussions, with supporting functions, processes, and technologies across a company.

ESG now features much more prominently in just about every company’s key strategic discussions, especially at its highest levels. As the battle over Exxon last year and McDonald’s right now show, these decisions determine the futures of companies. And Elon Musk’s recent ESG post on Twitter, meant to disparage the term, reveals its importance even in companies that resist its influence.

Expect ESG to become more important, driven especially by climate change and scrutiny of capitalism’s social impact but also by companies’ efforts to seek competitive advantage and differentiation and investors’ desire to incorporate nonfinancial analysis for better returns.

ESG investing, despite the criticisms, is becoming increasingly popular and is most likely to be an investing approach used by millennials. Morgan Stanley Bank (NYSE: MS) recently conducted a survey that found that nearly 90% of millennial investors were interested in pursuing investments that more closely reflect the values they hold.

By 2018, approximately $12 trillion worth of investment assets were selected using a socially responsible investing strategy. As millennials begin to comprise a larger segment of the total pool of investors, you can expect ESG investing to expand right along with them.

The financial services industry’s responded to the growing demand for ESG investments by making moves such as offering ESG-focused exchange-traded funds (ETFs). Both of the two largest ETF providers – BlackRock and Vanguard – offer clients a choice of ESG-focused funds. BlackRock added six new ESG funds in 2020, and its equity investment team now includes a Head of Sustainable Investing. Brokerage firms now customarily offer stock analysis employing ESG investment strategies, and robo-advisors such as Wealthfront can be set to seek out socially responsible investments.

Although ESG metrics are not currently a required part of financial reports for publicly traded companies, a growing number of companies are proudly including them in their reported statements or a separately issued document. Increasingly there is consensus among many regulators that some form of standardized ESG disclosures will be required of publicly-traded companies on most major global stock exchanges.

Each of the three elements of ESG investing – environmental, social, and corporate governance – comprises a number of criteria that may be considered, either by socially responsible investors or by companies aiming to adopt a more ESG-friendly operational stance.

While many ESG criteria are rather subjective (such as evaluations of “diversity” or “inclusion”), moves are occurring on several fronts that are designed to provide more objective, credible ratings of a company’s performance in terms of ESG policies and actions.

In the past, a company’s standing in terms of ESG has often depended less on substantive practices and more on how good the company’s public relations department is. Businesses such as AccountAbility offer ESG consulting services for companies that want to implement broad ESG-friendly policies and practices.

Environmental criteria include a company’s use of renewable energy sources, its waste management program, how it handles potential problems of air or water pollution arising from its operations, deforestation issues (if applicable), and its attitude and actions around climate change issues.

Other possible environmental issues include raw material sourcing (e.g., does the company use fair trade suppliers and organic ingredients?) and whether a company follows biodiversity practices on land it owns or controls.

Social criteria cover a vast range of potential issues. There are many separate social aspects of ESG, but all of them are essentially about social relationships. One of the key relationships for a company, from the point of view of many socially responsible investors, is its relationship with its employees. Following is a brief rundown of just some of the issues that may be considered when examining how a company handles its social relationships:

  • Is employee pay fair, or perhaps even generous, compared to comparable jobs or similar positions throughout the industry? What type of retirement plans are employees offered? Does the company contribute to the employee retirement plans?
  • In addition to basic wages or salary, what benefits or perks are employees provided with? With ESG-concerned investors, it can make a big difference in the evaluation of your company if, for example, you do things such as providing a free, very lavish buffet lunch for all employees every Friday – or provide other types of benefits that aren’t common at all workplaces, such as an on-site fitness center.
  • Workplace policies regarding diversity, inclusion, and prevention of sexual harassment are also frequently considered.
  • Employee training and education programs; for example, does your company provide financial support for continuing or higher education and/or flexible working hours for employees pursuing further education; what opportunities exist for employees to be trained in new job skills at the company that will qualify them for higher-paying positions?
  • What level of employee engagement with management is there? How much input do employees have in determining operational procedures within their respective departments?
  • The level of employee turnover
  • What’s the company’s mission statement? Is it socially relevant and beneficial to society?
  • How well are customer relationships managed? Does the company engage with customers on social media? How responsive and efficient is the customer service department? Does the company have a negative history of consumer protection issues, such as product recalls?
  • Does the company take a public or political stance on human rights issues? Does it donate money to charitable causes?

Governance, in the context of ESG, is essentially about how a company is managed by those in the top floor executive offices. How well do executive management and the board of directors attend to the interests of the company’s various stakeholders – employees, suppliers, shareholders, and customers? Does the company give back to the community where it is located?

Financial and accounting transparency and full and honest financial reporting are often considered key elements of good corporate governance. Also important are board members acting in a genuine fiduciary relationship with stockholders and being careful to avoid conflicts of interest with that duty. Are the board members and company executives a diverse and inclusive group?

The issue of executive compensation is a primary focus of many ESG investors, who, for example, don’t tend to favor multi-million-dollar bonuses for executives while the company imposes a salary freeze in effect for all other employees. Is extra compensation for executives appropriately tied to increasing the long-term value, viability, and profitability of the business?

An example of how responsible corporate governance is put into practice can be seen in the policies of the company, Intuit (NASDAQ: INTU). One of the company’s corporate policies that is aimed at helping to ensure that company executives take on a strong vested interest in the company’s ongoing success, rather than just in earning some quarterly bonus, is a rule that requires the top-level chief executive officer to maintain stock ownership equivalent in value to ten times their annual salary.

In addition, executive bonuses depend on more than just revenue or income – factors such as employee, shareholder, and customer satisfaction are also part of the calculation.

Forrester (Nasdaq: FORR) is one of the most influential research and advisory firms in the world. We help leaders across technology, marketing, customer

Source: What Is ESG’s Significance To Business Leaders?

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Why Chief Human Resources Officers Make Great CEOs

For decades the corporate HR department was seen as a back-office function, a cost center focused on mundane administrative tasks such as managing compensation and benefits plans. But over the past 15 years Ellie Filler has noticed a dramatic change. Filler, a senior client partner in the Swiss office of the executive recruiting firm Korn Ferry, specializes in placing chief human resources officers (CHROs) with global companies. For years many of the HR chiefs she recruited reported to the COO or the CFO and complained that they lacked real influence in the C-suite.

Today, she says, they often report directly to the CEO, serve as the CEO’s key adviser, and make frequent presentations to the board. And when companies search for new CHROs, many now focus on higher-level leadership abilities and strategy implementation skills. “This role is gaining importance like never before,” Filler says. “It’s moved away from a support or administrative function to become much more of a game changer and the person who enables the business strategy.”

To investigate the CHRO role within the C-suite, Filler worked with Dave Ulrich, a University of Michigan professor and a leading consultant on organization and talent issues. In looking at several sets of data, they found surprising evidence of the increasing responsibility and potential of CHROs.

First, in order to understand the importance of the CHRO relative to other C-suite positions, including CEO, COO, CFO, CMO, and CIO, Filler and Ulrich looked at salaries. To identify the best performers, they found the top decile of earners in each role. Then they averaged the annual base compensation of each group. No surprise: CEOs and COOs are the highest-paid executives. But CHROs are next, with an average base pay of $574,000—33% more than CMOs, the lowest earners on the list. “Great CHROs are very highly paid because they’re very hard to find,” Ulrich says.

The researchers also studied proprietary assessments administered by Korn Ferry to C-suite candidates over more than a decade. They examined scores on 14 aspects of leadership, grouped into three categories: leadership style, or how executives behave and want to be perceived in group settings; thinking style, or how they approach situations in private; and emotional competency, or how they deal with such things as ambiguity, pressure, and risk taking. The researchers then assessed the prevalence of these traits among the different types of executives and compared the results.

Their conclusion: Except for the COO (whose role and responsibilities often overlap with the CEO’s), the executive whose traits were most similar to those of the CEO was the CHRO. “This finding is very counterintuitive—nobody would have predicted it,” Ulrich says.

The discovery led Filler and Ulrich to a provocative prescription: More companies should consider CHROs when looking to fill the CEO position. In the modern economy, they say, attracting the right talent, creating the right organizational structure, and building the right culture are essential for driving strategy—and experience as a CHRO makes a leader more likely to succeed at those tasks.

The advice comes with some caveats. First, Filler and Ulrich studied only the best performers, so they’re pointing to a small subset of CHROs as having corner-office potential. They don’t see a path to the top job among people who have spent their careers in HR; instead, they are touting the prospects of executives who have had broad managerial experience (and P&L responsibility) that includes a developmental stint running the HR department. They emphasize that any CHRO who aspires to become a CEO must demonstrate capabilities in a host of skills required of top leaders.

“The challenge for CHROs is to…acquire sufficient technical and financial skills, in early education and in career steps along the way, if succession to CEO is a desired outcome,” they write in a white paper about their research. Indeed, some companies, including Zurich Insurance, Nestlé, Philip Morris, and Deutsche Bank, do put high-potential executives through a developmental rotation in a high-level HR job. (For one view on facilitating such developmental opportunities, see “It’s Time to Split HR,” by Ram Charan, HBR, July–August 2014.)

Filler and Ulrich highlight two examples of prominent CEOs who had developmental stints in HR earlier in their careers. Mary Barra, the CEO of General Motors, served as the carmaker’s vice president of HR for 18 months, and Anne Mulcahy, Xerox’s CEO from 2001 to 2009, ran that company’s HR operations for several years in the early 1990s. It’s no coincidence that both are women: According to the researchers’ data, 42% of high-performing CHROs are female—more than double the share in the CMO position, the next highest (16%). One implication: If more companies envisioned CHROs as potential CEOs, the number of female CEOs could dramatically increase.

In their white paper Ulrich and Filler also report on what CEOs and CHROs have to say about the changing nature of the top HR role. Several CEOs see the CHRO as C-suite consigliere. “It is almost impossible to achieve sustainable success without an outstanding CHRO,” says Thomas Ebeling, the CEO of the German media company ProSiebenSat.1 Media AG and a former CEO of Novartis. “[The CHRO] should be a key sparring partner for a CEO on topics like talent development, team composition, [and] managing culture.”

Peter Goerke, the London-based group director for HR at Prudential, agrees with Filler and Ulrich that although deep skills in marketing or finance might once have given CEO aspirants a significant competitive advantage, today a broader set of people-focused skills can be more useful. “Succession to a CEO role requires a balance of technical and people skills,” he says. “For all C-suite roles, and often at least one level down, there has been a gradual shift in requirements toward business acumen and ‘softer’ leadership skills. Technical skills are merely a starting point.”

In spite of the historic bias against the CHRO function, the rising status of HR leaders is not entirely surprising. Over the past 20 years Jim Collins and other management theorists have focused on talent strategy as the prime determinant of corporate success—an idea Collins popularized in phrases such as “Get the right people on the bus” and “First who, then what.”

In her work recruiting CHROs, Filler has seen a growing recognition that those aphorisms hold true. “If you don’t have the right people in the right places—the right talent strategy, the right team dynamics, the right culture—and if you don’t proactively manage how an organization works from a culture and a people perspective, you’re on a serious path to disaster,” she says. Conversely, a top-notch CHRO can help a company plot a more successful future.

Source: Why Chief Human Resources Officers Make Great CEOs

Critics: by MasterClass staff

A chief human resources officer (CHRO) is an executive-level position that oversees human resources management for a business or organization. The CHRO—sometimes referred to as the chief people officer (CPO) or executive vice president of human resources—directs the HR department and carries out HR policies. Some of the HR functions that CHROs oversee include talent acquisition and retention, performance management, and employee engagement. As the chief HR officer, a CHRO also helps to develop the workplace culture and supports business goals and diversity, equity, and inclusion initiatives.

As a leadership role, the CHRO job description includes overseeing the HR directors and HR team carrying out the company’s employee-based initiatives. The CHRO reports directly to members of the top C-suite executive team—often the chief executive officer (CEO) or chief operating officer (COO)—and works to align the HR strategy with the company’s strategic plan and business objectives.

A few of the responsibilities of a CHRO include:

  1. Benefits and labor relations management: A CHRO oversees the implementation of HR software to streamline healthcare and retirement programs, government compliance requirements, and employee relations. They explore partnerships to offer employees new benefits such as wellness programs or professional development opportunities.
  2. Guides company culture: This role in HR leadership includes helping to define and develop company culture for the workforce, executive leadership team, and other stakeholders. Maintaining employee engagement and productivity through incentives, clearly defined career paths and equitable compensation packages, and a commitment to diversity in hiring practices are core components of this human resources function.
  3. Oversees talent recruitment and retention: Talent management is another cornerstone of human capital management and the CHRO role. A CHRO develops and adopts a talent strategy that outlines how to recruit, hire, develop, and retain employees. The talent strategy includes offering equal opportunities to all candidates, employee training initiatives, career development programs, and succession planning, which is a strategy to identify potential leaders when companies change management.

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