Got Change for a Dollar?
Hell, these days it practically votes. (Thanks, Mitch McConnell!)
Socially responsible investors argue they are simply taking the considerable influence of money and putting it toward doing good. If a business wants money, it needs to act in accordance with the investor's political or social agenda.
Proponents of "socially responsible investment" (SRI) often cite divestiture of corporate holdings contributing to the collapse of apartheid in South Africa as a proud moment for their cause.
And it is a growing cause. The Social Investment Forum, a non-profit promoting SRI, reported last fall $2.16 trillion - or approximately 13 percent - of the $16.3 trillion under professional management in the U.S. is invested in a socially responsible manner. Those numbers are up 82 percent from 1997, the study notes.
Yet, there are still lingering questions about SRI.
Beyond the example of South Africa, does SRI really make a difference? Or is it true that when one guy turns his nose up at tobacco stocks, there are 10 others who can't wait to get their hands on such high-performers?
If you invest according to your principles, does that mean you're going to end up settling for less lucrative returns? Was that banker in a Doonesbury cartoon correct when he opined the opposite of "wrong" is "poor?"
And in an age when electoral politics has long since jettisoned the spirit of "one man, one vote" for "you're only as important as your political donations," is this even a welcomed development?
More Americans are invested in the stock market than ever before. With the explosive growth of mutual funds and pension plans, almost one in two Americans has money tied up in Wall Street.
But how many really wield the kind of cash it takes to make CEOs put down a martini and pay attention?
Is it a good thing that so many important decisions are being made in an arena with a cover charge that most Americans can't afford?
Meet the Lambda Group
Brian Tremain and David Cupps head up the Lambda Strategy, a socially responsible portfolio sensitive to gay and lesbian issues, at Prudential in Lexington.
The two report the Lambda Strategy and a second socially conscious portfolio they operate have combined assets of about $66 million.
The Lambda Fund is fairly representative of the SRI model in that it first screens out the "sin stocks" of tobacco, alcohol, gaming, defense, and nuclear energy.
"Ever since I began in this business in 1980, I didn't feel I had to make money off the backs of others on the earth," Tremain said of his decision to filter out these industries.
Companies are then considered according to measures of workplace tolerance for gays.
Tremain said companies must satisfy at least one criterion such as maintaining a policy of non-discrimination in regard to same-sex orientation, offering domestic-partner benefits or participate in the National AIDS Fund (corporate America's response to the epidemic).
Of course, it's not all about social issues; financial considerations count too.
For example, while Disney is practically famous in every household (with the help of the Southern Baptists) for being gay-friendly, that company is not in the portfolio.
"We're not interested in media right now," Tremain answered as simply as two plus two equals four.
And because this is a business venture, the screens to filter out odious companies are not so restrictive as to cripple returns.
Tremain says he allows a company to have up to 5 percent of revenues from one of the "sinful" practices.
Social investment literature advises people to look carefully at the screens. For example, if an investor is opposed to guns, he needs to be aware some funds will include Wal-Mart - not a firearms manufacturer, but a leading retailer of guns.
Clearly, screening can become complicated and some critics charge investors who allow principle to dictate completely will screen themselves right out of the market.
"Some screen out what we screen in," Tremain said.
Got my mind on my money, my money on my mind
"Principle" may start with the same letter as "poverty," but those two words don't have to have any more in common than that, reassure SRI fund managers.
Industry observers note SRI funds tend to steer away from smokestack companies and toward technology, health care, and financial companies.
Apparently those environmental screens have the fringe benefit of pushing investors into some of the hottest sectors of the economy.
If only suffering for principle were always this easy.
The Lambda Strategy portfolio fits this general description of an SRI fund. It features many holdings in companies offering software, telecommunications, medicine and financial services. (The Lambda Strategy does report holdings in two traditional manufacturers - Ford Motor Company and Delphi Automotive Systems.)
Lambda Strategy literature notes its performance has outpaced the S&P 500, an industry measure. For one-year returns ending June 30, 2000, the Lambda Strategy recorded 18.6 percent, compared to the S&P's 7.2 percent.
For three-year returns ending June 30, 2000, the Lambda Strategy reported 31.3 percent returns compared to 19.7 percent for the S&P.
However, not all SRI funds do well.
For example, an investment fund for emerging African businesses had a bumpy ride last year.
Tremain bristles at broad generalizations of SRI fortunes, saying you can't lump them all together. SRI funds vary in the way they're managed, in their focus and holdings.
Got change for a dollar?
So is an investor with a fat wallet and a social agenda enough to make a corporation shape up?
Dr. Keith Johnson at the University of Kentucky business school suspects the answer is "no."
"There are so many players in the marketplace," Johnson said. "Those [who] aren't bothered by a stock can counter those that are."
Companies may become more image conscious in response to the rise of SRI, but the savvy businesses have always cared about their image anyway, Johnson said.
The biggest impact of SRI is probably on the investor who gains the psychological benefit of feeling like he's doing the right thing, Johnson said.
Admitting it is hard to quantify, Tremain and Cupps insist SRI can change corporate behavior and cite instances where it has happened.
Cupps recalled that shareholders recently prompted Mobil to restore same-sex benefits after the company downgraded them.
Similarly, GayMoney.Com reported Johnson and Johnson agreed to write a policy banning discrimination in response to a shareholder resolution.
And in addition to examples where investors make something happen, there are examples where shareholders keep something from happening.
"Look at tobacco stocks," said Andy Loving, a Louisville financial planner who deals with SRI.
Loving said tobacco stocks are deemed "undervalued" - Wall Street jargon for "people aren't buying them the way they should."
If people aren't buying those stocks, it is possible to infer -as Loving suggests - one reason is that investors are considering the social issues attached to cigarettes. And if investment in tobacco companies falters, it impedes the ability of those firms to do business, Loving added.
"You can't say there's no effect," Loving said.
(Of course, crippling lawsuits and anti-tobacco verdicts might also have something to do with investor reticence.)
Loving said another aspect of shareholder activism is to make companies do positive things like invest in communities. He pointed to the Louisville Community Development Bank which makes money available to impoverished neighborhoods.
"Part of socially responsible investing is to put money in that bank where you know it'll help a low-income neighborhood," Loving said.
Triumph of Capitalism
But how many people are really in this game?
A congressional study reported the number of stockholders has leapt by over 50 percent during the 1990s and the Federal Reserve estimates approximately 49 percent of all U.S. households are stockholders.
This explosion is credited to laws shielding some IRA and 401(k) investments from taxation, mutual funds offering returns surpassing traditional savings accounts and low inflation protecting the value of investments over time
Some consider this trend to be a great social movement radically redrawing America's economic lines.
The congressional report observed: "[I]t is suggested that broadened stock ownership can erode class conflict, for as capitalism expands, a lot of 'them' can become 'us.' It brings us all together as stakeholders-in-common."
But while more Americans are stockholders, how many of them have a slice of the pie big enough to mean anything?
Not many, according to several studies on wealth distribution.
The ownership of investment assets is still highly concentrated in the hands of the rich, according to sociologist Edward Wolff.
"About 90 percent of the total value of stocks, bonds, trusts and business equity were held by the top 10 percent," Wolff wrote of wealth distribution. "Despite the widespread ownership of stock... the richest 10 percent still accounted for 78 percent of their total value."
With those numbers, it is hard to argue the unwashed masses have seized control of corporate America.
Loving acknowledged the corporate boardroom is not an arena where just anyone can be heard.
"But the reality is that's the system we have in place," Loving said.
In the spirit of making lemonade out of lemons, Loving said SRI at least offers one way to introduce some sense of fairness into American business.
After all, Loving points out, corporations are not inherently bad.
"They create jobs, generate tax revenue and provide goods and services," Loving said.
The problem arises when there are no "checks and balances" on corporate behavior as there are with government.
"A corporation is not all bad anymore than the judicial branch," Loving argued. The judicial branch would be oppressive and wrong if all power flowed to it, he said.
"There needs to be other places of power to ask questions [of corporations]," Loving said.
We the people
The Lambda Strategy promotional material features a quote from Tremain about social change:
"The... thing that is important both to myself and to my clients is the fact that we are investing in companies that are supportive of our families and our community, and this is the way you effect social change."
Asked about where that leaves the role of government, Tremain explained he made that statement during the Newt Gingrich years when it looked like Congress wasn't going to do anything for homosexuals.
"You can't always wait for what the public sector will or won't do," Tremain says. "You go where your wins are."
But Tremain said he does believe in government's role, noting his support of the Human Rights Campaign to enact new laws against discrimination.
Cupps said government and SRI can act together.
"You need government to punish those treating others unfairly, but you also need someone supporting those doing something positive," Cupps said.
The 'tragedy of capitalism'
Fundamentally, SRI won't work because it doesn't address underlying issues of consumption and competition, according to Dick Levine, a UK architecture professor and director of the Center for Sustainable Cities,
"A CEO of a corporation tells you he's an environmentalist ... and will be as environmentally responsible in business as possible," Levine said. "He'll be environmentally responsible 'As long as I can remain competitive.'"
"Who is he competing against?" Levine continued. "Companies who manufacture in nations with cheap labor and few environmental laws that are in danger of undercutting his business."
"The tragedy of capitalism is that there isn't much room for concern for the commons," Levine said.
Government is supposed to look after things like the environment enjoyed by the public at large. But that governmental role and the public sphere are shrinking in this country, Levine said.
It isn't in the nature of the stock market to adequately address these issues, he said.
The stock market, he said, "offers two choices: Look foolish holding out for principle while everyone else makes a profit, or be greedy."
Even when Ford (a company included in the Lambda Strategy portfolio) admitted the SUV is extremely unfriendly to the environment, the car maker restated its resolve to build the vehicles because they sell so well.
"Who doesn't want to make more money?" Levine said. "Even the most conservative and conscientious institutions are drawn in."
Levine said the rules of the game need to be rewritten to emphasize sustainability. He suggested that participants in giant pension funds like TIAA-KREF that have holdings in many, often competing, corporations put pressure on businesses to cooperate for preserving the general welfare.
"Organizations like KREF with fingers in all the pies need to pull [the corporations] together and say, 'We're the parents, You're the children. Here's the rules to prevent you from destroying the house,'" Levine said.
"Even capitalism needs to be concerned about its own survival," he added.
The problem with SRI is that it's too narrowly focused, Levine said.
"It's not just a question of putting money in the most socially responsible investment opportunities and not just trying to influence those companies," Levine said. "It's looking at larger patterns and synergies to move society to sustainability... I'm less interested in marginal improvement."
Is that all there is?
Tremain, Cupps and Loving deal with issues that are generally grouped as "liberal" or "progressive."
But SRI is hardly a tool exclusive to the Left. There are SRI funds for right wing causes, too. ("Except they don't perform as well as ours," Cupps joked.)
Asked what's to stop a right wing group from coming in and canceling out his investors' interests, Loving answered, "Nothing."
Loving suggested that push-and-pull is "no more different than the democratic process."
But in important ways, it is.
Where would a contest among economic interests leave the vulnerable minorities that depend on the protections afforded by constitutional government?
And do the masses lacking the money to participate just hope the plutocrats seemingly most like them take power away from the others?
If everything is for sale - when a company will toss out one conviction for another just to satisfy the next group of well-financed shareholders - is that any way to maintain a society?
Whatever happened to letting people speak for themselves through their elected officials, laying down a law that stands for a principle and not just one group's financial might?
None of the SRI investors suggested government should not have a role in protecting its citizens.
Yet, sometimes the rhetoric appears to exaggerate the magic of the marketplace. Capitalism is fundamentally about making money. Politics is about constructing social order.
It's important in this election year not to get the two completely confused.
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