SRI Notes

Fortune on Green Funds

The latest issue of Fortune has a pretty good update on SRI mutual funds.  The toughest criticism the industry has seen in recent years is that funds are not green enough, and that even though Best Buy, Outback Steakhouses, and Hershey pass the screens, what's truly responsible about them?

Glad you asked, at least about Hershey.  Hershey's controlling shareholder is the Milton Hershey School for disadvantaged kids, which is one of the worthiest causes I can think of.  Age and decrepitude have forced me to curtail my candy bar consumption, but when I indulge I make sure it's a Hershey product.

The larger point is well-taken, however.  SRI so far has been more about avoiding/boycotting bad companies than aggressively looking for great ones.  Give credit to KLD and Barclays, who are today introducing an exchange-traded fund that weights companies, in part, according to their social scores and virtually abandons the old exclusion approach.  The product, which is then optimized to the Russell 1000, will be a interesting test of whether social screens can, in and of themselves, add value.

The Economist Weighs In on Social Responsibility. Unfortunately.

This week's Economist includes a survey of corporate social responsibility. On seeing the news, my reaction was one of both hope and fear: Hope because critics of corporate social responsibility tend to be ideological, and The Economist typically tries to focus on the facts. Fear, because the magazine's snippy black-or-white writing style, while clear and entertaining, risks oversimplification.

But hope and fear were replaced by mere disappointment. The survey's a disaster, unfortunately.

The magazine's leader, "The Good Company" states "all companies, but especially big ones, are enjoined from every side to worry less about profits and be socially responsible instead."

Nonsense. The net profit margin for the S&P 500 over the past four quarters was 8.5%, the highest level seen in over 20 years (source: Baseline). The implication that corporate gadflies are draining away profitability has no basis in fact.

It continues "companies at every opportunity now pay elaborate obeisance to the principles of corporate responsibility."

Twaddle. Corporate social behavior is, on most dimensions, worse than in the past.  Executive compensation as a percentage of sales is at historically high levels, despite no apparent commensurate increase in management competence. Charitable giving accounted for a greater percentage of corporate pretax earnings 15 years ago than it does today.  And, of course, there are the scandals.  It is extraordinary that, after Enron, Worldcom, Tyco, and Parmalat, otherwise intelligent people can claim the level of corporate social responsibility has gone up.

Marc Orlitzky recently published a comprehensive and thoughtful statistical review of the academic work done on corporate responsibility over the past 30 years.  The survey does not appear to mention it. A shame, as Orlitzky provides hard evidence that contradicts The Economist's arguments.

Speaking of evidence, there's not a lot presented.  Looking through the survey, I see no charts (ok, one quadrant chart illustrating a concept). No statistics, no quantitative studies, no detailed presentation of successes and failures.  And more straw men than a scarecrow factory.

What a shame. The Economist had a chance to write a strong piece on a timely topic, as it did with environmental issues in the early 90's.  Instead we get a 22 page op-ed piece.

Don't waste your time.

One More Worthwhile Organization

A colleague who has spent a great deal of time in developing countries recommends Heifer International, which gives livestock and training to needy people worldwide.  A recent Barron's article on the organization is here.

Another Tsunami Relief List

Here is a list of tsunami charities recommended by the American Institute of Philanthropy and the Better Business Bureau.

100 Best Companies to Work For

The latest list of "The 100 Best Companies to Work For in America" is available now at Fortune's website (subscription required). For more information on this list, see the Great Place to Work Insititute's website - they do the underlying research.

There are many lists of great companies, but this is one of my favorites. It is one of the longest-lived (the first book came out in 1987) and is based on thoughtful and original research, not impressionistic analysis or press clippings. And it feels intuitively right to me - I have visited many of these companies, and they really do seem to be superior workplaces, and, often, superior business franchises.

In 2002 Chris Luck and I did a study and found an equal-weighted portfolio of the publicly-traded companies on the list would have had returns a little better than those of the S&P 500, even after accounting for valuation disparities, industry exposures, and other risk factors.

Business Schools and Social Responsibility

In today's Financial Times, management columnist Michael Skapinker (subscription required) recounts a story from Temple business professor Robert Giacalone:

...[He] asked students whether they would dump carcinogens. On this the class reached consensus: they would do it, because if they did not, someone else would. Prof Giacolone asked whether they wanted to live in such a cynical world. 'We already do,' they replied.

Other business professors feel the same way.  Joshua Margolis (co-author of People and Profits) argues that too little attention has been paid to social issues in business.

This is striking to me because I have never seen social responsibility treated as seriously in major business schools as it is today. It is now taught and discussed in dedicated programs at Harvard, Stanford, and Wharton.  (In 2000 Wharton even convened a conference on social investing, although no major school has done so since.)

Will it do much good? I doubt it. I don't believe unethical behavior is pervasive among corporate managements. Most of the senior managers I have met have been pretty well-intentioned people. Highly-focused, results-oriented - but not unethical or malicious.

But there are exceptions. The worst corporate behavior, in my opinion, is caused by a relatively small percentage of people who have talent, drive, and no moral compass. Robert Hare of the University of British Columbia, an expert in sociopaths, believes that the corporate world is fertile ground for them.   (I Googled "Ken Lay" and charming - 8770 hits.)  You can send these people to ethics courses:  they'll probably be star pupils - and then deceive people anyway.

I believe the disillusionment of the Temple students comes from a conviction that the business world is now dominated by people like this. I don't believe it has gone that far, but there certainly seem to be more amoral people in charge than there used to be. My guess is that this is coming from two powerful management trends.

First, Jack Welch's General Electric taught the business world that the numbers come first, and everything else is a pretty poor second. It's easy to forget that American business in the 70's and even the early 80's had a strong institutional mindset and often espoused long-term management values. Welch demonstrated that a single-minded focus on business results (with a corresponding campaign against bureaucracy and paper-pushing) could revitalize even an enormous company. The lesson wasn't lost on anyone. Welch openly wondered about the risks of the approach in his 1991 Letter to Shareholders:

"Then there's the fourth type [of manager] - the most difficult for many of us to deal with. That leader delivers on commitments, makes all the numbers, but doesn't share the values we must have. This is the individual who typically forces performance out of people rather than inspires it: the autocrat, the big shot, the tyrant. Too often all of us have looked the other way - tolerated these 'Type 4' managers because 'they always deliver' - at least in the short term."

Welch saw the risks, but tolerating the misbehavior of those who 'always deliver' is now a fundamental part of our business culture. No one had a problem with Ken Lay or Dennis Koslowski when their stocks were working.

The second trend has been around a lot longer, and is perhaps the greater problem. That is the cult of personality that surrounds some CEOs. CEOs are celebrities in this country, and as with all celebrities, we're willing to overlook a lot in their behavior. (It is bizarre to me that Donald Trump is now one of the most admired business leaders in America, and even more bizarre that my alma mater, Babson, is teaching a course based on elements of his show).

What really bothers me about the CEO-as-star mentality is that the best CEOs aren't big self-promoters.  Jim Collins's book Good to Great explores this issue in depth, and finds that the most effective leaders are exceedingly modest and continually deflect attention and recognition toward their colleagues. I've seen it many times in my career - quiet purposeful CEOs who get the job done, and self-promoters who disappoint. And yet we continue to glamorize the second category.

So the first step in improving corporate behavior, in my opinion, is not to give everyone an ethics class (well, ok, it can't hurt).  A better first step would be to stop giving a free ride to the glib CEO who's hitting the short-term numbers but not doing the things he needs to do to build his company for the long term. That's the situation where we've seen the worst behavior from corporations.  Things won't get better until boards of directors learn to recognize it and intervene before things get out of hand.