In This Chapter

Social justice issues drove the founders of the socially responsible investing concept. The Quakers, Christians, and others spoke out against slavery and war when it was not popular to do so. They backed their words with admonitions against investing in slavery and war efforts. Churches built the first schools for children of slaves and the first public hospitals that took charity cases. Later, religious organizations fought for women’s right to vote, temperance, and many other major social issues.

In modern times, groups that supported socially responsible investing also backed the civil rights movement, and continue to promote equal employment opportunities. For many SRI investors, the human rights fight has moved offshore, much the same way some environmental issues have been outsourced. SRI investors interested in societal issues come from a variety of perspectives and with differing agendas. Some of these agendas may conflict with other SRI investors, as we’ll see in this chapter. The socially responsible investing world that focuses on societal issues is diverse and passionate. If you have a concern about human rights, social or political change, or investing in accordance with religious values, socially responsible investing has a place for you.

For many socially responsible investors, making the world a better place for everyone to live means changing social and political structures to be more responsive to the needs of all people, not just those with power. This is a radical concept for many investors who have grown up in an economic system that rewards power and punishes weakness. Corporate America is a powerful force for change and it is through this venue that SRI investors act. Socially responsible investors concerned with human rights take their charge from religious directions or a more humanistic sense of fair play. Regardless of the motivation, societal issues figure prominently in why many people turn to socially responsible investing. Many SRI investors interested in social and/or political change are inclined to be involved in advocacy as opposed to passive investing (more about shareholder rights in Chapter 11).

Major companies can have a direct affect on social issues, both at home and aboard. They employ thousands of people and through connections to suppliers, distributors and others can influence tens of thousands more. Changing the policies or encouraging a major company to establish a new policy that supports a social or political goal is a major step in gaining broader acceptance of the goal.

Although great strides have been made since the civil rights movement of the 1950s and 1960s, much remains to be done. Minorities still are under-represented in many corporate executive ranks. When systematic discrimination in hiring and promotion can be proved, the results are painful for companies in terms of public relations and fines. In 1998, Texaco settled a hiring discrimination suit for $175 million and a court-ordered change in the way it recruited, hired and promoted its employees. To its credit, Texaco changed its culture over a period of years and went beyond the court-ordered steps to improve minority hiring and promoting.

Socially responsible investors note that examples such as Texaco that verify the business soundness of having strong policies of minority recruiting, hiring, and promotion. Companies with those policies in place are unlikely targets for huge discrimination settlements. Not only are those policies right from a moral point of view, they are also smart business because they prevent potential problems.

Along with racial and ethnic minorities, women have lagged behind white males in successfully climbing the corporate ladder. Wages for women are rising, but are still around 80 percent of what men earn for the same job. There can be some argument that the statistics don’t factor in the time many women take off to have children. When they re-enter the workforce, they may not have as much experience as a male counterpart who did not leave to have a child. Socially responsible investors will advocate for workers rights as shareholders. Some of their positions include extended family leave, paternal leave, programs to reintegrate women returning after maternity leave, onsite day care, and other programs that make it easier for women and men to raise a family and pursue a career.

Diversity of the workforce is very important to many SRI investors. Diversity provides for a richer work experience where different ideas and perspectives can be explored. It is also important because our culture is becoming more diverse each year. Companies that reflect the diversity of the marketplace in their workforce relate to their customers more easily and naturally.

A number of SRI investors believe that the idea of diversity as expressed by ethnic and racial minorities and women is too limited. They argue that it does not accurately reflect the world and marketplace where a company must operate and compete. True diversity includes a workplace that hires, trains, and promotes without regard to race, ethnic origin, religion, age, sexual orientation, mental or physical abilities, or AIDS/HIV status. Each year, a large number of shareholder resolutions are filed concerning employment policies for people with HIV/AIDS. Employment discrimination in this area is seen as significant by SRI investors.

Equal employment opportunities span a wide variety of SRI concerns including the ingrained types of discrimination found in some companies. It is broader in scope including employees’ lawful right to organize into labor unions and negotiate for better wages and working conditions. Some of the earliest institutional investors to practice socially responsible investing were labor unions. SRI investors recognize that even if unions are not represented in a company’s labor force, there is still an obligation to treat workers and potential workers with respect and dignity. For example, if a company must close a facility, SRI investors would advocate a policy that called for as much advanced warning as practical and benefits for workers losing their jobs that exceeded any minimums required by the state where the facility was located.

Equal employment opportunities also relate to various discriminatory situations discussed in the previous section where certain categories of employees or potential employees were denied the same opportunities as other employees.

Companies that promote fair employment conditions usually follow through with policies that make the work environment safe and as pleasant as possible. The other side of this issue is those companies that maintain unsafe and/or uncomfortable working conditions. When workers are treated badly, through unfair employment practices and unsafe working conditions, lawsuits and other legal proceedings often follow. Employees that work for companies that treat their workers with respect and maintain safe working environments and fair employment policies are more likely to stay with the company. Retaining valuable employees is an important step in the financial success of a company. Companies that disregard their employee’s safety and have high turnover are often less productive and profitable over the long term.

Socially responsible investors believe companies with strong worker safety records tend to also be stronger financially. Part of rationale for this is that financially weak companies sometimes cut corners and expenses not directly related to producing revenue, such as safety measures. Weaker and poorly managed companies focus only on short-term financial results, which can lead to low worker morale and high turnover. These companies tend to be low-skill producers that don’t mind high turnover because it keeps wages low. A relentless focus on the bottom line, however, can fail to provide for minimal employee needs. Eventually, an employee could be seriously injured or turnover could become so high that even at low skill levels it is costing the company money to recruit and train workers.

Companies that follow strict worker safety protocols and provide proper training and equipment usually have higher productivity. Higher productivity means the company achieves more results per employee than other comparable situations. This means that the company’s per/unit cost will continually drop as experienced workers get better at their jobs and incorporate on-the-job suggestions for improving how things are done. When a company takes pride in its workers by taking care of them, it is not unusual to see the work force return that attention with innovative suggestions for improvements in products or production. It is unlikely employees will step forward with suggestions to improve the company in environments where they are treated as expendable components in the work process.

Socially responsible investors can track a company’s work safety and grievance proceeding through several government agencies including the National Labor Relations Board, the Occupational Health and Safety Administration, the Securities and Exchange Commission, and state labor relations agencies. Find contact information for these agencies in Appendix A.

Globalization has spread U.S. products and production around the world. Large multinational companies may have more sales overseas than domestically, and more production in other countries than in the United States. Globalization has even brought foreign companies to the United States to produce their goods—Toyota, for example, has several production facilities here. Economists can argue the merits of this reality, but it is unlikely to reverse itself short of some cataclysmic economic or political event.

As U.S. companies have moved or expanded production capacity overseas, some difficult ethical questions have arisen. Whether a U.S. company opens a plant in a foreign country or contracts out the work to a domestic supplier (the more common solution), the labor laws, and practices of the country are applicable. Because the incentive for moving production out of the United States is lowering costs, the work often goes to developing countries or countries with few labor laws. In some cases, local laws can easily be avoided by paying off the proper officials. The result is workers who are exploited for their labor and paid almost nothing in many cases. They work long hours, often without breaks and without days off. The conditions may be dangerous, especially if there are toxic chemicals or fumes involved. There is

much concern that workers in these developing countries are being exploited in violation of the country’s own labor laws and in violation of basic human rights. Socially responsible investors reject “profit at any cost.” They are concerned about working conditions up and down the supply chain, not just for workers in the United States. Although abuse is harder to track overseas, SRI investors know that’s where it is most likely to occur.

As we discussed in Chapter 4, U.S. companies have been outsourcing production to foreign partners for many years. In some cases, U.S. companies establish overseas operations that they manage. However, it is more common for companies to outsource production to existing companies in foreign countries. This is done to lower costs and keep the product competitive on the world market. Foreign companies can often produce the company’s product for a fraction of when it would cost the company to make it domestically.

Foreign producers are often found in less developed countries that are hungry for exports. Exports help these countries by bringing in hard currency from stable countries into their economy. This capital helps grow the economy and stabilize the inflation rate. In exchange, foreign producers offer rock-bottom prices for their work, often because they can pay extremely low wages and demand long hours from workers. In many cases, the concepts of overtime or holiday pay are unheard of and workers who argue otherwise are soon without a job. The labor pool in these countries is usually very deep with plenty of workers eager to replace any who balk at working conditions. In some countries, child labor, indentured workers, and penal laborers are used to cut wages even more. All of these cases are considered violations of basic human rights.

An even more insidious role played by some companies with foreign investments makes them complicit in human rights violations by governments. Companies may secretly support government policies that create terrible working conditions for their citizens in order to keep wages low. Bribes, political contributions and other questionable policies promote the status quo, which is often a violation of basic human rights. This was the case in South Africa during Apartheid, although not all companies doing business in this period were guilty of these acts. SRI investors often avoid companies with questionable connections to foreign governments that may contribute to human rights violations.

A number of high-profile media exposés in recent years have uncovered the use of sweatshops and child labor in foreign countries to produce popular wearing apparel label products. Most of the clothes we wear are made overseas where labor costs are low. In some cases, workers were being paid one dollar a day for 12 hours of work and producing designer label goods selling for more than they could earn in two or three months or more. While it is not practical to compare wages in a developing country with wages in the United States, SRI investors hold companies accountable for paying living wages to people in their own country.

The global supply chain refers to all the steps in the process of producing a product, from procuring raw materials to fabricating the final product. A number of industries, clothing in particular, accomplish the whole supply chain, except for some or all of the actual sales outside of the United States. This puts U.S. companies in arrangements with many companies around the world to gather material and parts and do the final assembly. Companies with the attitude that price and delivery are all that matters encourage abuse of contract workers. In countries where no effective laws protect workers, some companies meet competition by abusing workers. (In recent years, we’ve also discovered they meet competition by cutting corner with food safety and other dangerous practices.)

Thanks to mounting public pressure and pressure from socially responsible, a number of U.S. companies have taken steps to ensure foreign contractors meet minimum standards of conduct. When evaluating companies for their use of foreign contractors, SRI investors look for published standards the company expects each vendor to meet regarding working conditions and human rights. Does the company have a monitoring system in place to verify that vendors in foreign countries are complying with its standards? Does the company report to the shareholders findings and steps taken to correct any failings?

Transparency in the company’s relationship with foreign vendors and how it is setting and monitoring standards goes a long way in instilling confidence in SRI investors. Companies that are forthright about problems with vendors, but report on efforts to correct those problems receive higher marks from SRI investors than companies that gloss over problems or attempt to spin them away. Companies that use celebrity spokespersons are particularly vulnerable to the bad publicity of being accused of supporting a sweatshop labor force in foreign countries.

Celebrities are becoming more cautious about linking their names with companies that may have human rights problems. SRI investors are concerned that foreign vendors pay a living wage in their country, treat workers with respect, and provide a safe working environment. Socially responsible investing advocacy is this area is very strong since the focus is on change. Mutual funds and institutional investors take the lead in working with companies to improve their relationships with vendors, help set standards for worker treatment, and suggest monitoring programs. These advocacy programs often take years of negotiations to work through and implement. This is one of the greatest success stories of socially responsible investing. As more companies adopt codes of conduct for foreign contractors and see that they are enforced, it raises the standard of working conditions in those countries and improves the well-being of workers and their families. Without some intervention by U.S. companies, many of the benefits of globalization would never find their way to the citizens of developing countries.

Religious organizations and institutions have been at the lead of the socially responsible investing movement from the beginning. Although most SRI mutual funds are not organized on “religious” principles, faith-based groups back a number of funds. We’ll discuss these in more detail in Chapter 9. SRI mutual funds have a code of ethics that many religious groups would support, but may not include all the issues that a faith-based group finds important. In some cases, faith-based groups may take exception with some positions of more progressive SRI funds. For example, some religious groups have financial restrictions that might prevent them from investing in companies that earn or charge interest. Other religious faiths have strong beliefs about the sanctity of life and would be guided in their investment decisions regarding companies that made birth control pills or prophylactic devices.

The differences between traditional socially responsible investors and faith-based investors are not large. Most faith-based investors share the same concerns as traditional SRI investors: the environment, labor practices, product safety issues and so on. Faith-based investors are likely to avoid investing in companies that have documented ethical problems, much the same as traditional SRI investors. Faith-based investors, however, are more likely than traditional SRI investors to avoid companies involved in the “sin” businesses of alcohol, gambling, and tobacco. Faith-based investors have at least as much interest, if not more, in coupling their beliefs with investment decisions. The growth of faith-based mutual funds and industry studies indicates that mainstream investors share many of the same values even if they may not be a part of the faith community.

One of the faster growing segments of religious funds is the conservative Christian funds. Proponents of these funds often refer to it as values-based investing. A key component is the understanding that investors will not be profiting from the sins of others. How the funds interpret “sins” is driven by the organizers’ understanding of conservative Christian values. As we’ll see in Chapter 9, a number of different faith communities offer mutual funds that interpret their values through investment choices.

A company’s responsibility for its product after the sale is a huge issue with socially responsible investors. It is also a huge issue with trial lawyers who sue for damages and the government that can impose fines and other measures against companies. Socially responsible investors avoid companies with histories of producing products that become liabilities after they are sold. There are cases where unforeseen problems can arise, but in the most egregious cases companies become aware of a problem with a product and choose to do nothing about it, and even worse, some attempt to cover up or deny the problem.

The tobacco industry is the worst offender and the classic case of a whole industry that knew its products were addictive and caused cancer, but denied any liability for many years. There are many other examples such as asbestos, pharmaceuticals, and defective automotive equipment. Any company that produces any type of product is a potential target for a liability suit, whether it is justified or not. SRI investors avoid industries with patterns of lawsuits by consumers and governmental agencies. The worst offenders shift what should be their expense to the public for correcting. This distorts the true value of the company and creates a drain on public resources. Eventually, many of these worst offenders face a bill for their irresponsible behavior.

Dangerous products can create liability issues for companies that socially responsible investors want to avoid. The danger may come because of poor design or workmanship or because the product is inherently dangerous, such as tobacco products. Although there are specific industries that SRI investors avoid because of obvious dangers (tobacco, alcohol, weapons, and such), almost any industry can have problems. Pharmaceutical companies, for example, face potential liabilities if drugs they bring to market are discovered to have serious side effects, especially if the company knew or suspected there was a problem. The drug industry is highly regulated, however, that has not prevented some major problems in medicines reaching the market that had serious, unreported side effects. In recent years, a number of major drugs have been pulled from the market when problems, and sometimes fatal consequences, were reported. Socially responsible investors look for companies with good records of product testing and meeting or exceeding government standards for safety. For example, food producers are questioned about the use of pesticides on the crops they either grow or buy. Pesticide management programs can reduce the amount of chemicals used on food crops. Companies that follow these principles and require growers to do the same receive endorsements from SRI investors. These companies exhibit an understanding that their responsibility doesn’t end when they sell the product.

Socially responsible investors exclude companies that make dangerous or socially irresponsible products, such as tobacco, alcohol, pornography, and weapons. Many of the SRI funds exclude companies that derive a major portion of their revenue from work with the Department of Defense or are connected with war efforts in other ways. They also are concerned about companies that make products that are marketed to children in a way that glorifies violence or promotes stereotypes of any group. A number of food producers that make “kid food” such as cereal or snacks are beginning to address the health crisis of overweight children by marketing products that are more nutritious.

On the positive side, SRI investors encourage companies to exercise honesty and integrity in advertising and marketing their products. It is important that consumers be able to make informed decisions about what a product will and will not do, and that will only come with truth in labeling and advertising. Companies that respond quickly and forthrightly to product safety or other issues and move to correct the situation in a manner that puts the consumer’s interest first are highly regarded by SRI investors.

Poor environmental practices are among the worst offenses that SRI investors find when screening companies. In addition to the concerns expressed in Chapter 4, the question of who pays for cleaning up the mess is a major concern for SRI investors. The tobacco and asbestos industries reached major settlements over liability for their products. Other major industries have also face product liability suits and others will in the coming years. The issue of greenhouse gases is a potentially huge product liability issue if courts rule that producers of these gases have a responsibility for fixing the problem. With the controversy over the role of greenhouse gases in climate change, it may seem unlikely that this will happen. However, if the scientists who believe that humans are changing the climate of the world are correct, what may now seem as unlikely may become a reality. Socially responsible investors look at current potential liabilities, but they are also concerned about those companies that shift liabilities to the future or to some other source. For example, the nuclear industry is an example of shifting liability to the future. Spent nuclear fuel must be stored in a secure, contained environment for hundreds of years to prevent it from polluting the air or water. Who will pay for this storage? Most of the cost will undoubtedly be borne by taxpayers. Many industries that used chemicals, which ended up in rivers and lakes, now are defunct or unable to clean up their mess. Virtually, every waterway, river, and lake anywhere near a coal-fire generating plant is contaminated with mercury, which falls out of the sky from the plant’s discharge. If the mercury could be cleaned up, who would pay? Socially responsible investors screen companies based on the potential for current and future liabilities. Companies that passed represent safer long-term investments, and they are generally better corporate citizens.