Capitalist Tool Misses Point on SRI

When Does Socially Responsible Investing Go Too Far?, an advice item at Forbes (“the capitalist’s tool”) on money and ethics misses a major point. A reader writes in that his wife “has become passionate about social and political issues and asked that we not invest in companies she believes are bad corporate citizens.” Her list has grown so long there are few companies left. Jeanne Fleming and Leonard Schwarz advise it is “irresponsible of Julia to be indifferent to the costs associated with doing what she wants… you need to sit down with Julia, explain how the lines she’s drawn are incompatible with your family’s investment objectives and discuss how you might relax the rules underlying her list.”

Here’s my take: By black-listing companies she thinks are immoral, Julia isn’t helping to change them, she is simply letting them get away with murder… or whatever crimes she thinks they are committing. If caring people like Julia refuse to buy a company’s stock, it makes the situation worse. Companies with no Julias will  have owners who only think of short-term gains, putting additional pressures on companies to externalize costs and generally behave badly.

The husband seeking advice should be told that active ownership is more powerful than hiding their heads in the sand. Take a look at websites like CorpGov.net, Shareowners.org and ProxyDemocracy.org. You will soon learn that power lies in engagement, not in denial.

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2 Responses to Capitalist Tool Misses Point on SRI

  1. ProxyAnalyst August 12, 2010 at 4:25 am #

    Herein lies the problem with the logic of corporate governance activists: THERE IS NO INCENTIVE FOR “JULIAS” AND THEIR HUSBANDS TO DO ANYTHING BUT DIVEST. While I don’t disagree with you that active ownership is the preferred option to screening out “bad” companies (however one chooses to define the term and such companies), as a practical matter, individual investors have neither the means nor the understanding of the intricacies of the corporate governance field to take action. Moreover, there remains little for individual investors to do, besides voting once a year, that addresses their need to take meaningful action.

    Until shareholder voting becomes a meaningful exercise – the day when director elections result in significant and informed change and votes on the issues become something more than a mild indicator that directors should take some action – then the approach taken by “Julia” is the most legitimate course of action.

  2. James McRitchie August 12, 2010 at 9:55 am #

    Julia has apparently locked herself out of too many companies to create a meaningfully diverse portfolio. Therefore if they divest, as you suggest, they are left with Treasury Bonds or the bonds from their local co-op.

    Shareowner voting is meaningful. Proxy proposals get passed and implemented every year. Starting next year, a few more director elections will also become meaningful… although many are so to a lesser degree even now with the increasing number of companies under majority vote requirements for directors. By divesting, Julia and her husband only help to ensure that voting doesn’t become more meaningful.

    If Julia is as concerned as she sounds about corporate behavior, she should get involved with groups like the Investor Suffrage Movement, Shareowners.org and others. For the price of a stamp or an email, she could be filing resolutions herself and could make a real difference.

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