Kevin Pestinger, Department of Management

It is becoming increasingly apparent in the world of business that companies have to address the issue of social responsibility. Consumers have begun to demand, with both their purchases and their investment dollars, that companies start to account for their impacts on numerous social issues such as poverty, unemployment, the environment, and world peace. As information becomes readily available to the masses, people recognize the disparity between those whom business should serve and those whom business does serve. The future of business does not lie in the maximization of profits for the owners at the expense of society, but rather in balancing the needs of all four of business’ stakeholders: the customers, the employees, the community (including both the physical environment and the social environment), and the owners. This paper describes the role of social investment in the world of business.

Socially responsible investing is much easier to define than its counterpart, socially responsible business. The clarity of the definition for SRI is therefore useful in understanding the complexity of socially responsible business. Peter Kinder, president of a social investment research firm, defines socially responsible investing as the incorporation of social or ethical criteria in the investment decision-making process. “Social investing is the combination of an investor’s financial objectives with his or her commitment to social concerns, such as peace, social justice, economic development, or a healthy environment. As an investment, it may or may not have economic return as its principal goal and it is made with an intent to take into account the impact of the investment on the society in which it is made” (Kinder et al. 1993, p. 268). There are three facets to SRI and individual investors may include one, two, or all three of these in their investment actions. Shareholder activism, portfolio screening (both positive and negative), and community development investment will be described in more detail later in this paper.

Social investing has existed for as long as people have allowed ethical and moral values to influence their investment decisions. The seventeenth century Quakers refused to profit from war or slave-running. “The first socially screened mutual fund, the aptly named Pioneer Fund (1928). served evangelical Protestants in the United States who opposed consumption of alcohol and tobacco and would not own the stock of companies that made liquor, cigarettes, or cigars” (Kinder et al, 1993, p. 13). Screening against so-called “sin industries” was the limit of social investing until1967. In response to riots in the black ghetto of Rochester, New York, the Eastman Kodak Co. was targeted by a community coalition called FIGHT (Freedom Integration- God-Honor-Today) to improve living conditions and job opportunities for blacks by hiring six hundred unemployed people. A manager from Kodak agreed to FIGHT’s demands, but the next day Kodak’s executive committee repudiated the agreement. The coalition convinced shareholders (forty thousand shares-representing a very small percentage of the total) to withhold their proxies from management at the company’s annual meeting. Although the percentage of votes withheld was small, Kodak decided to reach an agreement with FIGHT.

Several major milestones in social investing occurred In 1970. Campaign GM was Instituted by Ralph Nader who proposed that nine resolutions dealing with social responsibility issues be added to the proxy ballot. The Securities and Exchange Commission (SEC) allowed two of the nine to appear on the proxy ballot. The significance of this event is seen as the next year led to the formation of the Interfaith Center on Corporate Responsibility (ICCR), and the addition of the Rev. Leon Sullivan to GM’s Board of Directors (the first minority on the Board of the Nation’s largest company). Universities had previously been pressuring for divestment In South Africa and now Rev. Sullivan began the push for corporate divestment of operations In South Africa. The first ever “Earth Day” was also held during 1970. Environmental issues would soon enter the arena of social investing. The Interfaith Center on Corporate Responsibility was heavily involved in the withdrawal of businesses from South Africa and today is becoming increasingly involved in the environmental movement through the sponsorship of the CERES Principles.

Anti-Vietnam War feelings were also extremely strong in 1970. The Pax World Fund was founded at this time with the primary goal of excluding war-related industries. In the same year Congress passed an amendment affirming that “bank holding companies possess a unique combination of financial and managerial resources, making them particularly suited for a substantial role in remedying social ills” (Alperson eta!, 1991, p. 11). Some bankers in Chicago saw this as an opportunity. After taking over an ailing bank in the economically depressed South Shore neighborhood, they created new bank subsidiaries to work in partnership with the community.

The subsidiaries loan money for single-family mortgages, small businesses, and rehabilitation of run-down apartment buildings. The bank also began to offer innovative Development Deposits which allow individuals and institutions from outside the South Shore area to promote social good through their regular bank deposits. “South Shore Bank is now considered the national model for development banking” (A! person et a!, 1991, p.11).

Social investment has grown rapidly since the 1970s. In 1984, $40 billion was being managed in a socially responsible manner. By 1990 this figure had grown to $450 billion. Socially responsible mutual funds have also flourished. As of September, 1994, there were over $2.5 billion in assets among 33 socially screened mutual funds.

Shareholder activism is the first facet of SRI. Shareholder activists are holders of a company’s stock who apply direct pressure to a company, through the use of proxy statements and shareholder resolutions, to improve its performance in specific areas. There are many issues facing the shareholder rights movement. In 1983 the SEC instituted new rules that make it much tougher to file resolutions. One of the rule changes was reversed by the courts in 1985 but several others remain unchanged. Activist groups are urging the SEC to consider other changes in the proxy process, such as a mandatory confidential vote to make the system more democratic. “The whole proxy system is enormously tilted against shareholders. We would never tolerate in the political system the kind of voting we have in the corporate world” (Miller, 1991, p. 76). Shareholder activism has the potential for being a powerful political force. The many changes that have taken place in South Africa since 1960 provide an example of the political influence of shareholder activism. “As a practical matter, it is only through the exercise of their rights as stockholders-by, for example, communicating with managements (and being listened to), by passing binding resolutions, by replacing managements through the proxy process, or by being allowed to accept takeover offers-that activist socially responsible investors can succeed in achieving their goals” (Miller, 1991, p. 76). As this movement continues to empower more individuals who were often previously underrepresented, it also seems to be making the transition from semi-complicated issues (such as South Africa and weapons manufacturing) to extremely complex and divisive ones (such as birth-control, gay rights, and abortion). The second facet of SRI is social screening. A screen is a criterion or a group of criteria used to select securities or issuers. There are negative (also referred to as exclusionary) screens and positive (or qualitative) screens.

Negative screens are used to either divest of securities which are already held or to steer clear of investment in securities that do not match personally defined ethical considerations. Examples of negative screens include nuclear weapons involvement, animal testing, and labor violations. Negative (or exclusionary) screens are easy to measure; companies either pass them or fail them. They essentially reduce the number of investment choices available. Some legal concerns have arisen related to the fiduciary responsibility of fund managers to act as “prudent investors”, Courts have ruled that to limit a fund manager’s universe of investment options based on social criteria does not impede the manager’s ability to act as a “prudent investor”. Positive (or qualitative) screens are much more difficult to measure but they are just as important as exclusionary screens. “Social investing began with exclusionary screens. It will always use them. But the movement’s present and future belong to qualitative screens. Qualitative screens are screens that companies can fail, but they are also used to identify companies of merit” (Kinder eta!, 1993, p. 61). Consumer relations, women and minority advancement, and charitable contributions are a few examples of positive screens.

Community-development investment (CD!) is the third and most altruistic facet of SRI. It has been defined as a grant made primarily to support or encourage community development that is paid back and may produce income. CD! may take the form of loans or deposits in financial institutions often at below-market rates of return. Essentially, the investor is donating either a portion or all of their possible rate of return in the interest of bettering a community. As described earlier, the Shorebank Corporation is the best example of development banking. Several other banks have become involved in similar ventures and numerous charitable organizations use their funds for development projects.

The critical issue surrounding the future of social investing is whether or not corporations are going to disclose the information which social investors must have. It is currently quite expensive to set strict social screens due to the difficulty of researching and standardizing social data. As computers and their databases become more powerful, the cost of research will surely diminish.

Taken as a whole, it is in all businesses best interests to balance the needs of their stakeholders: the customers, the employees, the community, and the owners. However, individual businesses are all involved in a downward cycle of competition based on competition and growth which is often referred to as the “tragedy of the commons”. The government has attempted to maintain itself as the guardian of the rapidly deteriorating “commons” while businesses inherently find loopholes to continue the widening of the gap between the owners and the other three stakeholders. Corporations must cease their enormous lobbying efforts aimed at eliminating government regulation and transfer their efforts to the creation of a system which will healthfully balance the needs of all stakeholders.

References

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