SRI Notes

Recommended

Not really a secret as it moves up the best-seller lists, but Freakonomics deserves the praise it's received. At least two chapters - one on the finances of a Chicago crack gang, the other an account of the rise and fall of the Ku Klux Klan - could be books themselves.

The praise is not unanimous.  Some economists have criticized Levitt's methods as imprecise or worse.  Salon complains that he doesn't offer solutions to the problems he identifies.  For my own part, I can't say I'm comfortable with the breathless attempts to turn him into a celebrity.  And the title is...not good.

But Levitt's work is very important to social investing. Several of his studies demonstrate that cheating pays in some professions. And he has pioneered analytical techniques (mainly of question framing) that make it possible to detect cheaters in situations you might not have expected. Social investors would do well to borrow some of those tricks.

And yes, there is a blog.  Levitt and co-author Dubner helpfully give a list of their negative reviews here.

What We Don't Know About Enron

Maybe a lot, according to a new book by Kurt Eichenwald. He argues that Skilling and Lay may not have committed crimes, although Fastow almost certainly did. One reviewer comments:

Enron's executives made mistakes, and some committed serious crimes, but today's near-universal depiction of the company as a gang of evil crooks obscures the most important lesson of the saga: The differences between Enron and today's corporate success stories are smaller and more complex than they seem...

Eichenwald's Enron, in other words, was neither a teeming hive of crooks, nor, equally ludicrous, a convent of gentle innocents mugged by senior management thieves. Rather, it was a Petri dish designed to nourish hyper-growth, for better and for worse. In Enron's fast and loose culture, engineered by Skilling, blessed by Lay, revenue producers were deified and managers stiffed. Finance and accounting were transformed from bean-counting functions to profit centers (a terrible idea). Business development executives were paid not on value created but on contracts signed, with execution left to dull managerial types. In the 1990s, with the economy and stock-market booming, this culture allowed the company to vault from being an obscure operator of gas pipelines to a global trading powerhouse. It also created a testosterone-charged, me-first atmosphere in which mistakes, risks, and early-warning signs were trampled in a hungry stampede.

But these problems affect other companies, too, especially during a boom. So even with this potent fuel, Enron needed a catalyst to become a fireball. As Eichenwald tells it, his name was Andy Fastow...

OK, the reviewer's Henry Blodget, who brings his own...perspective...on that era. But I think the point is well-taken. Understanding exactly what happened at Enron is really important. The name has become synonymous with corporate malfeasance and anyone who ever touched the company has been tarnished (ask Paul Krugman).

But hardly anyone can tell you what really caused the collapse. Blodget correctly notes that it wasn't the executive pay or the corporate jet.

My take is that the company's senior management confused its business with its stock price - or perhaps more accurately, they made the stock price the company business. With their balance sheet massively levered to the stock, a significant correction turned into a fatal liquidity trap. Blodget says Fastow, incredibly, did not even have a debt maturity sheet. It probably would have been helpful, as things got out of hand, to know exactly how much money the company owed and when it was due.

Another interesting review of the book is here.

An Excellent Book

A friend recommended Marc Gunther's Faith and Fortune, and (after learning I was quoted in it) I dashed to the bookstore to have a look.  It's excellent.

Gunther is a senior writer at Fortune (he wrote the article on SRI funds mentioned below), and he writes well. This matters because many authors have trouble with this topic. Some fall into a dry academic style, others let the diversity of the topic muddle their thinking, and still others get up on the soapbox and preach. Gunther avoids all of these and his clear prose and storytelling skill set Faith and Fortune apart.

He focuses for the most part on CEOs, delivering chapters on Southwest Airlines, Timberland, and Tom's of Maine. These stories have been told, but not as thoroughly or as well as Gunther tells them. The same is true of his chapter on Amy Domini. But he also honors Barbara Waugh at Hewlett-Packard, noting that "more than anyone I know, Waugh has found a way to change corporate America from within." And he introduces us to Ricardo Levy, a man I'd never heard of, but whom everyone interested in this topic should know about.

Gunther also investigates the spiritual aspects of corporate social responsibility, and notes a broad revival of religious interest in this country:

The spiritual revival in the workplace reflects, in part, a broader religious reawakening in America, which remains one of the world's most observant nations. (Depending on how the question is asked, as many as 95% of Americans say they believe in God; in much of Western Europe, the figure is closer to 50%.) The Princeton Religious Research Index, which has tracked the strength of organized religion in America since World War II, reports a sharp increase in religious beliefs and practices since the mid-1990s. When the Gallup Poll asked Americans in 1999 if they felt a need to experience spiritual growth, 78% said yes, up from 20% in 1994; nearly half said they'd had occasion to talk about their faith in the workplace in the past 24 hours.

He might be onto something here.  Jim Collins found in his acclaimed Good to Great project that the best leaders were quite humble. He reported on the success of Kenneth Mockler of Gillette, a deeply committed Christian who sought to bring his values to the workplace. Gunther interviews Collins for the book and finds that several of the Good to Great CEOs were deeply religious.

Still, I have wonder: despite this religious revival, the last ten years will go down in history as among the most scandalous in the history of American business - what were all these people doing at the office?

Refreshingly, Gunther saves the question of whether social responsibility pays for the last chapter. And he concludes that the question is unanswered and perhaps doesn't even need to be answered. This intellectual honesty is so refreshing - I wish other books had more of it.

Faith and Fortune is carefully researched, clearly written, never boring, and often instructive.  Highly recommended.

Travels of a T-Shirt

Pietra Rivoli, a Georgetown economist and expert on corporate social responsibility, has written a new book which is getting great advance reviews.

Read an excerpt here.

Pietra's also very knowledgeable about SRI - she's been a Moskowitz Prize judge for many years, and wrote a thoughtful defense of the industry in Business Ethics Quarterly in 2003.

The Next Book to Read

Stu Hart, a leading thinker on sustainability and business at Cornell's Johnson School of Business, has a new book coming out - Capitalism at the Crossroads.  A positive review is up at Socialfunds.com. 

Over the years Hart has gained recognition as a management theorist (McKinsey award for best Harvard Business Review article), a financial analyst (co-authored the 2001 Moskowitz Prize-winning study), and a popularizer (co-authored The Fortune at the Bottom of the Pyramid).

It's nice to see the Wharton School's publishing house making this one of their first projects, too.

Salon Article

Ellie Winninghoff, who is writing a book on SRI, has put up an excellent article on SRI at Salon.com (sorry, have to watch an ad to read it, but it's worth it). 

It's particularly great that she tracked down Jim Hawley, who co-authoredThe Rise of Fiduciary Capitalism.  The book explains that the balance of power has shifted among the owners of American corporations.  In the old days (the 1970's), most stock was owned by individuals in brokerage accounts.  Today, most stock is owned by large pension funds.  These intermediaries now hold de facto control over most of America's publicly traded companies.  The only problem is they don't know it, or act like they don't know it.

Robert Monks, who is also mentioned in the article, is the leading voice for corporate governance reform in the U.S.