In This Chapter

The plight of workers has always been a concern of socially responsible investors, whether the workers were slaves, child laborers, women in textile mills and sweatshops, or foreign workers in substandard conditions. Labor organizations, including unions, have fought for workers’ rights and benefits for years with varying degrees of success. As the industrial age ended and the service/information/technology age began (in roughly the 1960s), jobs shifted out of the manufacturing sector and into what can be called the knowledge sector. With this shift, many manufacturing jobs either disappeared or went offshore to cheap labor countries.

Those jobs were replaced by many more jobs in businesses that required fewer physical skills and more mental work. Knowledge workers and service personnel were fast growing job areas, but many positions did not pay as well as manufacturing jobs did. Retail and other service sector jobs are traditionally on the low end of the pay scale. With expenses rising faster than personal income, it became necessary for most families to have two wage earners whenever possible to afford a good house and college for the kids. Unfortunately, people with limited educations and skills often found themselves in very low paying jobs with little chance for advancement. No matter how well the economy did, they never did much better than hold their own.

The idea of a “living wage” may seem contrary to some, but it reflects the status of our nation’s working poor—the employed who make so little, they can’t make ends meet. Added to the plight of the working poor is the concern for health care insurance coverage, which is a national crisis. Unpaid medical bills were cited in over 50 percent of the personal bankruptcy filings in recent years.

As the world has become not only a global marketplace, but also a resource for inexpensive labor, the United States has not done a good job in monitoring working conditions in facilities on foreign soil. Whether it is a plant owned by a U.S. company or a foreign company contracting work for an American client, worker abuse is the focus of SRI investor attention. Poor labor practices are not the only problem spread by U.S. companies. Influence pedaling both at home and abroad can only lead to problems. SRI investors avoid those companies with poor records on ethical and moral grounds and because they are generally not quality investments.

The idea of paying workers a living wage is a controversial issue. First, what is a “living wage?” The term is not widely understood by all. Secondly, the traditional concept of wages is that they are a function of supply and demand. When the labor market is tight (too few workers) , wages rise as employers compete for their services. When the labor market is loose, wages remain flat because more potential employees exist than jobs to be filled. Most Americans accept this explanation of how wages are set as valid. But nothing is quite that pure.

Thanks to technology, it takes fewer employees to do more work than just a few years ago. The increasing productivity tends to keep the labor market at the low end of the skills set full of potential employees, including recent high school graduates or dropouts, retired people, workers laid off from manufacturing jobs, and so on. Many of these people come into the service sector portion of the labor market (think Wal-Mart) at the lowest level. While they may not earn minimum wage, what they do earn may not be enough for a person, much less a family to live on.

In defined Chapter 6, we discussed CEO compensation and how it has grown out of proportion to worker wages in some companies. We noted that this was the source of poor morale. Low wages may make good economic sense in the short run, but they don’t work for socially responsible investors. Workers who can’t survive on one job are under tremendous stress. If they have dependents, the stress of surviving from paycheck to paycheck can take its toll on the physical and mental health of workers. Millions of people in this situation know that it only takes one problem, even a small problem, and they face a financial crisis. An illness in the family, car problems, and so on can shatter a fragile budget.

Socially responsible investors are concerned that employees working under these conditions can’t possibly do their best. Moreover, as a matter of simple social justice, companies and senior executives shouldn’t take in hundreds of millions (if not billions) in profits on the backs of the majority of the employees who can’t afford to go to the doctor or eat out once a week because the company’s wages are so low. This is an area where the idea of a living wage takes root.

One way a living wage is defined, although not always by SRI investors, is through “living wage ordinances” enacted by governmental entities. These ordinances in general say if a company is going to do business with the city or county that enacts the ordinance, it must pay a living wage that is equal to some percentage over the federal poverty level for a family of four. The amount is set with consideration to the cost of living in the community, so the living wage may be lower in a southern community than it is in a northeastern one. This is a tangible expression of what a living wage can actually be. While a living wage mandated by law may not be what all SRI investors advocate, it does address the issue.

Health care costs have been rising at rates three times faster than the growth of personal income. Unpaid medical bills are cited in over 50 percent of all personal bankruptcy filings. Families with health problems that don’t belong to a group policy may find it impossible to get health insurance at any cost. Millions of Americans work for smaller companies that don’t offer health insurance to employees.

Our country is in a health care crisis and it is families who suffer the most. Health care insurance is almost unaffordable to all except the largest companies and governmental units who can still negotiate with insurance companies. Providing affordable access to health insurance is a high priority for many SRI investors. While it is understandable that small companies may not be able to afford this benefit for their employees, there is no reason larger companies can’t make it available at a reasonable cost to their employees. The stress of health problems and the added danger of putting off seeing a doctor because of money is reason enough for SRI investors to advocate the availability of basic “affordable” health insurance coverage for all employees. The key term here is affordable and it ties back to the living wage issue. If an employee makes barely enough to cover food and housing, but not enough to pay insurance premiums, it does not just cost the employee. Several big employers such as Wal-Mart were criticized for having a large number of its employees of welfare-sponsored health care plans.

Socially responsible investors advocate for health care insurance plans that don’t push all of the rising cost of premiums off on the employees. Every increase in premium that employees must pay means their real income (what their take home pay is actually worth) is diminished. At some point, the expense becomes too much for employees in the lower pay grades or part-time employees and they must choose between health insurance and food. SRI investors advocate with companies so employees are not forced into this decision.

Globalization is a word thrown around with such abandon that it has become meaningless—that is, it means everything. For economists and businesses, it means competing in a global market that operates 24/7. For many companies, it has opened vast new markets for its products and abundant sources of inexpensive labor or contractors to produce the products. These markets have existed for many years and U.S. companies have been in them. In the years following World War II, however, the personal incomes in many “developing” countries mushroomed creating new markets for American goods and services. Americans have eagerly embraced foreign produced goods such as electronics and clothing. A number of America’s largest consumer goods companies sell the majority of their products in foreign markets. In the process, the mix of our economy and job base has changed dramatically. The supply of manufacturing jobs has declined for decades. They are being replaced by service, retail, and knowledge-based jobs. Companies can outsource manufacturing to low-cost labor countries, which accounts for the decline in personal income among people who have lost good-paying jobs as factories have shuttered.

Jobs and goods are not the only things that have gone overseas with globalization. The United States has also exported parts of its culture to almost every country in the world. You would be hard pressed to find a country that doesn’t have a McDonalds or Starbucks. American cigarettes are widely exported and are major brands in many foreign countries. Even our television shows, movies, and popular music spreads around the world. While there are many good aspects to the “Americanization” of the rest of the world, it is particularly problematic in very poor countries where American lifestyles clash with the basic needs of daily survival. In too many cases, we have assumed that our values and ideals should be those of everyone else. This attitude doesn’t win us friends.

It would be wrong to understand globalization in just U.S. terms because the very word implies a scope far beyond our borders. The term can be defined as a convergence of economies, cultures, information technologies, political interests, and ecological concerns. Geographical borders still matter (and wars will be fought over them), but as other barriers drop, the world is moving toward interdependence. For example, it took years to put together the European Common Market because of all the nationalistic suspicions, especially surrounding the common currency—the euro. Now, economists are seeing the benefits that were promised come to fruition. Interest rates are lower in many of the countries than they have been in years. As a result, businesses invest in expansion, and so on. It is not perfect, but countries are trying to get in because they see the benefits.

The world’s financial markets, especially those in Japan, London, China, and the United States are moving toward cooperative agreements or partnerships that will allow investors access 24/7. Thanks to technology, there is no real barrier to the flow of information other than the human capacity to distill and digest it. SRI investors are concerned that powerful institutions, which already own most of the stocks and almost all of the outstanding bonds in the U.S. markets will be able to manipulate world markets in a manner to the detriment of individual investors.

Despite the obvious interdependence developing among countries of the world, arms sales continue at an uncomfortable pace. Many SRI mutual funds exclude companies involved in the production and sale of weapons or other materials deems exclusively made for war efforts. Despite the fact that some of these companies have been very profitable at times, SRI investors have an ethical problem with profiting from the production of goods designed to kill other humans.

Socially responsible investors realize how easily a company can take advantage of people in developing countries either directly through its plants or indirectly through its vendors. Operating a manufacturing or assembly plant in a desperately poor country is an opportunity to exploit its citizens. When companies have thought only of profit, they have chosen to pay much less, than they could have and still made a substantial profit in favor of making an even larger profit. This exploitation recognizes that poor people willingly work in substandard conditions for poor pay just to have some income. It is all the more terrible because officials in some foreign countries are party to the exploitation of their own people.

The United States has laws and regulations against bribery and corruption in foreign countries, however, they are not easy to enforce. Exported through globalization is the corruption of the political process with money. SRI investors do not accept the argument that corrupt practices are the norm in many countries, and they want companies to export higher standards of corporate behavior. It is bad enough to pay off a local official to look the other way on wage or work condition violations in a foreign community. But it is something completely different when a company or industry controls or influences a national government. In the sordid history of American companies doing business in less developed countries, influence pedaling on a national scale is not unheard of. The countries are often stripped of natural resources with none of the wealth returning to the people. Dictators and despots have become incredibly wealthy because they made choices that favored huge corporations rather than their citizens. In all fairness, U.S. corporations are not the only entities guilty of manipulating foreign governments. Some major players today are state-sponsored oil companies, which take “whatever-it-takes” views of acquiring mineral rights in foreign countries.

At particular risk are native or indigenous peoples. These populations descended from the original inhabitants often live in very fragile environments and circumstances. Development of their traditional lands, such as farms, or watersheds behind dams, threaten their way of life. In many countries, indigenous peoples have little to no political representation. Their cultures, which are usually different from the dominant population, are endangered and they often face discrimination.

Socially responsible investors, particularly through the use of some mutual funds, support companies that honor indigenous peoples and work with them to secure their place in the social and economic structure of their country. This means protecting against exploitation of workers and theft of rightful property. SRI investors also strive to return fair market prices for produce marketable goods and open distribution channels to direct markets.

The United States has a terrible record of treatment of its indigenous peoples, the Native Americans. After taking their land, breaking every treaty signed with them, and ghettoizing them on reservations, the United States is in an awkward position when attempting to tell any other country how to treat its native population. Several SRI mutual funds work with U.S. groups for the rights of Native Americans, both economic and cultural. One battle that seems to be mostly won, at least with large companies, is the use of Native American images in advertising. Over the years, Native Americans have been portrayed (along with other minorities) in a cartoonish manner for all types of advertising and in sports logos. There is still work to be done, but SRI investors have worked closely with Native American advocacy groups to successfully limit the exploitation of images that degrade their history and heritage. Many SRI screens would exclude companies that perpetuate use of inappropriate Native American logos or images.

Despite what some may think, many good things about American culture are exported with globalization. Does it change foreign cultures? Yes, it does, but all cultures are subject to outside influences and they either accept and incorporate those influences or they reject them. That is the way countries grow and change. It is arrogant of the United States to insist that a country in Southeast Asia shouldn’t adopt some of our culture because some of theirs will be lost. Those are not our decisions. On the other hand, we shouldn’t insist on thrusting American values on countries that are not ready for them or don’t want them—that’s also arrogant.

Globalization will continue to happen. SRI investors should be concerned that U.S. companies not insist that foreign countries bend to our will as a price for doing business with us. We must recognize the values of the host country and work to accommodate their way of doing business. Companies open to working with foreign business environments may find they have something to learn as opposed to telling a whole country what it is doing wrong.

Depending on who you ask, globalization has been the greatest thing for U.S. businesses or a complete disaster that is destroying our economy. One theory is that globalization is resulting in more efficient use of resources (humans are included in this definition of resources). For example, manufacturing and assembly jobs can be done much cheaper in many developing countries where a day’s wage would not cover a coffee break for many wage earners in U.S. manufacturing plants. The more efficient decision is to move those jobs offshore, and that is what has been happening for several decades. The result has been an upheaval in many American towns that relied on the factories to provide good-paying jobs for years. When plants close, displaced workers have a difficult time replacing income. Going from a $20 an hour job in a factory to $8 an hour at a convenience store is a difficult transition. Companies have not universally trained displaced workers for job positions above clerk. After the factories close, young people that finish school leave their communities because there are no good paying jobs. The community loses its best and brightest to other areas where jobs pay higher wages.

On the other hand, some businesses have prospered because markets for their products have opened around the world and they have found places to manufacture at a fraction of the cost. Major companies have been marketing their products overseas for years, but thanks to globalization the barriers for smaller companies have lowered in some foreign markets making it possible for them to export—something the U.S. Government strongly encourages. While the opportunity to sell and produce overseas is attractive, it doesn’t make for as many U.S. jobs as once was the case. SRI investors are concerned about displaced U.S. workers and how companies help the transition when this occurs. Is retraining help offered? Are other jobs at other facilities made available?

How much notice do displaced workers receive? What type of separation package do workers receive? All of these questions point toward a company that either takes its role in the community seriously or sheds workers like dead weight.

Many people argue that the political process, especially on the national level, has been corrupted by the influence of special interest money. The reality is that politicians in the U.S. House of Representatives or Senate face the almost constant need to raise money for re-election or old campaign debts. Those who seek national office must raise staggering sums to mount effective campaigns. The Federal Government provides matching dollars for people seeking the office of president, but the money carries limits on spending. No serious candidate accepts the free money because of the limits on spending. It is estimated that expenditures in the 2008 presidential campaign will top $1 billion. Is it any wonder that candidates spend as much, if not more time, at fund-raisers as they do with voters?

The question then is what influence does all of this money buy? What do politicians owe those who have funded their re-election? SRI investor ask: Has money donated to political campaigns, either directly or indirectly through trade groups, been in the company’s best interest? Has it always been legal? Have other, not as closely regulated, avenues been used for political contribution?

Campaign finance laws leave room for transactions that push the ethical boundaries, and opportunities exist both at home and abroad for outright bribery and corruption. SRI investors monitor companies for their contributions to political campaigns and consultants or lobbyists that stray over the line. Companies are pushed for more disclosure. Transparency in political contributions is an antidote to the natural suspicion that surrounds big business and politics. Businesses have a poor record resisting the temptation to quickly adopt local customs of

bribery in foreign countries where they do business. This acquiescence to criminal behavior because everyone else does it is wrong and illegal in the United States.

Federal campaign laws limit how much corporations can donate to political candidates and campaigns. The whole campaign finance process is subject to ongoing reform and revision by legislation and court decisions. Recent scandals of influence pedaling for campaign donations are only newer versions of an ongoing problem. The perception and, to a very real extent, the reality is that individuals have very little influence in the political process unless they bring substantial sums of money or guarantee large blocks of votes. Socially responsible investors recognize this perception corrupts the political process and alienates individuals from the process. At the same time, companies should support candidates and issues that will favor their business. But where is the line drawn between supporting a candidate or issue and seeking undue influence through excessive political contributions or fundraising efforts?

While limits exist on directly supporting a candidate, a whole industry has emerged that offers companies the opportunity to contribute virtually unlimited amounts without facing legal problems. The so-called soft money organizations allow companies and executives to contribute large sums for “issue” ads. These campaigns don’t mention candidates by name, but it is clear whom they appeal to and whom they support. These organizations are called “527” groups after the section of the IRS code that allows them to raise funds and sponsor issue ads. Corporations and individuals can contribute to these organizations at much higher levels than they can in directly supporting candidates. Federal election laws do not allow these special interest groups to coordinate their campaigns with candidate campaigns (although in the 2004 presidential election, both sides accused the other of this behavior).

Virtually all corporations belong to one or more trade associations. These groups are often active politically. SRI investors have expressed concern that as shareholder dollars are farther removed from the control of management, the chance increases that the money will be used to support issues and candidates that don’t represent the company’s best interests. This lack of control raises concerns about oversight and transparency of political donations. Management should be held accountable for the effectiveness of money spent on political action projects. Companies that adopt policies of more openness and transparency in matters of political campaigns have better records of consistent and ethical application of those funds.

Money and power are the great corrupters of the political process—and you could say the same for the business process. Cynics say the national political is the best money can buy. While that is an exaggeration, the ongoing scandals that seem endemic to Washington alienate people from the process. Even the majority of honest political leaders are forced to spend too much time raising money if they wish to be re-elected. With money comes obligations, often unspoken ones.

Given that some bad eggs are always going to find a way to enrich themselves at the public’s expense, SRI investors hold out for companies that use political contributions as part of a strategy to help elect people who will do the right thing for the country and economy. There is nothing illegal or immoral about asking your congressional representative for help with a problem, whether you are an individual or a company. The problem comes when you ask for special consideration over your competitors or to avoid some rule that others must abide by. If a promise of a large campaign donation accompanies the request, the company has crossed from asking for help to offering a bribe.

While this activity occurs in the United States, it is much more common in some foreign countries where American companies do business. Paying off local officials to look the other way may be considered the cost of doing business, but it also can be illegal in the United States. Corrupting a local political system, even one that may be somewhat corrupt already, is not right.