Mastercard Incorporated (MA) Earnings Call Transcript & Summary

Welcome, everybody, to this fireside chat with Michael Froman, Vice Chairman and President of Strategic Growth at a -- excuse me, President of Strategic Growth at Mastercard. I'm James Faucette, Senior Research Analyst here at Morgan Stanley. And as part of this Morgan Stanley Standing Sustainable Futures conference, we're very pleased to have Mike with us today. Before we get going with him and all the topics that we want to address, I do have a quick disclaimer to read. It says the views expressed were represented by non-Morgan Stanley speakers during the Morgan Stanley Sustainable Futures conference do not present the views of Morgan Stanley or Morgan Stanley Research. For important disclosures, please see the Morgan Stanley research disclosure website at morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representative. So once again, thank you very much for joining us today. And as we get going with Mike, if you're following along via the webcast, you can submit questions directly in that webcast portal. And the sooner you get those submitted the sooner we might be able to get on to them, particularly if there were any delays in having those registered. So Mike, welcome.

Let's start with the very basic, your work in Mastercard. Can you talk to us about the strategic growth team and the role it plays within the organization?

Sure, James. Thanks very much for having me. Within strategic growth is everything from our ESG work, our center for inclusive growth, which is our thought leadership arm, our Mastercard Impact Fund, our philanthropy, but also all of our work on financial inclusion on new verticals, including cities and governments that we work with and our work on humanitarian and development issues. So how do we bring our technology to help address humanitarian and development issues. And the common element across all of this is how can Mastercard use its assets, both its commercial and its noncommercial assets to help address major social and economic issues and do so on a commercially sustainable basis.

So that's a big mandate. That is ambitious for sure. So when you look at that, though, what are your top priorities for you and your team today? And how has that shifted especially given the experience of the last few years where there's been so much upheave in change?

I think this really started long before ESG was a word that was well known and often referred to, we were involved in doing financial inclusion -- focusing on financial inclusion. It goes back about a decade, and it's now deep in the DNA of the company. And what I think has evolved over the last couple of years, in part because of COVID, in part because of racial equity issues in the U.S., is a greater focus on digital inclusion, making sure that individuals and micro and small businesses were digitally included, we're able to reach their governments, reach their customers, reach their suppliers, get access to capital, get paid the way they want to get paid. That was a key part of what we were focused on. We have focused additionally on data and data responsibility, data responsibility for privacy, security as the digital economy became more and more important. And then, of course, around climate change as that became a front center issue for every company. We've looked to see what we can do, not just in managing our own carbon footprint, but how we can use our assets, our network, our relationship with banks and merchants and individuals to try and address climate change as well.

So I want to go into the ESG topics and the things that Mastercard and your team are doing specifically to address these issues. But obviously, tackling the economic and social challenges of today are incredibly important. What is your philosophy or what's the philosophy of Mastercard as to the role of business in the private sector more broadly to drive that sustainable growth because some people feel like, oh, it's not really the role of business. Others say that it's the sole role of business, like how do you think about that for Mastercard?

There's been a real evolution in the discussion around the role of the corporation in society and sometimes is put as stakeholders versus shareholders. I think it's less an issue of that than it is an issue of short-term versus long-term shareholder value creation. So we focus on financial inclusion, not just because it's the right thing to do, but because we know that a more inclusive economy is going to be a more thriving economy and that our business will do well in the context of more inclusive economies. We focus on climate change and environmental issues, again, not just because it's the right thing to do and because being able to operate in a healthy environment is good for business, but because it's also key to attracting the best quality talent and retaining them. It's key to developing closer relationships with customers who are also wrestling with these issues and our capacity to partner with them is, I think, our competitive advantage that we have to really work with them on these issues, and our issues around people and around bridging the gender pay equity gap, increasing diversity at the company. Again, it's not just the right thing to do. It is good for business. It means we're going to have better talent around the table. We're going to be more -- better positioned to deal with a wide range of markets for our products and integrating that into the core of our business strategy is key to our philosophy around that.

So Mike, ESG generally is obviously very important, and I would even characterize it as hot topic right now, and not just for investors, but the media, partner conversations, consumers as well as the investment community. But all the things that you outlined as far as why it's important to think about the role of the corporation more broadly could have been said 10 years ago, 20, 50, 100, whatever time frame you want to pick. Why do you think there's an elevated focus on ESG now as opposed to in the past? Like what's different today versus those previous periods where it didn't really factor heavily in people's conversations and decision-making.

You're right that it could have been talked about 30, 40 years ago, but it really wasn't. And I think it's only been in the last 10 or 20 years that attention is focused on that. I think part of it, frankly, I've spent about half of my adult life in government and half of it in the private sector. I think part of it is as governments have been less able to -- less functional when it comes to dealing with some of these critical issues. Society has looked to other major institutions, including the private sector to take on greater responsibility. It's also a function of the realization that government can't do it all, that NGOs, while they play a critical role, can't do it all, philanthropy absolutely critical, can't do it all. And that having the private sector bring the strengths of innovation, for example, to the table, and introduce that innovation into some of these broader issues like doing climate change or are dealing with inclusion is going to have a greater impact. So I think for all those reasons, but there was a need, but I think people also saw that there was an opportunity and that if you could align the incentives of the corporation with addressing some of these issues that, that would have maximum impact.

Let's start with what -- I mean, Mastercard, obviously, is a large company, I've often talked about the benefits that Mastercard can deliver from an efficiency, including environmental efficiency standpoint as in terms of processing payments versus alternatives, and that includes the traditional ones we think about like cash and check all the way through to some proposed new areas or types of transactions. But in my mind, Mastercard has always been able to provide a very efficient solution. But when you think about the broader footprint of the company and start to -- and as other companies start to look at Mastercard as a role model or something to emulate at least in certain cases, what insights can you share as far as the best practices for building an ESG-centric organization and operating it. And how do you do that? And how as a company can you prioritize purpose and profit? Like what are the key learnings that you would want others to take away from the Mastercard experience?

Well, first, it's got to be genuine and authentic, to the company. It's got to make sense from both a business strategy perspective but also from your employees' mindset that they come to work, working in our case, on payments, on data analytics and for them to think through, well, what is relevant to ESG in my world. And that is why we focused initially on financial inclusion. It was absolutely authentic and genuine to who we were, and it allowed us to build that muscle internally where it wasn't that distinction between profit and purpose. But both were very much aligned with each other. It sounds a little corny, but we talk openly about doing well by doing good. And by saying that, and it's deep, deep, deep in the organization in part because our leadership over the last 10 or 12 years has been a real outspoken force in this area. But by talking about that, people recognize that they can do good as part of their day-to-day job, and that helps contribute to this long-term value creation for the company. So that to me is the -- each company is going to find their own way and they're going to find their own issues that are genuine and authentic to them. When it came to climate change. We're not fossil fuel company. We're not an electric vehicle company. Our impact on -- we don't even have that large of a supply chain, like a major manufacturer that can really move the needle on climate change. And so we looked around at our assets and said, our major asset is that we're a network. And when you've got close to $3 billion cardholders. We've got tens of thousands of banks. We've got tens of millions of merchants in your ecosystem, our ability to have an impact on climate change could be well be tied, for example, to creating a carbon calculator that allows a consumer to see their carbon footprint as they're spending money on their card and to help inculcate a notion of conscious consumerism and then be able to take action whether it's by planting trees or some other action to offset that carbon footprint. That's the contribution we can make that's authentic to us. Other companies will have other avenues to pursue. And then the last piece I would say, and this has been a recent announcement we made, we now pay all of our employees in part on our ESG metrics and very specific quantitative metrics, not just some general feel good, how do we think we're doing on ESG. But are we achieving our financial inclusion objectives? Are we achieving our progress towards net zero? And are we appreciating the gender pay gap, and that can affect all of our employees' bonuses, a positive or negatively. And there's nothing like compensation to get people's attention. The number of calls we're getting, e-mails we're getting from hundreds and hundreds of employees saying, "What can I do to help? What can I do to pursue these goals?" That is ultimately how you integrate this into the core of the business.

So I've heard executives at Mastercard talk about different, I don't know, ideas or drivers or maybe calling pillars around how you assemble your ESG ethos, maybe it's like -- and what I've heard them say before is people, planet and prosperity, right? Those are kind of the pillars that are named at least. Can you share though some particular examples or anecdotes that highlight Mastercard's success in investing in sustainable and inclusive growth?

So look, if you look at those 3 areas, people like many companies, we're breaking lots of new ground when it came to creating flexibility for our employees during COVID and expanding benefits dealing with mental health-related issues as well as physical health-related issues, making sure that we were focused on our employees, first and foremost, and their financial security as well has been key. When there was a 2017 tax cut, one of the things we did with the benefits of the tax cut was increase our match for 401(k) plan so that employee matches puts in 6%, we put in 10% because that was the calculation that we made that if you really want to have retirement security, you need to save something like 16% and invest 16% of your income in your retirement. Obviously, diversity is key to that pillar as well. And we've been making progress both on gender diversity and racial diversity. On the planet side, I mentioned a couple of examples, I mentioned the carbon calculator, that's part of a larger effort to build a coalition, called the Priceless Planet Coalition of over 100 customers and other partners who have committed to mobilize the resources through marketing campaigns and other efforts to plant 100 million trees over the next 5 years. And that's again something we drive into our business, and it helps drive use of our card. It helps strengthen our relationship with our customers. We've launched a Sustainability Innovation Lab in the Nordics to take the same kind of lab innovation capability that we have in payments and think about what's the innovation that we can drive in the area of sustainability. And then in terms of prosperity, that third pillar, it really goes back to financial inclusion. We laid out this goal of bringing 1 billion individuals into the financial system who were unbanked or underbanked by 2025, 50 million micro and small merchants, 25 million women-run businesses. And we manage it like any other KPI of the business. Every region has goals. Every country has programs. And as I mentioned, people are compensated in part on how we achieve our financial inclusion goal. And then, of course, in the United States, in particular, in light of the George Floyd murder, we launched our In Solidarity initiative, a $500 million initiative, really focused on how do we bridge the wealth and opportunity gap faced by black communities, particularly in a handful of cities across the United States. So we brought all the assets of the company. Philanthropy, products, investment partnerships to those cities to really try and address this issue in a subset a meaningful way.

So I've always found a big concept, and this goes back a long time ago when we were learning very basic economic concepts of externalities and that kind of thing in our purchases and consumption. And you talked about this idea of having a carbon meter so that you can see what the environmental impact is of your purchasing -- of somebody's purchasing decisions. Now Mastercard is a really, really smart company. You guys do a lot of great stuff, but you don't really manufacture any goods and you don't deliver services like travel, et cetera. So I've got like it's very obvious if you're going to do that, it's going to require collective action, not just from what Mastercard can do, but also from everybody that provides goods and services. Maybe that's obvious. But from your perspective, how can you help ferment that and drive the kind of inputs that you need so everybody is making reasonable decisions. And I can easily imagine where if you have competing goods and if you can really validate that one's a lower carbon footprint than another, like that can drive not only choice, but change, et cetera. But what's the path for that cross-sector collaboration? And am I right in assessing that that's probably going to be quite vital?

It's absolutely vital, and I would even broaden it from what you said because it's not just that we need other private sector partners who are developing this data and developing this analysis. Sometimes it's a retailer who's decided it's going to be their competitive advantage to be able to mark their products with the carbon content, just like they market with nutrition content. And sometimes it's a rating agency that's got a database that looks at a wide number of companies and assesses their carbon footprint. I'd also say we've got to bring in the government, the public sector side into this. And public-private partnerships, I think, are a key part of addressing this as well because the regulatory environment, what the SEC requires in terms of disclosure, how the ES&G are themselves defined in terms of metrics, all of this is going to affect company behavior, including our behavior. And so partnering with governments, partnering with other private sector partners is absolutely critical to being able to do this. No one company can do -- can make major progress on this alone. It really requires partnership, including with fintechs. Our carbon calculator is a partnership between us and a fintech in the Nordics. And we've been able to do is help them develop it and then bring it to scale across our global network.

You mentioned at the outset in kind of introducing yourself Mike that you had worked in both the private as well as public sector throughout your career, and you just pointed out is that it's important to work with governments and other institutions. Can you talk a little bit about how your experience on both sides informs your approach to engaging with government and kind of what that -- you expect that process to look like and how you can help move that along within Mastercard?

Well, to be frank, when I was in government. I hear a lot of talk about public-private partnerships, and it usually meant we wanted the private sector to write a check -- we do. now that I'm on the other side of the table, I think a real partnership isn't just about financial support. It's about bringing technology and innovation and expertise to the table to partner with governments. But that requires a lot of work on both sides. There's still a pretty big trust deficit between the public, the private and the nonprofit sector and all parties really need to work on that. I think governments need to understand that the private sector has an operational role to play, has a contribution to make in terms of bringing innovation and technology to the table that can really help government achieve its objectives. But the private sector and our team at Mastercard is very focused on this, needs to understand what are the imperatives driving government decisions? And how do you co-create with governments. So that it's not us selling them a product as much as us sitting down, working with them, understanding what it is they're trying to achieve and together trying to design solutions. And I think that's -- you can say that about any customer, I suppose. But I think particularly when it comes to governments, it's really important to understand that they don't want to just be sold to, they want to be able to shape the outcome and shape the solution. And that's -- and they're going to have different issues they bring to the table than a private sector partner might bring to the table, and it's really important for us to understand that as well. So I'm hopeful. I mean the context of COVID, we ended up working with upwards of 100 governments, some local, some national all over the world, help them get disbursements into the hands of people, helping get loans into the hands of small business, help them with our data to understand what the impact of COVID was on particular sectors, on particular regions as they were developing economic plans to address that, to be able to test what those -- the impact of those plans might be. So there's a lot the private sector can bring to the table, but it does need to be in the spirit of partnership, true partnership.

So I hesitate here, Mike, because I don't know how much I want to disclose internal Morgan Stanley processes. But let me say that was probably in 2016, roughly when Morgan Stanley started putting together its first basket of ESG stocks, right? Like this was going to be a representation of companies that were engaged on key ESG themes and that we thought could really advance things. And I put forward Mastercard. And I was frankly met with a lot of [indiscernible] and like, what are you talking about? And I had to do a fair amount of internal pitch work to get it -- to be part of that. And even when it was first published, we got a lot of like comments of similar nature back from investors. What I think is encouraging today is 5, 6 years later, that actually doesn't really happen anymore. I think people kind of get it and the messaging is good. But one of the key things that I talked about then and still raises questions today is in the area of financial inclusion. And you've talked about how the financial system has to work for everyone. What is specifically Mastercard doing today to drive financial inclusion? And maybe more specifically than that, what assets are you levering to push that work forward?

Well, first of all, thank you for your advocacy on our behalf. We appreciate it.

We're always looking for new shareholders.

Yes, there you go. Look, I think on financial inclusion, I think one important thing to observe is that it's not just an issue of developing countries. People sort of think about it that it's an issue of Africa or Southeast Asia, there are serious financial inclusion issues there, we're very much involved with that. But here in the United States or in Western Europe, you have tens of millions of people who are unbanked, underbanked or overly dependent on nontraditional financial services. In the United States, just to give you an example from some of our work on the racial wealth and opportunity gap, a black -- an average black family may well spend twice as much on service on fees to access basic financial services than a white family. And from the point of view of income, it is expensive to be poor in the United States. And so if we can help provide products to help people get paid when they want to get paid and how they want to get paid. So that they may not have to go to a payday lender to get a loan or to be able to get a payment and deposit it on a check, if you don't have -- deposit on a phone, if you don't have a bank account, were to be able to send money to friends or relatives across the United States or in other countries, those are all things that we can do to make it less expensive to be poor. And to make financial inclusion a pathway towards greater financial security, financial wellbeing and ultimately, prosperity. When you look abroad, of course, the challenges are evident. And whether it's people who have had no relationship with the banking system. And for the first time, we are helping get -- when I say a card, doesn't have to be a piece of plastic, it can be something on their phone. They can be credential on their phone that allows them to pay and get paid the way they want to get paid. And that's oftentimes -- payment is oftentimes the first foray into the financial system for somebody. And once they're in, in the digital environment, then they can digest savings products and micro insurance products and loan products. So we have a program in Kenya, where we partnered with Unilever and a local Kenyan bank to digitize the relationship between micro merchants, those little stores at the end of the dirt road that are being supplied by Unilever. We digitize that relationships at the local bank can see the relationship between those 2, you can see how much the merchant is buying and how much the merchant is selling. And suddenly, somebody who was invisible to the banking system is now creditworthy. And the bank is willing to extend them credit for the first time so that they can buy more from Unilever, sell more to their customers, pay back their loans to the bank. It's a win-win-win situation. And we're just the organizer of the ecosystem passing that information from one to the other safely and securely. So there's so much that can be done in the area of financial inclusion, both at the base of the pyramid, but also in quite advanced economies.

So just as a reminder for those people who are listening via the webcast, you can submit questions via the webcast. We've got a question here that I think is a good one that ties back into the environmental portion and kind of what we were talking about earlier. And that is, look, I think it's key that if you could work with merchants to provide more background and information on carbon footprints and the like, that could be helpful in providing carbon price, if you will, when somebody goes to purchase something. But what about the role of your -- of Mastercard's issuing partners? I mean, have you started to see at least initial evidence of greater consumer usage or engagement when you provide the externalities, if you will, the costs such that you could engage and use your issuing partners as another force multiplier and trying to drive this kind of information and decision-making for consumers?

Absolutely. Look, the issuing partners are key to delivering this kind of information because it's ultimately their customers, right, who are the ones who are operating and it's showing up in their banking app, so to speak. So they're absolutely critical to this. And other things we're trying to do is help our customers and our partners with their ESG objectives. If we can come up with ESG products and services, and help our banking partners, merchants, fintechs, governments achieve their ESG objectives that's good for business. And it helps us achieve our goals. It helps them at their goals. Right now, so many companies, as you know, I'm sure all those that have been speaking today at your conference have made net zero commitments in 2030, 2040, 2050. Every company is in the process of now figuring out now that they've made the commitment, how they're going to actually execute on that commitment. And if we can help them by coming up with as we are doing with ESG products and services that help them achieve their objectives, whether it's in the area of inclusion, the area of dealing with climate change and getting to net zero, then that's helps strengthen our customer relationships and it's good for business as well.

So you talked -- you alluded a little bit towards ideas of incentives, et cetera. But within the ESG nomenclature, the essence of G is obviously governance. And can you talk a little bit about how Mastercard itself is holding itself accountable for progress towards your ESG goals? And what incentives are you putting in place, whether it be organizationally, for management, for employees to make sure you're making progress to those objectives and ideals?

Well, in addition to the compensation scheme that I mentioned, which is now, we started by doing it for senior management, and after 1 year, decided to expand it to all employees. That, I think, is a very powerful way of incentivizing the right behavior. But we've also taken steps now over the last couple of years to really institutionalize ESG across Mastercard, whether that's the role of the Board and its review of our ESG activities, really across all of the Board committees or it's the role of our risk management process to include climate risk into our risk management processes, to include ESG into our reporting pipeline and to think about how to improve and build on our reporting capabilities in order to report out on ESG. It goes into our product development efforts in making sure that as one of the lenses that we look at when we're thinking about our products and services as to how it lines up against our ESG priorities, our material issues. So in all those areas, we are in the process of institutionalizing ESG really across the company. We often say that sustainability is way too important to lead to the Chief Sustainability Officer. It's got to be the business of everybody across the corporation. And using incentives like compensation on one hand and integrating it into the management procedures on the other hand, and the processes, I think we're getting there.

Well, I think those comments are not uniquely applicable to Mastercard, right? And it's probably something that we all organizationally have to think about. But just in our last couple of minutes, Mike, what would be your kind of parting words of advice or key considerations for companies looking to progress their -- and push forward their ESG strategies and work in the space?

Well, I guess for the companies, I'd say, one, I go back to that issue of developing a strategy that is genuine and authentic to who the company really is because that's the only way it's going to become commercially sustainable, become a key part of their business strategy is if it makes sense from a company point of view. But the other point I would make, and this is really more now for those companies that are doing metrics or those who are assessing the ESG performance of companies, the E metrics are pretty well developed. They're evolving, but they're pretty well developed, they're quantitative, they're pretty easy to understand. The G metrics are pretty recognized list. I think the S metrics have a ways to go, and it doesn't surprise me that James, you had a little bit of work to do to sell us internally back in 2016. Because when people think of S, they think very importantly about issues around treatment of your workers, and that is absolutely critical. But if you want to incentivize in addition to treating your workers well, also having a positive impact on society, then you've got to have metrics that recognize companies for that. And that's a much harder piece of work to get done because it's hard to compare what we do on financial inclusion to what some other company might do on education or on health. And yet, ultimately, if the purpose of the metrics, or the purpose of the reaction from investors is to encourage the desired behavior you've got to be able to define us in a way that incentivizes companies to do the right thing. We're going to do the right thing anyway because it's so core to our culture around financial inclusion because this whole notion of decency that we talk about. But more than that, it's really -- if you want to incentivize the corporate sector as a whole, you've got to get the metrics right and that includes the social metrics.

Well, Mike, that's all the time we have today. Really appreciate you joining us here as part of the Morgan Stanley Sustainable Futures Conference and the work that you're doing in conjunction with Mastercard, I think there's a lot to be emulated there. So thank you very much.

Thanks for having me.

And thank you to all of you for joining us today. Have a good day.