SRI Notes

Harvard Draws a Line

Accoring to this article in The Harvard Crimson, the University's panel on social investment (known as the Corporation Committee on Shareholder Responsibility) affirmed avoidance of direct investment in companies involved in Sudan.  But the panel also decided not divest from holdings that indirectly hold Sudan-related investments.  If I understand this correctly, it means Harvard can continue to own Berkshire Hathaway shares (as discussed here) despite Berkshire's PetroChina holdings.

Oil Prices and Alternative Energy

Social investors and oil company CEOs agree:  high oil prices are good.

Jack Robinson, who manages the Winslow Green Growth Fund, tempts fate in the latest CFA Institute Conference Proceedings Quarterly (link to abstract is here), quoting the most dangerous words in investing:  "it's different this time."

Robinson focuses particularly on alternative energy, noting that "at times in the past [it] has seen an explosion of [investment] interest only to have it evaporate as oil prices declined.  This time, however, unique circumstances may make green investing in general, and the search for alternative sources of energy in particular, a permanent recipient of investment capital."

Calvert seems to agree, and this month launched its own alternative energy fund.

I can't resist also linking to a slightly different view - this Fortune article explains why Exxon Mobil CEO Rex Tillerson has no interest in alternative energy investments.

Maybe everyone is right.  High oil prices would be a boon to both alternative energy companies (by making alternative more attractive when compared to oil), and to Exxon Mobil (by allowing the company to continue to earn stellar returns on equity).

The futures markets have been predicting sustained higher oil prices for some time.  This interview with Fatih Birol, chief economist of the International Energy Agency, certainly seems to support that view as well.

Two things bother me about all this.  First, high oil prices are good for oil companies and alternative energy companies, but bad for consumers - especially poor ones.  Birol argues that Africa is being hurt the most by the current high price environment.  Second, former Exxon Mobil CEO Lee Raymond, who knows something about oil supply, last year predicted a decline in oil prices over the coming decade as the global industry catches up on the underinvestment of the prior decade.

Whomever is right, oil seems to be running everything right now.  Last week Starbucks announced it would be very difficult for the company to hit the high end of earnings guidance.  One key culprit:  the price of milk.  So why are milk prices so high?  This article from Monday's Wall Street Journal offers several explanations - a cut in EU subsidies for export, a drought in Australia - and higher corn prices (feed for the cows).

So why are corn prices so high?  Well, corn is an important ingredient in ethanol, although some experts had predicted that this would not have a major effect.  (This is reminiscent of a headline from The Onion's history book, Our Dumb Century.  After the 1929 market crash the headline reads:  "Experts Blameless, Say Experts" ...)

As for the Australian drought?  It's bad.  Really bad.  And unlikely to end any time soon.

My favorite part of all this is that today, the Fed Open Market Committee commented that "readings on core inflation have improved modestly in recent months," as they left the Fed Funds rate unchanged.  And the core inflation numbers certainly are reassuring. 

But the core numbers don't include oil, corn, and milk, three commodities that in recent years have stubbornly refused to regress to the mean.

Michael Porter and Gerstenfeld's Law of Trying

And the 2006 McKinsey Award goes to...Michael Porter for his outstanding article on the role of corporate social responsibility in corporate strategy.  Socialfunds has the story.

Most management articles on corporate social responsibility can be safely ignored.  CSR tends to bring out the worst vices of some management consultants - their reliance on platitudes, sloppiness around definitional issues, and especially their reluctance to quantify.

But Porter's piece strikes me as worthwhile.  On its own merits, it makes good points about which of the myriad social and environmental issues a firm should be most concerned with (those it understands well and has a stake in).  And Porter points out that old-school stakeholder theory (take care of customers, employees, and shareholders and your job is done) doesn't fly anymore.

I suppose I'm also happy to see a prominent management consultant and academic say "when a well-run business applies its vast resources, expertise, and management talent to problems that it understands and in which it has a stake, it can have a greater impact on social good than any other institution or philanthropic organization." 

This is a constructive rejoinder to the CEOs who say "it's not my job".  As Steven Lydenberg has pointed out, the great corporate success of the past 20 years comes with greater corporate obligations.  Porter argues effectively, I think, that corporations are well-equipped to meet them. 

What's missing now, is trying.  Most companies still act as corporate social responsibility is too hard or too expensive.  They are convenient things to say, but come on.  In his classic text on forecasting (available online here) J. Scott Armstrong of the Wharton School invokes Gerstenfeld's law of trying.

It was discovered one night by my friend, Art Gerstenfeld, upon returning home from work.  Gerstenfeld's son met him at the door, and the following exchange took place between the two:

"Daddy, fix my bike for me."

"I don't know anything about bikes."

"Daddy, please fix my bike."

"I don't know how to fix your bike!"

"Daddy, please fix my bike!"

"I don't know how to fix your bike!"

PAUSE

"But, Daddy, you can try, can't you?"

ANOTHER PAUSE

"Yes, I suppose that I can try."

And then he fixed the bike. 

With Porter on board, the time is right to spread the word on Gerstenfeld.

The Man With the Iron Face

In the midst of this excellent article on the Chinese banking system, there is a pretty inspiring profile of Li Jinhua, China's Auditor-general.  There is so much interesting material hinted at in this article (e.g., a brief mention of a jailhouse interview in Las Vegas with accused embezzlers from Kaiping) I hope the authors, William Mellor and Le-Min Lim are considering writing it up as a book. 

Recognition for Pietra

Moskowitz Prize judge Pietra Rivoli's new book, The Travels of a T-Shirt in the Global Economy, was one of six shortlisted for this year's FT/Goldman Sachs Business Book of the Year Award. Today's Financial Times includes an excerpt from the book and some quotes from Pietra (link here, but subscribers only...).

Some other links:

• Last spring NPR did a series of reports based on the book, including a cool map.
• Here is a transcript of a presentation Pietra gave to an audience at the IMF.
• You can read an excerpt from the book here.

If you have a financial background, I'd also strongly recommend the paper Pietra did with Georgetown colleague James Angel in 1997.  There is a brief but good plain-English article on the study on page 5 of this issue of Georgetown Business magazine.

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.

Corruption and Valuation

Transparency International got some media attention last week as the UN declared December 9 "Anti-Corruption Day".  The World Bank also supported this initiative. 

It turns out that Transparency's corruption measures also have investment significance.  Charles Lee and David Ng of Cornell University have done a strong study on the impact of corruption on corporate valuation.  They find that markets punish companies that operate in more corrupt countries by awarding them lower valuation ratios (Price/Book and Price/Earnings).

Socialfunds.com has a good summary of the study, which won last year's Moskowitz Prize.