Introduction: We Are Running Out of Time
We need to take back control of our money, our investments, our retirement funds, our jobs, our economic system, our lives, and our democracy. The global economy and world affairs are dominated by corporate oligopolies and a small group of corporate elites that are controlling our destiny with our own dollars.
The primary focus of this book is on money and socially responsible investing (SRI), and SRI’s ability to create a dynamic, new, decentralized, noncorporate democratic economy which will not only maximize individual portfolio financial return and community wealth, but will also create a renewed social and environmental vision of the future. SRI is also necessary to save our democracy. We must act now. We can demand a better world. But we are running out of time.
The struggle for the control of our own capital is no longer an esoteric academic exercise. It is a necessity. The survival of our planet may depend upon it. Giant corporations, and increasingly a small number of them, from Wal-Mart to Microsoft, are defining the world we live in. Soon, our only economic choices will be whether to buy Pepsi or Coke, shop at Wal-Mart or Home Depot, bank at Citigroup or Bank of America, and see a movie on TV presented by Disney or General Electric.
Individual financial decisions will be just as limited. Do we invest in a scandal-ridden mutual fund, or through a brokerage firm providing insider stock deals to corporate management in exchange for large underwriting business? Better yet, do we turn over our tax preparation to a CPA firm that “cooks the books” for corporate clients, while it electronically transfers our personal financial information to its information technology (IT) subsidiary in India?
The excesses of corporate management’s greed in the 1980s gave way to even more outrageous excesses in the 1990s. The music played, stock values increased, and no one believed that the party would ever end.
Of course, there was never any celebration for half of the world’s population—the 2.8 billion people who live on less than the equivalent of two dollars per day, the more than one billion people who do not have access to safe water, the 840 million people who go hungry, or the one-third of all children under the age of five who suffer from malnutrition.1
The economic disparities are glaring and getting worse each year. The richest fifth of the world’s population has access to 86 percent of the world’s gross domestic product (GDP), while the poorest fifth has access to 1 percent. The assets of the world’s three richest men, currently Bill Gates, Warren Buffet and Karl Albrecht, exceed the combined GDP of the world’s forty-eight poorest countries.2
Meanwhile, millions of Americans are unemployed and if they find a job, it is at companies like Wal-Mart that pay barely above minimum wage, with little or no health benefits, which means taxpayers subsidize them. Many people are working more than one job just to support their families, and the underemployed, like those whose unemployment compensation has run out, are not even counted in the unemployment numbers. The savings rate has dived to 0.2 percent of disposable income3 and by March 2005 consumer debt stood at over $2.12 trillion.4 That’s about $6,000 for every man, woman and child in the United States.
To understand whether our country, economy, and investors are being served by the present system, we first need to explore how and why Americans seem to be disengaged with the political process. Although voter turnout improved in the 2004 Presidential Election, it still represented less than 60 percent of the registered voters, and only about 17 percent of the youth vote. We will begin this book by exploring electoral politics and government institutions and whether they are responding to our democratic need for change and truly representing our interests as shareholders, taxpayers, voters, and citizens. And we’ll review political and economic issues that must be addressed by responsible investors in this new millennium.
We need to ask the following questions: Are politicians and government bureaucrats being bought off to support the “corporatization” of our global economy? Is the privatization of the public sector healthy for democracy and competitive capitalism? Is there a viable countervailing power to corporate dominance of our air, water, and food, much less the U.S. political and economic system? Are our elected officials—local, state, and national—representing their taxpaying constituents or their corporate donors? Has corporate management become so powerful and democracy so weak that corporate democracy, intelligent consumerism, and SRI are the only remaining leverages available to the public to affect positive social, environmental, and political change? In this context, corporate democracy means one dollar, one vote, where shareholders’ voting power equates to dollars invested; political decisions are made by the ability to control capital and leverage dollars and have nothing to do with participatory democracy or one person, one vote, as we know it. Have politicians, government, and democracy become irrelevant?
President George W. Bush was re-elected in 2004, this time by a majority of both the popular vote and the electoral vote; the same election delivered increased Republican majorities in both the Senate and House of Representatives. Was this a victory for democracy or a victory for corporate management which invested heavily in Republican candidates? As the Wall Street Journal reported on Nov. 4, 2004:
In the next four years, drug makers, health-care companies, and financial-service concerns expect to benefit from Bush efforts to rein in legal costs and extend dividend and capital-gains tax cuts. Wall Street companies are looking for a flood of new investment if Mr. Bush succeeds in opening the Social Security system to privately-owned accounts. Fast-food chains are less worried about a higher minimum wage and auto makers about tighter fuel economy standards—both areas where a Kerry administration planned to make changes.
For the last four years, Americans have witnessed corrupt corporate management, with greedy Chief Executive Officers (CEOs) and Chief Financial Officers (CFOs), and record personal and corporate bankruptcies. From 1988 to 2000, the ratio of non-financial debt (consumer credit card) to the GDP held steady at about 1.8 to 1; now it is more than 2.0 to 1. From 2001 to the end of 2003, the economy added $1.3 trillion in gross domestic product and $4.2 trillion in debt, which means that for every new dollar of economic output, we’ve added $3.19 in new debt. In the first quarter of 2004, debt rose at an annual rate of 8.6 percent, more than double the growth of the economy. By December 31, 2004, our national debt stood at $7.6 trillion.
The number of new personal bankruptcies nationwide rose 7.8 percent to 1,625,813 from 1,508,578 for the year ending September 30, 2003, according to the Administrative Office of the U.S. Courts; personal and corporate filings doubled since 1994.5 Thanks to corporate management’s greed, fraud, incompetence, and a bad economy and market, more than sixty thousand companies sought bankruptcy protection in 2001. The ten largest companies filing for bankruptcy in 2001 reported employing about 140,500 while by September 30, 2002, the top ten bankrupt companies reported employing 444,600.6 Of the twenty-four largest bankruptcies since 1980, twelve, or half, occurred in 2001 and 2002.7 Welcome to the new millennium!
Meanwhile, excessive management compensation, lucrative severance plans, and outlandish corporate parties thrown at shareholders’ expense are skyrocketing. This might lead one to believe that shareholders, the legal owners of corporations, receive the most benefit. Actually the majority of financial benefits accrue to an extremely small group of people worldwide—corporate officers, including CEOs and CFOs, as well as corporate board members. These are the elite of the elite, individuals who have managed to be at the right place at the right time. They have been educated at the right schools, have the right friends, and have had the political skills—or sheer luck—to have successfully obtained or retained positions within corporations to gain access to incredible wealth and power, for which the rest of the world’s citizens suffer immensely. Not only does the majority of the world’s population suffer economically due to this distorted global economic malice, but our environment, food and water supply, and in fact, most of the day-to-day, life-and-death decisions are in the hands of these non-elected, non-caring corporate elite.
The situation has been made worse because economic entities, called corporations, are legally treated as human beings and given the same civil liberties and rights as us mortals. The individuals running them are protected by a battery of attorneys, have limited legal and financial exposure, and heavily influence, if not totally control, the politicians and government bureaucrats that protect their corporate seal and “life” of state incorporation. What’s wrong with this picture?
Capitalism in the traditional sense no longer exists, if it ever did, except for the small business merchants and those in many service sectors of the economy who actually compete in a relatively free marketplace, but are ultimately manipulated by large corporations that dominate their trade associations, i.e. Chambers of Commerce. These same giants of American enterprise control supply as well as demand (through manipulative use of the major media outlets and mass advertising). There are probably only about two hundred thousand people across the globe that control our natural resources, wealth, and truly act as self-appointed kings (or Niccolo Machiavelli’s ”princes”), preaching free enterprise while exercising authoritarian capitalism, feeding at the public trough, and privatizing everything that moves.
So how is the SRI community responding to this dismal state of affairs? We will review its struggle for vision, and an evaluation of some of the movement’s founders’ conflicts, successes, and failures. This review will identify SRI professional and trade organizations that have advanced the movement and illuminated early struggles within some of the first SRI firms, including Working Assets and Progressive Asset Management, as well as the problems encountered when socially committed firms such as Ben and Jerry’s “go public.”
For more than three decades now, I have been involved in the SRI movement. I began my SRI career in 1972 when, as an analyst for the California Legislative Assembly Office of Research, I wrote a report entitled The State of California and Southern African Racism: California’s Economic Involvement with Firms Operating in Southern Africa. Suffice it to say the report was controversial, as was the divestment legislation I wrote for the Black Caucus in 1973. I wrote several additional reports and legislation advocating socially responsible investing. I served on a Sacramento city investment board and was a consultant for the California Legislature’s Select Committee on Investment Priorities and Objectives. In 1980, Governor Jerry Brown created the Governor’s Public Investment Task Force which I chaired. The task force issued a set of recommendations leading the way for both the California Public Employee Retirement System (CALPERS) and the California State Teachers Retirement System (CALSTRS) to adopt strong proxy voting and shareholder advocacy policies that continue to this day.
In 1983 several colleagues and I opened Working Assets Money Market Fund, a socially responsible mutual fund, and a year earlier, I had started my own investment advisory firm, Harrington Investments, Inc. (HII), which currently manages about $170 million in individual and institutional socially screened assets. Later, in 1987, I co-founded the Oakland, California-based Progressive Asset Management (PAM), a brokerage firm specializing in SRI and in 1996 I formed Global Partners, LLC, a high social impact venture fund primarily investing in small businesses specializing in organic and natural products as well as alternative energy systems. As such, I have been an “insider” in the SRI community and a witness to all its growing pains, struggles, and successes.
And so, in reviewing the SRI community’s history, I will outline a few major debacles and policy and management errors, as well as success stories that have helped us advance SRI. There are also numerous enthusiastic, knowledgeable, and experienced folks who are currently exploring new directions and structures that address problems of legacy (when founders of SRI businesses move on or retire and need to insure that their social and environmental mission is adopted by a new group of owners). This is also the task of another group of SRI leaders which is creating an innovative business structure called Upstream 21. We’ll see how this fits into other goals of SRI, especially as it relates to expanding democratic ownership to stakeholders and funding new, innovative green technology and other socially responsible private business opportunities.
We’ll review and evaluate socially screened mutual funds—with a track record of at least ten years—to determine how well they have performed financially against each other and against standard indexes. Just as important, we’ll look at the social criteria of each fund, evaluate how well the fund meets its social goals, and review its shareholder advocacy history—if it has one. We’ll discover whether or not a mutual fund is innovative in taking a further step by investing a portion of its assets in Community Development Financial Institutions (CDFIs) such as community banks and credit unions, loan funds, microcredit enterprises, social venture funds or private placements, all of which may have a much more significant economic impact on local communities than passively screening stock portfolios.
We as shareholders are the owners, but the ownership responsibility is so distorted through multiple layers of administration and bureaucracy that most of us know little or nothing about our companies, much less have the ability to exert control. A mutual fund shareholder may invest in an index fund, sector fund or an aggressive growth equity fund, and have little knowledge of the companies that comprise the portfolio, much less be aware of the mutual fund adviser’s ability to vote the fund’s stock on behalf of the investor at literally dozens of annual shareholders meetings. “Don’t ask, don’t tell” takes on a whole new meaning.
Readers may be shocked to also learn that the charitable contributions made to environmental or social change organizations are at times turned into investments in companies that are causing the often irreversible environmental or social injury that such nonprofit organizations were created to repair or prevent in the first place. It is even difficult for donors to get many nonprofits to disclose this information. Never mind a donor’s inability to find out how the organization voted its stock (perhaps that you donated) on a shareholder resolution that your church or pension fund may have introduced to address a particularly egregious corporate action or policy.
If SRI investors fund community-based organizations, we need to evaluate these financial intermediaries, discuss organizations that support charitable giving and philanthropic goals, and review their investment philosophy. Institutional investors—large philanthropic foundations, family trusts, and environmental and social justice organizations—invest their operational funds, endowments and reserves, in liquid securities, such as stocks, bonds, and mutual funds, as well as in non-liquid investment instruments. Some that invest in traditional stocks and bonds are often screened by portfolio managers, utilizing social and environmental criteria. However, many, if not most, of these institutions do not socially screen, and many have not even considered mission-based investing. Why not? Why the resistance?
On the other hand, as some nonprofit foundations and public interest organizations become more active at the shareholder level by voting stock, dialoguing with corporate management, joining shareholder coalitions, and endorsing environmental and human rights codes of conduct, will such actions encourage their larger cousins to adopt social investment policies consistent with social or environmental program objectives? Will some organizations follow the Sierra Club’s lead and create mutual funds reinforcing the organization’s primary mission—such as protecting the environment by investing in environmental businesses and screening polluters? Are we on the verge of a major shift where foundations become more of an activist with their ownership of capital? Will they join an increasing number of public pension funds, social justice foundations, colleges and endowments, family trusts, and private investors in challenging corporate management?
We will also look at a recent phenomena, within the last ten years, where a lot of social venture funds and associations—such as the Social Venture Network (SVN), Investors Circle, the Environmental Capital Network (ECN), and the Community Development Venture Capital Alliance (CDVCA), as well as an array of “angel” investors—have complemented and supplemented their investments with SRI private equity financing. Many of these organizations have joined growing community-based efforts to decentralize investment and consumer decision-making to democratize control of regional and local economies.
Any discussion of SRI also requires a review of retirement plans and the role of pension fund capital.
Most employees of private pension plans,while they receive quarterly reports from their plan administrators or their employers who may control their individual 401(k) retirement plan, don’t even know what companies make up their investment portfolio, and are totally unaware of how their employer votes their stock “exclusively for their benefit” as required by the Employee Retirement Income Security Act of 1974 (ERISA). Some plans, such as was the case with Enron, may be almost entirely invested in their own company’s stock. If the company goes down, so do the retirees’ future benefits.
A public employee may also be in the dark on such matters unless he or she is lucky enough to be in a large state or city plan like the California Public Employee Retirement System (CALPERS) or the New York City Employees Retirement System where attention has been focused in recent years on shareholder proxy voting, corporate governance, and issues of shareholder transparency. The overwhelming majority of public employees of most state and local government plans across the country are ignorant of their beneficial ownership and shareholder voting rights. Much of the voting of stock proxies is administered by government bureaucrats, and votes are cast overwhelmingly to favor corporate management’s position. Not only do public employees have their stock voted against their own economic interests, some pension plans are investing in companies that are actually taking their jobs by privatizing the public sector. How about that—you own the company that eliminates your job!
We’ll also focus our attention on the difference between investing in liquid, socially screened securities and indexes, and putting money to work directly in a community investment vehicle—both at home and abroad—as well as micro-enterprise lending.
And, if we are interested in influencing corporate behavior, we must take a hard look at the current rage—corporate codes of conduct. What are these codes and what are sustainability and corporate social responsibility (CSR)? Is CSR an oxymoron? And, if we accept corporate voluntary codes, are they just public relations devices, or are companies actually changing their conduct for the good of global society? How do concerned investors monitor these voluntary codes to ensure that corporate management will respect and implement them? Will there be an enforcement mechanism to ensure compliance, and will sanctions be imposed against bad actors?
We’ll take a meaningful look at shareholder advocacy, including the efficacy of engaging in dialogue with management, filing and co-filing shareholder resolutions, and determining the results if a majority of shareholders adopt a resolution opposed by corporate management. Based upon the recent deluge of corporate fraud, accounting irregularities, and CEO excesses, will Wall Street reform? Have we witnessed a shareholder revolution that will lead to a new form of responsible capitalism, creating the basis of enlightened corporate leadership reminiscent of Plato’s philosopher kings?
We in the SRI community need to look beyond our marketing and advertising to face the question head on: Is SRI really a force for progressive change? In an honest and open fashion, we need to appraise how successful we can be with passive social screening and shareholder advocacy. What are the pitfalls of relying only on social screening? Is there a difference between the social criteria and the actual implementation of a social investment strategy? Are we simply institutionalizing limited corporate democracy? Does corporate governance reform simply legitimize the undemocratic corporate structure and management control? If a company’s management is treating its domestic employees well, should SRI turn a blind eye to its human rights violations in China? Should we invest in a company that advances the employment and compensation of women and minorities while killing its customers with lung cancer? When SRI mutual funds invest in “best of class” oil or chemical companies, does this add credibility to our profession or homogenize it into oblivion?
In the final chapter, I will review stakeholder and shareholder strategies and specific tactics that are being coordinated within the SRI community to gain leverage in the corporate boardroom. We will review the goals of SRI investors, as well as pension funds, mutual funds, labor unions, and other institutional investors, and evaluate NGO’s and community investment strategies for democratizing the economy.
Economic control, leverage, or influence comes not from the barrel of a gun, but from the slide of a credit card, the press of computer keys (to make an Internet purchase, donate to a charity, or trade a stock), and the signing of a proxy to vote your shares. This book will primarily focus on investing, and what has been defined in the late twentieth and early twenty-first centuries as socially responsible investing.
The final chapter will also explore environmental fiduciary responsibility and review several projects underway aimed at dramatically increasing public disclosure of corporate financial risks associated with corporate activities, presently undisclosed, that may significantly increase costs to shareholders in the future.
Socially responsible investors need new strategies to challenge corporate power, including revisiting the corporate campaign originally designed and successfully implemented in the 1980s by Ray Rogers and others against the former textile giant, J. P. Stevens. It is important, in this regard, to follow the money and ask the following questions: Will the investment banks and brokerage firms on Wall Street introduce shareholder resolutions, and vote against the management of corporations in which they underwrite and make a market for their stock? How long will a Merrill Lynch or a Paine Webber have such a corporate client’s business if they vote against corporate management? Will SRI practitioners, making money off Wall Street investment products, challenge the invisible hand that feeds them? Will mutual funds vote against corporate management while soliciting it for 401(k) and 403(b) business? Follow the money. It is one thing to screen a company from investment because it doesn’t meet social or environmental criteria; it is another to work actively with other stakeholders to challenge corporate management’s power, as well as Wall Street’s largest financial services powerhouses.
How widely are corporations sharing our personal, financial, and medical information? Is technology being utilized by governments to spy on its citizens? Will this rush by corporations, especially technology and financial services businesses, to outsource U.S. jobs and confidential personal financial data overseas lead to greater productivity and savings for shareholders, or simply increase U.S. unemployment and Americans’ identify theft?
Various shareholder strategies will be discussed, reviewed, and evaluated. Do corporate governance shareholder strategies by pension funds and other institutional investors advance progressive goals or simply distract investors from the real issue of corporate control over our economy and political system? Is corporate management really influenced at all by responsible shareholders’ actions? Does more responsive and transparent corporate management lead to a more socially responsible company? Is a major structural overhaul of “capitalism” overdue? Will 2005 become George Orwell’s 1984? Should corporate management be seen as treasonous and unpatriotic for avoiding U.S. taxes, shipping jobs overseas, and doing business with our country’s enemies?
Finally, this book will discuss a strategy that will build a long-term coalition of organizations and individuals, including shareholders, to provide a truly countervailing power against corporate management. From such a broad coalition of stakeholders comes a longer-term solution for developing more sustainable financial growth and security for investors, and more decentralized and democratic local, national, and global economic decision-making, inevitably more responsive to people than to short-term corporate profits. For socially responsible investing and democracy, it is time for a new beginning. We can truly change the world—but we’re running out of time.
1. Thom Hartmann, Unequal Protection, p. 149.
3. “With Interest Rates Stable, Credit Card Fees Rise,” New York Times, April 20, 2003, p. B9.
4. “Consumer Debt Rises to $2.12 Trillion,” Wall Street Journal, March 8, 2005, p. A2.
5. “Personal Bankruptcies Hit Record High,” San Francisco Chronicle, November 15, 2003, p. B1
6. “In Bankruptcy, Getting Laid Off Hurts Even Worse,” Wall Street Journal, September 30, 2002, p. A1.
7. “The Largest Bankruptcies 1980—Present”, www.bankruptcydata.com.