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Saturday, Jul 11, 2009
Everybody pays when companies pollute and cheat. So big institutional investors have a legal mandate to be socially responsible.
Dec 8, 2004 | Whenever confronted by pesky issues it doesn't want to deal with, Wall Street has a simple retort: "Walk, don't talk!" Hence the rationale for what is called socially responsible investing.
But it has never been simple to figure out exactly how to be responsible. Consider, for example, the letter businessman Paul Hawken, coauthor of "Natural Capitalism," wrote in early 2003 to the Green Money Journal complaining about the existence of McDonald's in the social investment fund run by Domini, one of the leaders in the field.
"What does socially responsible investing mean?" asked Hawken. "Is it a way for upper-middle-class people to launder their money? ... Getting kids [hooked] on junk food doesn't qualify. If the business model is corrupt, then it hardly matters if a company uses recycled paper or provides day-care."
In other words, the practice of negative (or ethical) "screening," in which socially responsible investment (SRI) funds avoid investing in anything from purveyors of sins such as tobacco and gambling to corporations that engage in nefarious environmental and labor practices, is little more than a marketing ploy -- an exercise in green-washing.
Another critique holds that SRI screening is counterproductive because the principle of keeping one's hands clean of the objectionable companies is tantamount to ignoring the worst corporate environmental and human rights criminals. "If the company is doing something you don't like, don't sell the company," corporate governance activist Robert A.G. Monks told social investors at their annual gathering, SRI in the Rockies, last year. "It's your company. Change the company!"
In fact, many Americans don't have much choice. Although individuals owned as much as 80 percent of publicly traded equity in the United States in the early '70s, today their stake has dropped to less than half. Today, institutional investors such as pension funds control over half the shares in corporate America. Individuals still own most of that stock, of course, but decisions on what to buy and sell are made through representatives who invest our money on our behalf: so-called fiduciaries that are legally required to manage these trusts and vote their proxies in the sole interest of the people whose money they manage. These behemoths, through their holdings, in effect own the entire economy -- and may even control the entire global economy.
These mega-institutions cannot just abandon ship when companies don't perform, or engage in what some might consider politically reprehensible practices. As Monks points out again and again in his books and in his other writing, they -- we -- are stuck owning most of corporate America.
That does not mean that investing cannot be political or even moral. On the contrary, it can -- and must be. A strong case can be made that if pension funds and other institutional investors are to truly meet their legal obligations, they must promote a socially responsible agenda. Not because they are nice guys, but because it is in the long-term interest of the shareholders they represent.
