Socially Responsible Investing Pitfalls
The premise for socially responsible investing sounds great in theory but in real life it may prove to be difficult to achieve.
Gambling, alcohol, tobacco and military investments all come to mind when thinking about types of investments to avoid for the socially responsible investor. These are generally considered bad investments for the socially responsible investor.
Good socially responsible investments are one that improve society. Investments in energy efficient technologies such as solar, wind and turbine technologies. Healthy food companies such as organic food manufacturers are yet another option.
These are the most obvious types of social responsible investments but there are also many others. There are numerous mutual funds available now that only invest in areas that have positive reports for the following areas: environment, human rights, labor relations, employment equality as well as community investment. For a list of such funds, please see:http://en.wikipedia.org/wiki/Socially_responsible_investing
The extent of when such funds invest or divest in certain areas may vary to a great degree. Most large companies would most likely have violations in many areas on a few occasions. Wal-Mart has had employee lawsuits and environmental lawsuits. Even under the best management such a large company would most likely have a few of these as a result of the massive scale of the organization.
At some point, nearly every company will most likely have some negative marks. McDonalds manufactures fast food. They sell healthy salads as well as artery clogging burgers & fries. Some may say that McDonalds creates unhealthy food addition among the poor, while others may see their food as a valuable convenience when traveling or looking for free Wi-Fi.
Many companies that manufacture products now do so in China which has little transparency regarding labor laws or practices. So should all of these companies be disregarded?
Producing products generally involves using natural resources and possibly harming the environment at some level. Many people may see technology as a positive, but what about all of the toxic chemicals used and the used equipment that ends up in landfills?
Even simple things such as food manufacturing may have negatives. A food company that makes bakery products or soda may be seen as contributing to obesity & diabetes. What may have started out years ago as a nutritional product that aids in survival may now be seen as harmful.
The same may also be said with tobacco and alcohol which were thought at one time to be healthy while now they are not. The health companies of yesterday are the villains of today. Defense companies have their good and bad also depending on the perception. Defense companies may be the heroes protecting the country from harm or the wartime profiteers taking advantage of the government and harming people.
So if such companies were started with good intentions, the initial premise was good. If the science later proves that such products are no longer healthy, should they be removed from the market then as a measure of good social responsibility? Should McDonalds remove unhealthy items from the menu such as hamburgers and french fries even though customers want them? More than likely, the customers would go elsewhere and thousands of people would lose their jobs in the process. Would this still be the socially responsible thing to do?
Many of the things that are good may be things that simply aren’t that profitable or practical. Should we all invest in organic fruit & vegetable companies, solar power and bicycle companies?
Some of the good socially responsible companies may be highly cyclical. Investing in energy efficiency such as windmills is not something done by the average person everyday, while buying cigarettes or beer is for many people.
Picking good socially responsible companies seems like it is much more difficult than simply removing the seriously bad companies from the investment list. Companies with a history of bad behavior such as BP are much easier removing from the list than selecting the perfectly socially responsible company.
Software is one area that scores well in having fewer negatives than positives. Companies such as Google and Yahoo have daily customers making them less cyclical as well as producing little in the way of pollution. They are also generally helpful to society, in some cases allowing people to communicate freely by bypassing government restrictions.
Products or activities that are good is often a measure of short term perception vs long term perception. Denying a smoker a cigarette for a day or an alcoholic a drink may lead to side effects & mood that are worse than if he or she simply had it in the first place. Helping a homeless person out by giving him a dollar may seem like the righteous thing to do but if everyone did this, there would be little incentive to work. All of these people would generally be happier that day if they all had such things, however in the long term these things would be detrimental to the health & well being. Looking at companies using a long term perception starts to make it look much clearer.
Socially responsible businesses must be well-intentioned both from the start and currently. Serving the customer, then seeking payment should be the goal here. When the order of these two things gets switched, then the company is no longer well-intentioned and simply has dollar signs in the eyes.
Some examples of this are possibly BP which is in the energy extraction business. At some point, saving money at the expense of safety became pervasive throughout the organization. Rather than safely delivering the product, the company took shortcuts to save money and had some massive disasters along the way the killed people and hurt the environment.
When a company acquires another company, it often seems that the goal of serving the customer is lost in the process and dollar signs become a priority over the customer. Services that may have previously been free may no longer become free after the company gets acquired. A company that has good ingredients or quality often get watered down to save money.
Coca-Cola at one point used sugar as a sweeter for their soda products. To save money, corn syrup was added as a substitute. Studies not done by the Corn Refining Association have shown that high fructose corn syrup is broken down by the body differently than cane sugar contributing to fatty liver disease, obesity and other health problems to a much greater degree than cane sugar yet the soda industry still uses this inferior ingredient in the US. As a result, it seems hard to recommend this group as being socially responsible. If they were responsible they would remove this ingredient and use something else.
Source: Sugar: The Bitter Truth http://www.youtube.com/watch?v=dBnniua6-oM
Socially responsible marketing by some companies may mask a company that in reality could care less about such things but are simply trying to fool customers in order to sell more. When a company has to make a commercial to show that they are being socially responsible, this could mask an underlying lack of having socially responsible goals.
The companies that are indeed socially responsible may be living this everyday and have no need to advertise it. Evidence of such activities may be found in footnotes in the annual report or buried on one of the website back pages. Google has some info on their server retirement practices at http://www.google.com/corporate/datacenter/server-retirement.html as well as other info on energy usage reports.
Software companies are not always perfect either. SCO Group had questionable intentions from the beginning. The company claimed that it owned the rights to a particular UNIX patent and began quickly starting lawsuits against various organizations including former customers. The company failed to succeed at most of these lawsuits and failed. The company is no longer publicly traded. Rather than seeing serving the customer as the first goal, dollar signs became the first goal. This was not sustainable.
Other companies such as Microsoft appear to be playing catch up all the time with what is going on in the market. When tabbed browsing became available in competing Internet browser such as Firefox, this was shrugged off by Microsoft. When Apple came out with the iPod and iPhone, Microsoft started working on their own competing products which they are still trying to do to this day.
Was Microsoft looking at these markets with the customer first or were they simply looking at it with dollar signs in their eyes? Companies that look at a market as too big to not be in may fail to see the big picture which is coming out with compelling products or services that customers want.
Socially responsibility often goes beyond what a company does. Executive compensation is another area that should possibly be considered. For non profit corporations such as the Red Cross and United Way, high compensation is frowded upon.
Recently, the Boys & Girls Clubs of America executives were questioned by a group of US senators for a $1 million dollar CEO salary and high travel expenses. http://www.huffingtonpost.com/2010/03/12/charity-ceo-pay-questione_n_496317.html
At a certain point when the compensation gets to a certain level, the goals of the executives start to come into question. Is the goal of the executive to serve the needs of the community or to become super rich?
With publicly traded companies the goal should generally be to solve the needs of the customers and to be rewarded in the process. However, when executive pay becomes greater than $10 million or so, it becomes questionable if the goals of the executive are in line with the goals of the company.
It should also be noted that the executives involved in corporate fraud were also some of the world’s highest paid executives. This included Worldcom, Enron, Conseco, Adelphi, Tyco and Healthsouth.
High executive compensation also goes beyond social responsibility but also is a question of irresponsibility regarding the improper use of shareholder money. If someone else is willing to do the job for a few million dollars vs $20 million, this would be much better for shareholders and send a better message to the low level workers who are making much less money.
In summary, the optimal socially responsible company is one with good initial intentions that are still so to this day based on science and current consensus. The company processes must be long term in nature and the processes must also be well intentioned with good execution and few issues such as environomental, labor issues, etc.
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