Johnson & Johnson (JNJ) Earnings Call Transcript & Summary

Sorry. You indicated that so much of this work that was stakeholder-oriented is happening already, and yet the public felt this was a big moment and there was so much media attention to it. How do you think the public will know that there's been a shift in the thinking of companies in general? That are you saying we were already there, no change is necessary? Or are there some other things that people could look for that would make them think business is taking a longer-term view? And I know I'm asking you a general question about business, not your own specific companies, but I'm wondering if you have any insights about that.

I thought it was interesting this morning when we took a poll of CEOs and it said, the poll is the most important thing you can do to indicate that your company is going in the right direction. And treating your customers well only received like a 7% response. Treating your employees well got a huge response, and I believe in that. But I was one of the people who was voting for treat your customers well. So I think as consumers, the general public needs to see this in the products and services they receive from us. Otherwise, it's not working, right?

Yes. [ Nancy ], you got my attention real quickly because you've uttered a phrase that is really taboo at UPS right now, and that is saying no change is needed. So what I didn't want to imply at all is that because we had this path and this plan and we were going in that direction that we didn't need to change. In fact, it's just the opposite. The hurdle is being raised by all stakeholders that we had plans to be able to jump higher. And we had plans in place, but we can just see that the hurdle is going to continue to be raised. So status quo and status no is just not the way that you can compete in today's world. So for all of these stakeholders, you can go from being an example of success and people think that UPS has got a good reputation just what we're doing from a sustainability standpoint. In fact, the JUST Capital rankings just came out. And from a regard of communities, we were #3 of all companies in the U.S. that were included. And of course, UPSers are thinking, "Well, how can we not be 1 or 2, right?" But we were #3, so that's good. My point is, you can be #3 today and 5 years from now, if you don't change, you can be an underperformer and people start talking about, "What are you doing?" So I think all companies are going to be -- companies are going to be at different progression levels, but all companies are going to have to continue to make changes or they're going to fall below the expectations of all of their stakeholders.

Yes. And I think my previous statement, it should have been treat customers better because I think many of the companies in the room, and David is a great example, are already treating their customers really well. So then the thought naturally goes to, "Is there more we can do for employees?" But I think David kind of proves my point, and UPS treats its customers really well, and it comes out on the top of the scale.

She's coming to you. Right here. Just Todd Fein right there.

Todd Fein from Green Diamond. I'm thinking about the remark about culture. So if you have lots and lots of people with whom you need to effect change, I'm wondering the extent to which you're starting to rely on defining goals and plans that tie to people's performance and compensation to be how you effect that change compared to maybe other ways that you help educate and inspire the culture to change. How much do you have to bake it in to people's performance and career plans and goals and compensation versus other techniques to get that culture to change?

I think it'd be in both ways. You do look at the financial side. As a public company, the further you go up in the company, the more of your compensation is variable based on performance. And I think it'd be that way in most all public companies. And so the element -- that's not me, I promise. The elements that we choose are not going to all be financially oriented. There is going to be others, but be customer-based, employee-based and obviously financially based. So that is one way to drive behavior. The other, though, is to clearly define what's important to you and how you measure that. And do you just target or are you actually living by and reinforcing? And that's where the -- trying to affect culture and making sure people understand what you're trying to do. And I'll give you a good example of our transformation. We've had this saying that goes all the way back to our founder, who was the CEO for 55 years, so he's a legend at UPS, Jim Casey, about continuous constructive dissatisfaction. And it was just never be satisfied always, try to make this process better, always do it better. Now we are -- as part of this transformation, we're talking about continuous transformation versus constructive dissatisfaction. And the reason we're doing that is constructive dissatisfaction can be good. It can also cause you to keep trying to improve something that should no longer be done. And where continuous transformation is about, "Okay, let's constantly evaluate what needs to be done, and then let's improve that and let's not worry about the things that are no longer relevant." That's just one example of the cultural change that we're focused on.

Back to your compensation question, I think it's necessary because compensation drivers send a message, but it's not sufficient, right? People work for their own motivations and reasons beside just compensation. Yes, they want to be paid and they need to be paid, but you're not going to drive your company to long-term greatness based solely on compensation. To our previous discussion and to David's discussion, you really need a purpose. You really need a corporate purpose that motivates people, particularly in a transforming environment where we're asking people to go above and beyond and to take risks. And they all know they're operating in a world that's rapidly changing. There's a lot of uncertainty. So compensation is a piece of that. But really, it's a lot more about capturing the hearts and minds of people.

Yes. We, for example, compensate people based not only on what they achieved, but also on how they achieved it. So it has an equal weight in our evaluation. And as a consequence, through the how, you can also -- you can always try to make sure that the cultural values and the principles that the company has are reflected in the behaviors that people have and the decisions they make. So that is as important as it is what. Okay. There's a question there. Great.

Terrific panel. I appreciate. I have a question about -- an ESG question, and it's really about the relative weights that we attach to each, E and S and G. And the question is, if you think about -- let's take S. Like none of us would do business with a company that was maiming its employees, right? So that will be the S side. And on the G side, we probably wouldn't want to be doing business with firms that are laundering money for oligarchs. But if a firm is emitting huge amounts of carbon in the atmosphere acidifying the ocean, contributing to the disappearance of species and habitats, we're generally much more forgiving of that part of the ESG equation. And I'm wondering what your thoughts are about -- do you see that being calibrating over time? And if so, what role should leaders of companies like yourselves play in helping us get there with that on the cultural side?

I'm not sure that I would say we're forgiving of the environmental side. I think there's lots of discussion going on right now about the E as well as the S and the G. And obviously, there's more that can be done, but we have this problem of transition, right? Many of us arrived here by transportation that runs on carbon-emitting fuels, and we need to get from here to there. So I don't know if it's -- that we're much more forgiving about the E, but I think it's a little less clear to people how to measure the E and how to measure, are companies making the right progress from here to there? I don't know.

Yes. When I was thinking about your question, the first thing that came to mind is you start looking at the E and the S and the G and which is more important or how do you weigh them. Kind of reminds me of your golf game, right? Is the drive more important or is the pitch more important or is the putt more important? Well, it probably depends on the last hole, right? Whatever you did that you'll maybe remember the most. I think because of global warming and because of the importance around the world that environmental issues are getting, I don't think that's any longer the case. And maybe it used to be more about talk versus what you're doing, but I think now it's just the opposite. I'll give an example of that. Obviously, UPS, we have 600 planes. We have 125,000 trucks. And so if we don't embrace the effect on the environment, who should? And there's a lot of industries that are in that same -- but we're not waiting on government regulations or anything like that. We know it's the right thing to do and so we're being as aggressive as we can. And I'll just give you a couple of examples. We just invested in a company, a minority investment, but an investment in a company, Arrival, that builds EVs or electric vehicles. And we just signed a 10,000-unit contract with them. And that 10,000 vehicles is going to more than double our alternative fuel vehicles in one contract. We also just signed the largest renewable natural gas contract in the U.S. And as this continues to get implemented, we will be the largest users of renewable natural gas in the U.S. from not only a transportation standpoint but compared to other companies. And those are the things that we're looking at. But what excites us even more is where we can use technology to help us run the best mile or the greenest mile that is possible. And that's the one that doesn't exist. Because by using ORION, which is our optimized dispatch technology, we're actually able to eliminate millions of miles that we would be running. And when you do that, that makes a much bigger difference than it can in some of these other alternative fuels. So it's a combination of a strategy. Everybody wants to get to net neutral carbon and they want to get there as soon as they can. But in order to do that, you got to have tangible goals and actions that you're doing right now. If you're doing that and then you feel like you can get there -- and you hear a lot about net neutral or carbon neutral by 2050 or whatever, which is 30 years away, and that can be a very honorable goal if you're doing things right now to get there and to make a difference. It's not as honorable if someone just says be net neutral or carbon neutral by 2050 and they're not doing anything in the meantime. They just know that someday they will. And I think most people that say that are really focused on the here and now and how to get there. But I really believe it's getting a lot of attention. We can always argue, should it have gotten more? I can tell you that the environmental issues are getting more attention than I've ever seen. Justifiably so, right, we have to continue.

Yes. I also think, to your question, that ESG reads differently depending on the company, too. For example, a company like Johnson & Johnson, society is going to expect us to lead in certain areas which are different from the ones that UPS is leading. So I mean, for us, we can lead in environmental sustainability, but that's still the #1 expectation that society has about us, as well we should lead in ESG. Society expects that we lead now in helping governments and health care systems to manage the pandemic of coronavirus, and that's an expectation. So I think that depending on the type of industry and the social mission that you have, then there's a different expectation on how you translate ESG. I have a question here from the online, and I'm going to ask it to you guys. It says, corporate CEOs pay attention to their largest shareholders' priorities, for example, Larry Fink's memo. How do you integrate what matters to retail shareholders, too?

All right. Well, I think you really have to look at the shareholders the overall perspective, and each of them are very important. And to us, I would throw a third category in there. And that is that we have 150,000 UPS employees either active or retired that are shareholders, too. So we treat them also as if they were an institutional investor. And what I think really when you're looking at something like long-term shareholder value, you've got to have targets, you've got to have goals and you have to have a path to get there. That does not mean that just gives you an excuse or get out of jail free card on a quarterly basis or on a year basis. You need to identify the year and you need to talk to your shareholders about what you expect to do, and you also need to talk about the longer-term picture. And I think if you do that, if you're transparent and you give all of your shareholders a good view of what you plan to do, I think it covers you from that regard.

Thank you. Any perspective, Deanna?

No, thanks.

Okay. Another question. [ Paul ]? Yes.

Yes. Are your policy owners or your shareholders asking any different kinds of questions on calls with the company since this whole process of momentum has been accelerating?

Okay. I'll start. And I can't talk about policyholders, but I've got the shareholders part of this covered. I would tell you that the intensity of the discussions about ESG and the frequency of questions is more overall. Now there were some investors that over the last few years this has been important. They probably haven't changed at all. But I would say that to your typical investor, the ones that I meet with, which would be some of the larger ones, it is more of a topic of discussion than it's ever been before. And it is -- it used to be, "Tell me about what your goals are in these areas." Now it's, "Tell me how you're going to get there," sort of like what you just said. And so that's where I think it's changed.

Do you get more questions from your employees?

We definitely get more questions from our employees. And I think probably many people in this room have experienced, if you're going to recruit on a college campus, you better have an ESG point of view, a statement report because employees care a lot.

Yes. Amy, you were going to ask a question? The last one.

Amy Springsteel from BNY Mellon. I wonder, how do you resource purpose? I'm wondering about resource allocation. And ESG has touch points across the entire enterprise. Do you have a team doing it? Do you have a council? Do you have champions in each area of the business? I'm just curious about resource allocation.

There's nothing more dangerous than the last question of the day. That is a very good question. And traditionally, you could just barely miss the cut, right? Because if you've got your strategic imperatives that you're focused on, then there can be things like environmental, social, whatever, that you could miss the cut on because you haven't put the overall financial situation and looked at the other situations, too. So I think it's 2 things. One is you have to be guided by your core principles, your core values. And if this is important to you, if you think this is necessary to reach the long-term shareholder value, then you've got to question, are your metrics and the traditional way that you measure the business, are they accurately capturing that? And if the answer is no, you can tell by the things that come up above the priority list. If you say this is important to you but none of those items rise above the cut line, then you realize they're not. Then you have to go back, re-evaluate and take a look at what you're doing. So we do have people that help us capture the entire view. And it doesn't mean that you don't do these things for financial return, too. Like I said, it's all an and, and they're all interconnected. But you do have to make sure you're capturing the entire picture. And if you think that you're going to get long-term shareholder value and you're going to ignore one of these groups of stakeholders, it's going to all come back on you. And so it may seem okay from your quarterly review when you're planning. It's not going to be okay when one of those groups starts to rise and you realize you're losing customers or you're losing talent or whatever.

Yes. And I agree with David, and I would say our values are how we run the company, and the questions come up in all kinds of meetings. They're not just pigeonholed into one kind of metric or one kind of group or one sort of employee council. They really are alive every day in all kinds of ways, and I think that's the only way you can make this work.

Thank you. Thank you, David. Thank you, Deanna, and thank you to all of you for the questions. I hope you have a great meeting.