In This Chapter

The myth that individual owners of stock in most corporations have any real say in the governance has been stripped away in the last 20 years. Many individual investors are happy to be passive as long as stock in the company provides a good return.

In recent years, however, more stockholders have become concerned with the way major corporate decisions and policies are made and how much influence management has in the process. As more scandals resulting from management wrongdoing surface, it is clear that some companies have no real accountability to stockholders. Even when there is no evidence of legal or civil misdeeds, a growing number of investors are becoming concerned about such issues as senior management compensation, labor practices, environmental policies, and other social issues. Many of these owners now refer to themselves as shareowners to indicate their active interest in how corporate decisions are made.

At the same time, investors are asking corporations to recognize that they do not operate in a vacuum. The decisions made in the boardroom affect not only shareowners, but employees, customers, suppliers, communities where the company operates, the environment and possibly other constituencies. These stakeholders have a vital interest in how the business does its business.

The difference between shareholder, shareowner, and stakeholder may seem like semantics, but the terms can frame key distinctions in socially responsible investing.

The traditional view of the goal of any business is to maximize shareholder wealth—in other words, to make the owners as much money as possible. In many ways, this makes sense. It is not the purpose of a publicly held corporation to make its management wealthy, although that seems to be happening in too many companies.

Shareholders are the owners who have invested their capital in the corporation and should be rewarded if the company does well. When the first proponents of SRI suggested there might be additional goals besides shareholder wealth, some in the investment community reacted with shock and distain. The idea that a business would have any goal besides making as much money as possible for the owners was totally alien to the critics who went so far as to call SRI “un-American.”

The traditional approach to ownership seeks to maximize shareholder wealth. It is management’s job to use the assets provided by shareholders to generate the greatest return possible for the owners. There is no doubt that this focus can achieve results if management is talented enough to use the assets wisely. The results are profits returned to shareholders in the form of dividends and ever-higher stock prices.

Pressure from large institutional investors such as pension funds, insurance companies, and such for constant growth is equally responsible for the short-term growth strategies that drive business plans. Every quarter, companies announce their earnings, after analysts have already predicted what the major companies will report. If a company falls short of estimated earnings for a quarter, the stock will probably be hammered by investors selling and driving the price down.

For many years, a small, but growing number of shareholders questioned the wisdom of focusing on short-term profits to the exclusion of other priorities. They wondered if the “profit at any price” was a responsible model and suggested that companies had a corporate citizen role that extended beyond making money for its owners and paying management well.

The nature of individual ownership of stock has changed over the past 50 years. The biggest change has tracked with the growth of the mutual fund industry. The popularity of mutual funds has meant a shift from ownership of individual stocks to ownership in pools of stocks (and other investments). Many investors still own and trade individual stocks, but thanks to the ease of investing in mutual funds and their use in retirement programs such as 401(k) plans, mutual funds or institutional investors such as pension funds own the majority of the shares of individual stocks. For those investors who rely on mutual funds for most or all of their investments, the fund(s) place a barrier between them and what the stocks they own. Many actively managed mutual funds may turn over 100 percent of their holdings during the year so even keeping up with what you own through the fund may be difficult.

Concurrent with the growth of mutual funds has been the number of households directly or indirectly owning stocks. As companies eliminated traditional pensions and replaced them with 401(k) plans and other defined contribution plans, more families and households have come to rely on those investments to secure their financial futures.

If you own stock in a corporation, you have certain rights. Those rights include electing a board of directors to represent your interests and to oversee management of your investment. You also have the right to vote on important matters concerning the corporation (approving mergers, for example). And you can attend the annual stockholder’s meeting.

Unless you own or control a large block of stock, however, your concerns will largely go unnoticed beyond a boilerplate investor relations letter (signed by a computer in many cases.) Your ability to bring meaningful change to the corporation is severely limited by the way corporations are organized and governed.

The unfortunate truth is that many investors are more than happy to let senior management and the board of directors run the business. As long as many investors get a dividend check every quarter and the stock does reasonably well, they are content to let the system work without them. Of course, the premise isn’t wrong. Corporations are supposed to be run by management and the board of directors. It would be chaos if every stockholder tried to micro-manage the business. It becomes a problem when the corporation doesn’t act in a manner that the owners (shareholders) feel is appropriate.

Shareholders are passive investors because the system makes it hard for them to be any other way or because they simply don’t care how the corporation makes a profit, as long as it does make a profit. For those investors and potential investors who believe it is important how profits are made and do want a voice in matters of corporate social responsibility, being a passive investor is just not acceptable.

Shareholder or shareowner—the difference may not seem great, but for many investors it signals a break with the idea that, even those with only a very tiny piece of ownership, must surrender personal values to invest in stocks. The history of SRI was built around issues that attracted and continue to attract investors. Shareowners place issues that are important to them on the same scale with fundamental financial concerns about the health and future prospects of the company.

Shareowners may be active in selecting investments that meet their values or may carry their involvement a step further by pressing for change in business practices within a particular company or industry.

Shareholders have a formal way to bring issues before the corporation for consideration. Shareholder resolutions, which are discussed in detail in Chapter 11, allow individuals and other stockowners (mutual funds, institutional investors, and so on) to push for changes that the board of directors and/or management may be reluctant to make.

Shareholder resolutions can be complicated to put together and must meet certain Securities and Exchange Commission guidelines. Some senior managers are reluctant to bring them forward and follow a strict interpretation of the regulations as a disincentive for shareholders to consider this action.

Socially responsible mutual funds and other interested institutional investors have a better chance at the process because they can afford the expertise required to produce resolutions that meet regulatory and company guidelines. Even with the expertise to craft and file the documents, most shareholder resolutions are either withdrawn or do not receive enough votes to pass. Many resolutions that make it to a vote do so with a board of directors’ recommendation that stockholders defeat the resolution. If non-SRI institutional investors have any hint the resolution may negatively affect earnings, they will likely vote against it.

Hundreds of socially responsible shareholder resolutions are introduced each year. Many deal with environmental issues, although a significant number address other concerns such as the AIDS/HIV crisis. Other major issues addressed include:

The reasons the vast majority of shareholder resolutions are either defeated or withdrawn are as varied as the groups presenting them and the companies being confronted. In some cases, management can report they are already addressing the concern raise through a plan or program not readily identified by stockholders. Often a resolution is withdrawn because the group initiating action has opened a dialogue with management on the issue and resolution is sought via that avenue. In other cases, management may discount the resolution as impractical, too costly, or possibly undoable. Management disapproval often sinks a resolution. For example, one of the big arguments against reducing greenhouse gasses for some companies is that it costs a lot of money with very little return as direct benefit.

A problem that is particularly confounding is a practice known as “green-washing.” Green-washing is the appearance of doing some socially responsible practice or project, when the corporation is really performing a marketing or public relations exercise. The company can claim some socially responsible policy or action without really changing any existing policy or practice.

Socially responsible investing covers a wide spectrum of interests and issues. In coming chapters, you’ll see the breadth and depth of issues that bring socially responsible investors together. One of the methods you can use to categorize socially responsible investors is by their approach to problem companies. One group will exclude those companies whose products or corporate practices conflict with its values. Those conflicts could come from production of tobacco, alcohol, or firearms, for example. It could also be driven by policies and practices that were environmentally abusive.

Many SRI investors screen out the worst companies in a field, and then use dialogue and resolutions to encourage progress in the companies they hold. These companies are not the best or worst, rather they are in the middle in terms of corporate responsibility.

Although rare, some investors who object to these products and practices may invest in a company to establish a dialogue with management and the board of directors. This is usually done by a mutual fund that advocates on behalf of its shareholders who all share similar values.

A socially responsible mutual fund can be in a better position to advocate for change. It usually represents a larger block of voting stock and has the resources to employ the professionals who can engage companies in informal dialogue as well as preparing more formal shareholder resolutions.

The SRI movement has not been an organized effort, but a collection of many groups of investors who share common values. As we have seen, some SRI movements have even been in conflict with other groups whose values were at odds. For example, religious groups might object to the use of condoms while groups advocating safe sex in countries where AIDS/HIV is a national crisis may push for massive condom distribution.

The combative role of SRI (no investments in offending companies, boycotts of products/companies, divesture of investments in countries with poor human rights or environmental records, and so on) is still part of the scene, but many proponents are opting for what they consider more constructive tactics.

The concept of shareowners, whether exercised by an SRI mutual fund or as an individual investor making ethical investment decisions, places importance on acting like the owner of the company wanting to impart your values to the company. A successful SRI strategy helps companies see how ethical decisions are good business as well. Many SRI strategies seek dialogue with companies rather than confrontation. If there is an environmental concern, for example, the dialogue may seek to keep the company moving toward a more environmentally friendly policy in incremental steps rather than insist it move to full “compliance” instantly.

One measure of the acceptance of the term and concept of “shareowner” is the number of corporations that now refer to shareholders as shareowners in annual reports and other correspondence. This may signal recognition of shareowners as more active participants in the governance of the corporation or it may just be an investor relations effort. Corporate actions will speak louder than language.

The shareholder view of corporations suggests that its sole role is to increase the wealth of its owners. Under that operating basis, the corporation can focus on a narrow ban of inputs: customers, employees, suppliers, and investors. Some corporations now regard that view as limited and shortsighted. A broader view reveals that corporations operate in a wider context where they influence and are, in turn, influenced by a variety of different constituencies.

This broader view, often called the stakeholder theory, is the subject of academic research in the field of business ethics. The stakeholder concept has been explored longer in Europe and Great Britain in particular than here in America. The stakeholder theory doesn’t abandon the notion of creating wealth for the shareholders, but takes a broader and longer-term view of a corporation’s role in society. One stakeholder theory suggests that the corporation has an obligation of fairness to any stakeholder entity or group that adds value to the company.

A corporation that embraces the stakeholder concept makes a statement that it has a responsibility beyond making a profit for its owners. Before a company can consider the importance of stakeholders, it has to identify them. Not every company has exactly the same list of stakeholders, although most will share the same types. Some common stakeholders beyond the traditional employees and investors include:

What role do corporations have as citizens? What responsibilities do corporations have to their various stakeholders? The stakeholder theory is one of the leading topics discussed and debated by business ethicists. Although not all corporations formally acknowledge the stakeholder concept, many companies understand they ignore those whose lives and fortunes they touch at their own peril. At its minimum, good stakeholder relations are good public relations. Unfortunately, some companies will only view the concept in that light—a way to help smooth over any problems before they happen.

Some corporations embrace an operational model that considers the rights and inputs of stakeholders as protection against pressure groups and as a more responsible way to manage the business. Companies that isolate themselves when times are good may find little goodwill to be had when fortunes are reversed.

An all-too unfortunate example of how a company might work with its stakeholders involves closing a facility that will result in workers losing their jobs, suppliers losing business and a community losing an asset.

A company with little concern for its stakeholders might give employees as little notice as legally possible as required by the state. That could be days or weeks notice that they are losing their jobs. In the case of manufacturing or assembly jobs, it is possible the work is being sent overseas to a cheap labor country, where the company can significantly reduce costs and avoid most of the worker protection laws in the United States. The company may offer (or may have to offer by law) the displaced workers positions at other facilities, but in most cases there aren’t enough open positions and most workers don’t want to move many miles away for a low-paying job.

If the facility was very old, the company may sell it for next to nothing leaving a potential environmental mess to be cleaned up.

The community loses jobs, a facility on the tax rolls and a source of business for other local businesses.

Corporations that consider their stakeholders are not immune from having to close facilities (they still have an obligation to make money for their shareholders). But they would approach the problem differently.

A company that considered its stakeholders in the closing of a facility would plan the transition to have the least impact possible. This might start by announcing their intentions several months in advance of the mandated state required notification. The company would work with local training facilities to help workers get additional training for other jobs. Other companies in the market, including competitors would be contacted and workers would be encouraged to apply for openings. Job fairs would be organized.

The company would work with the local government and real estate community to find a buyer for the facility. If a buyer was not found and the facility lent itself to this usage, the company might consider a low-cost lease to the city’s economic development department to use the building as incubator space. New businesses could rent space at below market rates while they were getting started and move out to bigger spaces when ready.

If the facility was old and/or had environmental problems (asbestos, chemical spills, and so on), the company would clean up the problems before selling or demolishing the facility.

These are simple examples of things a company might do to acknowledge that stakeholders are important in a worst-case situation (plant closing). When contrasted with the first company that stole away in the night and left its employees and community without any attempt to ease a bad situation, these actions are notably better.