Booz Allen Hamilton Holding Corporation (BAH) Earnings Call Transcript & Summary

Good afternoon, everyone. This is Sheila Kahyaoglu with the Jefferies Aerospace Defense and Airlines equity research team. Thank you for joining us for our inaugural ESG Summit. We have Booz Allen here with us. And specifically, we have Nancy Laben here with us. Nancy is EVP and Chief Legal Officer of Booz. She oversees the Ethics, Compliance Legal and Corporate Affairs departments. She's been a part of the in-house council teams at 3 other Fortune 500 companies and today is a member of Booz Allen's leadership committee -- leadership team and sits on the Board of Booz Allen Foundation. She's a former Commissioner of the American Bar Association on Women in Professional -- in profession and serves on the Board of the Wolf Trap Foundation for Performing Arts and a member of the Smithsonian Women's History Initiative. Nancy, thank you so much for being here with us today. We really appreciate it, and I look forward to hearing some of your perspective.

So to kick things off, how should investors know about Booz -- what should investors know about Booz Allen's ESG program?

Well, thank you so much for having me, Sheila. I'm thrilled to be here today and very happy to talk about this because it's near and dear to my heart. I think there are 3 things that I would like the investors to take away from this conversation. First, we care about ESG because our stakeholders care about ESG. And that's our employees, our investors, our clients. And it provides a way for us to demonstrate an approach to delivering our strategic, financial and operational goals. The second, our ESG framework gives us the resiliency to meet our financial commitments and to enact our purpose, which I think you're aware is to empower people to change the world. And third, while we may not have used the term ESG throughout our 108-year history, it is a fundamental part of Booz Allen. It's built in and not bolted on, as I like to say. And I believe we're excelling today because of our commitment to ESG. For example, with respect to diversity, more than 80% of our leadership team is diverse, and our Board is one of the most diverse in the Fortune 500. With respect to sustainability, we've made significant commitments to be net-zero by 2050. And with respect to people, in addition to our focus on DE&I, we've made public commitments to support the mental health and resiliency of our employees. And so I believe that our past and present puts us in a very strong position for the future. And as we've already started to roll out VoLT, our new strategy, we see that there are some very powerful synergies between VoLT and our ESG strategies.

You just mentioned VoLT. So tell us a little bit about that? And how does it integrate into your ESG strategy?

Sure. So as we've shared previously, right, VoLT is our firm way growth strategy for the next 8 to 10 years. We shared the -- started the implementation last fiscal year, having successfully completed our prior strategy, which was referred to as Vision 2020. And VoLT stands for velocity, leadership and technology. And what does that mean? That means we will be using our speed and our agility to get ahead of the technology curve, to innovate and to help our clients solve their most difficult problems. We have significant mission connectivity and knowledge and our ability to combine that with our deep understanding of technology, allows us to compete for talent and then to provide solutions to our clients. And ESG is one of the underpinnings of VoLT as it does provide the framework for us to speak to our clients, our employees and our investors about our financial goals, about our operational achievements and about our strategic direction. I also think that given the SEC's looking at further defining the appropriate elements to include in ESG, that will further underpin our governance aspects and provide our investors with some confidence in where we're going with respect to VoLT.

And do you think having a clearly defined ESG strategy factors into the company's ability to win business?

Absolutely. An ESG strategy is one component of enterprise risk management, and it's one way to demonstrate an organization's purpose, values and culture. And it's increasingly important in competing for talent. Our ESG strategy and how we execute it, how we communicate it, I believe, creates points of differentiation on drivers of our ability to win business. Our clients ask about it. And as you know, investors and analysts ask about it. Our commitment to manage ESG risks in our business, those that could harm our brand, our reputation and our ability to operate, I hope and believe instills confidence among our clients and their various business partners. And so we hear about it a lot in the federal contracting space, and we hear about it a lot from our current employees and our prospective employees. And so it's clearly valued.

That's great. And you've set up goals of -- I'm sorry, you joined the business ambition for 1.5C campaign. And you might have to clarify what that is to those of us who don't know. So you might [indiscernible] to set up new long-term goals. Can you give us an update on where you are with those and what areas you're focused on?

Sure. So the business ambition for 1.5C Campaign is to actually address the change in temperature caused by organizations and individuals. And so we made that commitment in 2021, and then we organized an internal working group because I think as you're well aware, ESG is a team sport. It's not done from top down. It's really done by a whole team of folks who are connecting the dots. I've heard it referred to as the dot connectors who are most important to this. So we set out to set up an internal working group, which is focused on developing a clear, comprehensive and compelling plan that engages both our internal and external stakeholders. And so first, we're focusing on our Scope 1 and Scope 2 emissions; second, we're focusing on reducing our Scope 3, the value chain emissions; third, we're integrating climate into our business strategy and addressing how we can impact it; and fourth, we've committed to influencing climate actions in those society at large, not just that which we control. And I'm happy that the team is on a path right now to submit our proposed specific goals later this year to the science-based targets initiative, who sponsors the business ambition for the 1.5-degree campaign.

And then you've also set the goal of net-zero by 2050. What are the biggest buckets within the 3 scopes of emissions and where are the largest opportunities to reduce them?

So this is the area I had to learn the most about when it comes to ESG or as some are calling it EESG. I'm very comfortable with the social, very comfortable with the employee, very comfortable with the governance and environmental has been an area that's been a real fascinating learning curve for me, and I think for others. We're using our FY '20 numbers as the baseline for our emission reduction targets. And so in Scope 1, what we're talking about is 33 metric tons of CO2 equivalent; Scope 2, about 15,000 CO2 equivalent; Scope 3, 81,000 plus CO2 equivalent. So as you can tell, based on our historic performance, our Scope 3 emissions make up the bulk of our impact. And we're assessing various options to reduce our impact throughout our value chain. I think that's probably true for many professional services firms across the board. And some of the ideas that we're exploring -- so we saw a reduction in our business travel during FY '21, obviously, at the height of the pandemic. And we're looking to see how we can maintain similar reductions with the various innovations and lessons learned by delivering remotely to our clients going forward. Also related to remote delivery, we're looking at the long-term impacts of employees working remotely on our -- what we're calling employee commuting footprint, during the pandemic and then subsequently. And lastly, we're looking at partnering across our value chain to leverage our buying power so that we can influence the climate-friendly business practices of our suppliers. 2050 is a long way away, but I think these are the right things to start with as we go forward to making that commitment.

You mentioned the baseline is fiscal '20. So obviously, the fiscal '21 baseline is a lot harder to be sustainable just given we are going through COVID. Can you maybe give us what basis for tracking emissions on a per employee metric basis? And how does that tie into that accountability across the firm?

So because our core business revolves around our people, as I said, professional services firm, we've focused our carbon footprint strategy on reducing emissions from the space that our employees occupy, the energy that they use and their work-related travel. And we also educate and encourage our employees to play an active role in reducing our carbon footprint and making environmentally responsible choices. That can be as simple as making sure that there is a recycling bin that's very visible that employees can readily access all the way through to helping them reduce the amount of waste that they use from takeout food when they're working in the office. In 2021, as you said, it's been harder, but we've actually saw -- while we saw a dip in Scope 2 during FY '21, we've changed much of our long-term facility strategy in order to be able to continue those reductions even as people come back into the office.

No, that's great to hear and definitely a learning curve for us as well. So one of the other things on the environmental side, you've been one of the most active IT services companies partnering with FAA to reduce noise emission and fuel consumption in the aviation industry, which is really interesting how you guys even got involved in that. Can you talk about the framework there? And what types of studies and research is being applied by Booz Allen? And can you talk about your involvement in the road map for emissions reductions there?

Absolutely. As you said, this is one of the most fascinating areas because I think, certainly talking to the team involved, their passion just drives this at a fundamental basis. But it's -- basically, we bring together the various aviation subject matter experts along with other experts from the environment, data science and software development areas to support the FAA and other aspects of the government in addressing the climate and aviation noise challenges. And so some of our studies and our research have supported some of the major achievements achieved by the FAA, including helping establish the first carbon dioxide standard for commercial aircraft, contributing to the U.S. and FAA, ratifying the global climate deal to limit international aviation emissions through sustainable aviation fuels and working with [indiscernible] to create and establish market mechanisms to offset 80% of international aviation emissions. We worked with the FAA also with its aviation climate action plan, which lays out the framework for net-zero emissions by 2050, also for them. and creating and utilizing sustainable aviation fuel is obviously critical to that goal. And so our team supports the commercial aviation alternative fuels initiative, happy in that capacity. We've also helped them with what's called a TBO, trajectory-based operations, which is an air traffic management method for planning, management and optimizing flights throughout the operation by using time-based management, better information exchange between air and ground systems and the aircraft's ability to fly even more precisely their paths in time and space. And so the focus on that is to reduce flight times and optimize approaches to ultimately reduce fuel burn. And having gone through the last couple of days with really bad weather and canceled flights and lost luggage, I can tell you that I'm delighted that we're helping out on that front because I think it will really make a difference in the future.

I know. That's great to hear. And just on a related note, what are your thoughts on EV costs overall and the noise pollution issues they pose?

Sure. So that's a very important issue and could fundamentally change transportation. And so for NASA, the Booz Allen team explored market size and potential barriers to urban air mobility. There's really great progress being made with -- we've been working with Joby Aviation, recently testing its eVTOL noise levels with NASA, and you can go online and see an incredible video of Joby's CEO, talking as take-ups occur behind, and you can barely hear it. Our perspective -- we published a study is that there are a lot of unknowns but there's a lot of opportunity here. And so we've supported the FAA and NASA in thinking through some of the challenges and are working with them to develop the analytical methods to evaluate noise levels and how that could impact the public going forward.

Really neat stuff. And then last one on environmental for you, and then we'll get into the fun stuff. So you have this 4-pillar approach on climate resilience, innovation, equity and intelligence, projects like the DoD climate assessment tool, DCAT, how is the data being collected, processed and used today? And what other types of clients are leveraging these capabilities?

Sure. So for DCAT, we use what we believe are authoritative and internationally based current data sources and climate models. So for example, we take data from an organization such as the National Center for Atmospheric Research in Boulder, Colorado, as the foundation for our analysis. And then that data is passed on to an engine we use to generate indicators of climate risk. These indicators are also scientifically based and where our data scientists have developed scalable pipelines to generate a diverse set of statistical measures that help quantify that infrastructure risk. And so we take our expertise in engineering and in infrastructure management with data analysis and data-driven insights. And so we've been able to help our clients assess how climate will impact critical infrastructure in the coming years. And so while our current focus is in support of the DoD, many other civilian agencies can benefit from these types of insights, including organizations like the Department of Transportation, the National Park Service and the Department of Homeland Security. And if I could, just a plug for rec.gov, which allows people to get out and see the national parks, which are amazing. It's been a great project working with them on just that front, too, because if we can figure out what the climate change and risks are, people can then go out and enjoy.

That's great. Switching gears to social. The executive team, as you mentioned, is 80% women or diverse. The acronym is BIPOC which you'll have to explain to me. But can you talk about direct diversity contributes to Booz Allen's success?

Sure. So BIPOC refers to underrepresented minorities typically. And so we have a long history of recognizing the importance of diverse representation, especially at our leadership levels. And for the past few years, until June 1, all of our major groups called sectors have been led by women. And we also have a very diverse leadership team and Board of Directors. I think as you saw, we announced that on June 1, we have a new leader for our civilian sector and then previous director of the sector has been promoted to COO. So we still have the women involved. And these leaders represent not only a mix of ethnic and gender diversity, but also diverse cultural, religious and industry backgrounds. And we're extraordinarily proud of this given that the latest general research, which I'm sure everybody sees, shows that about 10% of senior corporate level positions are held by women from a racial or ethnic minority and only about 18% by men from a minority group. And so it's important to us. And we believe, and I think the research shows that companies with diverse leadership drive better financial results, and we believe it's been very true at Booz Allen. The other aspect of it is it's empowering for our talent to look to leadership and see a reflection of themselves to see that they actually can achieve their goals if they so desire. That's where representation is really critical because creating a diverse future workforce and to create a culture of belonging, we need additional diverse leaders at the top to influence what that future workforce looks like and how that future workforce will operate and grow into the future. We just can't sit still, status quo just doesn't serve us. And then if I could, to give you an example, close to home, the legal department has been working to certify compliance with the Mansfield Rule, which measures whether legal departments have affirmatively considered historically underrepresented lawyers. That's women lawyers, LGBTQ+, lawyers with disabilities and underrepresented racial and ethnic lawyers for our top roles and for outside council leadership as well. And so that allows me as the CLO to recruit legal professionals, very talented legal professionals who share our passion for diversity. So I think it's actually helped us a lot in recruiting both within the legal area as well as more broadly across the organization.

Yes, and you're in a people business where it's very tough to attract talent, we know that. So what does Booz Allen do to attract its talent and retain it? And what makes Booz Allen an employer of choice?

So if you take a look at our marketing, I think you'll see pretty commonly be the future work with us, and we really mean with. And what that means at Booz Allen is a commitment to transparency, a strongly held belief in the power of transparency to attract, retain and develop talent. And each quarter, we publish a digital magazine that highlights where we are in our diversity, equity and inclusion journey and its connection to our broader social responsibility commitments. It includes the challenges we faced along the way and tells the stories that you don't often hear of the institutional and systemic changes we're trying to achieve for both our current and future workforce. Many of our commitments that we make to our employees are focused on the employee experience, especially for our diverse talent and especially for women of color. That means that we want them to be seen, we want them to be heard and they -- we want them to know that they're valued. So we have listening sessions for difficult conversations. In fact, I just taught a class on how to have difficult conversations with some professors from Harvard. It means investing in our business resource groups and our employee networks. And it means growing and evolving our employee-led DE&I program, which we call Unstoppable Together, which is about learning about DE&I through various stories. And it means also acknowledging what our employees are feeling in response to various world events and working together to create more equitable systems and a more inclusive culture. And what we're seeing from the folks that we're hiring in now is that work is a component of their life, right? So if we're able to ensure that they're seen, they're heard, they're valued while they're working within the virtual walls of the firm, we can help them see their future at Booz Allen. And by using transparency, we're letting them know where we're going and how they can join us.

No, that's great to hear. And you mentioned the business resource group a little bit. Can you talk about how they tie into facilitating a culture at Booz Allen?

Sure. So we have 5 global business resource groups or BRGs. And this is an affinity group. And we restructured our affinity group about 4 years ago. And then from that time, we intentionally called them a business resource group instead of the more common employee resource group because we wanted to position them as groups that would fundamentally influence and impact our business. And at Booz Allen, we positioned the BRGs and their affiliated networks to not only deepen the sense of belonging within their workforce, a place to go to talk and share common aspects, but also to be the destinations for where our business can solicit new ideas, test concepts, encourage harnessing the diverse perspectives, which we desperately need in order to problem solve. And so it's a 2-way street in that sense. We've recently used the BRG blueprint, which has proven to be successful to expand that affinity-based concept for building new groups that we're calling TXGs or talent exchange groups that are based on a shared interest in specific technologies because it's critical that our workforce can find others with whom they connect beyond their daily client obligations. So if you're a data scientist or you work in AI or pick a specific area, there's a group that you can go to, to exchange your concerns, ideas, cutting-edge thoughts and get some help from people who actually know how to do what you're looking -- interested in doing.

I could see why you call them business research groups instead of employee ones now. And then I think as M&A becomes an increasing focus of the Booz Allen organization, which it wasn't previously. How do you ensure that these new businesses are integrated into this culture and it remains intact?

So we are very focused on making sure that our acquisitions are successful. And a key component of that is the successful PMI or post-merger integration. And we don't just focus on the business aspect of it, the financial aspects, but we've spent a lot of time focusing on the people and the culture. And we've actually redirected senior resources to make sure that there is a specific focus on the people and the culture. And while we do have a very strong culture at Booz Allen, one of our key strengths, I believe, is that our culture is always evolving. We couldn't have been around for 10 years successfully without having that natural evolution. And we know that our people are key to our performance. They are our biggest resource or aspect of that. And so with each acquisition, we view that as an opportunity to retain and incorporate the best parts of both organizations. And so in that sense, 1 plus 1 can equal 3. And we've learned a lot from some of our most recent ones, have really adopted some really great practices, not only on the financial side, as I said, but also on the culture side. And I think that just makes us stronger and build a greater foundation for our culture.

You're on the board of the Booz Allen foundation. Maybe first talk a little bit about what the foundation does and what it is and what the work going on there focuses on?

Sure. So I am extremely proud of the Booz Allen Foundation. I was one of the founding members. And our vision is to empower people to break the cycle of structural and equity call-out impediments by using technology and innovation. And that's a mouthful, I know. But empowering people to change the world as our broader vision, I think is actually something that we do very well. And so the foundation itself looks at being a convener of solution makers, through grant-making and by leveraging the skills and passions of the Booz Allen employee base. And I think we're uniquely positioned in particular to convene policymakers, people on the front lines, our government clients, our employees, passionate volunteers to actually achieve the vision of breaking down structural and equity concerns. And so what that means is we're driving inclusive pathways to advance tech careers in cyber, AI and digital, which obviously aligns with the direction of the firm. And specifically, we're helping underrepresented individuals to develop their identity and believe that they can succeed in STEM. We're helping them persist in studies and training for a career in STEM. And we're helping them build specific skills for cyber, AI and digital careers. And because there's a lot there that needs doing, we've taken what we're calling a hyper-focused approach working initially in the D.C. and San Diego areas to partner with local organizations to inspire and to enable underrepresented students to pursue STEM-connected pathways. So in D.C., for example, we're working with the Boys & Girls Club of Greater Washington to strengthen their STEM offerings for their after-school clubs. That's -- our people are going there and helping them actually put together offerings. We're investing in the Talent for Tomorrow Alliance, which brings together 2 nonprofits, Europe, and Capital Partners for Education to provide mentoring and to equip lower-income D.C. students with skills training for jobs for the future. And we're also doing STEM for Her to include students from [indiscernible] 6 and 7 in D.C. in their programs and especially in their STEM for Her day convening this fall. And this is done, as I said, by the passion of a lot of our Booz Allen employees who really volunteer for this. We've also done hyperlocal equity competitive brands where Booz Allen employees pitched the foundation on their recommended local organizations, doing work to drive STEM pathways. And so 10 or so organizations will be chosen for a $10,000 or $20,000 grant and a commitment to get professional support from our employees. So we're doing a lot of things. I think the most impactful thing for me, and I got to attend it, was we hosted more than 100-plus educators right before the pandemic for our STEM educators open house. And we brought together individual teachers Marymount University educators, our employees and our talent who are grounded in tech to help these educators figure out how to bring a technology-focused platform back to their schools. And as I've heard, it's really made a difference. And I'm very proud of this work.

That's great. I want to send my kids up. Switching gears to the governance side of things, how is ESG factored in and [indiscernible] with executive compensation?

So in 2017, we began using performance stock in our executive comp program to incentivize and align the achievement of our long-term goals to our business and strategy. And then as part of our ongoing commitment to advancing race -- hard for me to say, advancing racial and social equity, which was post the George Floyd murder, the Kaleidoscope Group conducted an independent assessment in the fall of 2020 of our both formal and informal business practices. One of their recommendations was to establish an increased accountability for the firm's DE&I commitments. And so we started at the top. Our Board and our executive leaders made a decision to increase accountability beginning with our partner core by connecting executive comp to achieving firm-wide DE&I goals. And I'm proud of this. This reflects our one-firm culture, and it makes sure we're all striving to accomplish the same goals and make the same contributions to the organization. So all of our senior executives, all partner level, are measured against a single set of DE&I initiatives relating firm-wide rather than individual performance. And our progress is set in 3-year intervals. It's evaluated annually with a new 3-year plan created each spring. And so we're looking now to expand accountability to the Vice President, Principal and senior associate levels in the upcoming fiscal year.

That's great. And you have one of the most diverse Boards and management teams as you mentioned. Can you talk about how this translates into the success of your company?

Sure. So I believe that Board diversity leads to more effective risk management. It requires a broader focus on all stakeholders, and the Board pushes us to be forward thinking. And as I've mentioned before and as McKinsey and others have shown, diverse businesses are much more likely to have higher financial returns. And our Board knows that it must be able to provide effective oversight of ESG risks as they're evolving, and they are constantly evolving. Stakeholders change priorities. Our growth strategy has changed. And so that introduces new material topics and new disclosure expectations both from what we would believe would be material as well as from what the SEC is looking at. And so our Board needs to reflect and have that expertise. And so we look at the skill set, if you will, of our Board members. And we're seeing that now play out with respect to climate change, AI and cybersecurity. And so I do believe that it's pushing us to see around corners and it starts with the Board and then we take it from there and translate it.

How does that -- how does the Board factor ESG into a long-term strategic planning?

Sure. So first, if you look at our governance, we are committed to independent, diverse corporate governance that supports our accountability and transparency given our status as a public company. And our Board of Directors guides us to operationalize our commitment to those independent and transparent approaches as well as keeping us grounded, if you will, in our purpose and values so that we can achieve sustainable long-term growth for the firm and for our stakeholders. And as you can tell, and as I'm sure others have spoken, we're all experiencing right now, secondly, the move towards greater regulation of ESG disclosure. So the SEC actions on climate risk and cybersecurity disclosure and the concerns about greenwashing. Well AI and technology will make it easier for stakeholders to identify greenwashing or disclosure inconsistencies, and the Board is cognizant of that. And so their oversight of an active engagement in is critical. And what we're doing here is, right now, our Audit and Nomination governance committees are working out how to collaboratively fulfill their chartered responsibilities as they relate to ESG strategy and our disclosures. So right now, because it's still immature across the board, and I speak with a core working group at the conference Board, I think we're right in the middle and everybody is trying to figure this out. We're making sure that the entire Board is aware of our ESG progress. And as ESG and its reporting matures, we will establish more specific roles and responsibilities. Our non-gov committee takes the primary lead, but we brief audit as well, and we've briefed the entire Board. And our people matters, again, because they've -- I think we are -- we should add the extra E to ESG. Our people matters and human capital matters are extensively briefed at our compensation culture and people committee. And as attestation and auditing becomes more required, obviously, our audit committees will increase. And so I think they play an incredible role for us and making sure that we are transparent. We are putting resources where we need to be. That's both money and people and we're being held to the commitments that we make.

And Booz has an ESG committee that it formed as well as an ESG Council. Can you talk about the collaborative approach and how you see these functioning at the firm level and what their outcomes or goals are?

Sure. So this is what I referred to earlier as the dot connectors, if you will. So I just talked about the role of the Board of Directors. And so that's -- I won't go over that again. So underneath the Board of Directors is the ESG Committee, which I chair. It has senior executives, and we act with the Board's delegated authority to champion really our commitment and to guide integration of our ESG strategy into our risk mitigation and to our business strategy. We meet about 4 times a year. And it was this group, for example, that committed to set net-zero targets and directed the firm to proceed to go ahead and do what we need to do in order to get there appropriately. So now we're leading and overseeing those various actions of a cross-functional initiative to develop our plan to get to net-zero. And then subsequently, the ESG Council is both corporate and market-facing leaders who must bring our strategy to life, if you will. These are the subject area owners. They're the market influencers who collaborate together to operationalize our approach. If the committee sets the strategy, these are the folks who actually make it happen through both their day-to-day activities and through the cross-functional activities. So for example, our cross-functional team, Tiger Team on climate impact and what that will mean for us and for others. Then there's also, last but not least, the ESG function itself. We have a team of ESG professionals within the Office of the Corporate Secretary who work with and support all 3 areas of our governance bodies strategically, by providing transparency, making sure we're aware of what best practices are, tracking our performance by integrating, making sure that we're pulling up all of the right information. And then by working and connecting that to our risk mitigation areas. And so I think this is, as I said, a team sport. And so we had to put some process in place, but these are the folks who do the day-to-day and make sure that all of this can get rolled up into our impact report.

No, that's great. And then we've covered a lot of ground today. Maybe just to wrap it up, Nancy, what are 1 or 2 takeaways investors should walk away with when they think about Booz and your ESG strategy? There's a lot.

Right. There is a lot, and I appreciate that. And I do appreciate the opportunity to share the breadth of what we're doing here. But we use the ESG lens to focus on long-term growth and to create sustainable value for the firm and our stakeholders. One, we want to minimize our risks early and look at it ahead of time; and two, maximize the opportunities early as well. And so we integrate our ESG considerations into our business strategy through connections with the existing functions and our ESG Committee and our Board. And as I said at the outset, it's part of our 100-year -- 108-year history and really does provide a solid framework for our future.

Well, Nancy, thank you so much for that and that comprehensive overview. We really appreciate it. And thank you, everybody, for joining and listening in. Thanks, all. That concludes.

Thank you.