June 7, 2004
Speaker Biographies
“Socially responsible” investing (SRI), which incorporates non-financial social and ethical criteria, has attracted significant publicity in recent years and sparked interest among some institutional investors, public pension funds, and Social Security reform advocates, particularly in the wake of recent corporate scandals. SRI adherents claim that one of every ten dollars in United States markets is invested using SRI principles. Although those claims are widely disputed, there is no question that public and some private pension programs are being asked to consider if and when they should include social and ideological screens when making investments. Social investing is not an exclusively American phenomenon. It is popular in Britain and Europe, and governments from Malaysia to Sweden to Canada have utilized pension funds to support stock markets or to make loans or create incentives with explicit social goals. Is this trend welcomed or a threat to fiduciary independence and responsibilities? This conference will examine social investing and its public policy implications.
CONFERENCE PARTICIPANTS
Organizer and moderator: Jon Entine, adjunct fellow, AEI
Mr. Entine is scholar-in-residence at Miami University (Ohio) and a columnist for Ethical Corporation magazine (UK). His books include Let Them Eat Precaution (ed.), (AEI Press, Summer 2004); Abraham’s Children: How Genetics Is Unlocking Jewish History and the Hidden History of the Bible (Penguin, Fall 2004); and Taboo: Why Black Athletes Dominate Sports and Why We’re Afraid to Talk about It (PublicAffairs, 2000). He is also a contributing author to Killed: True Stories You Were Never Meant to Read (Nation Books, June 2004) and Case Histories in Business Ethics: The Virtues and Moral Decision Making in Business (Routledge, UK, 2001).
PRESENTERS
Luncheon keynote: Alicia H. Munnell, Boston College Carroll School of Management
Ms. Munnell is the Peter F. Drucker Professor of Management Sciences and director of the Center for Retirement Research. She is a cofounder and the first president of the National Academy of Social Insurance, and she has served on the President’s Council of Economic Advisers (1995–1997) as assistant secretary of the treasury for economic policy (1993–1995) and also as an economist and senior vice president of research at the Federal Reserve Bank of Boston. She has published many articles and books and has edited several volumes on tax policy, Social Security, public and private pensions, and productivity.
Coauthor Annika Sundén is a research associate at the Center for Retirement Research and a senior economist at the National Social Insurance Board in Stockholm. Her research interests include the economics of retirement, pensions and Social Security, and household savings behavior. Previously, she was an economist at the Federal Reserve Board in Washington, D.C.
SOCIAL INVESTING: Pension Plans Should Just Say “No”
Ms. Munnell addresses the effectiveness of social investment screens for public pension funds. She and Annika Sundén believe that current social investing approaches are not effective and, even if they were, neither public nor private plans should engage in this type of investing. Negative screens designed to rid portfolios of “sin” stocks do not screen out all the firms that support the activities of these companies. As long as the marginal investor is willing to buy the stock, social investing screens do nothing to change the stock price or the cost of capital to “sin” companies. Investors forfeit returns by reducing the number of possible investments. Private plans are tax subsidized and regulated by ERISA and have a fiduciary duty to maximize return for any given level of risk. Social investing may be fine for wealthy individuals who want to feel good about themselves and can absorb the loss in return in their non-pension savings, but it should not play a role in the investment of either public or private pension assets.
Morning keynote: Prakash Sethi, Zicklin School of Business, Baruch College, CUNY
Mr. Sethi is the University Distinguished Professor at Baruch College in 1982. He taught previously at the University of California–Berkley and the University of Texas–Dallas. He is the president of the International Center for Corporate Accountability, Inc. (ICCA), which conducts research on codes of conduct and develops and implements external corporate monitoring systems. He is an adviser to the Executive Office of the UN Secretary-General on global compact. Mr. Sethi has published extensively in professional and scholarly journals on corporate governance and business ethics and has published twenty-four books, the latest titled Setting Global Standards: Guidelines for Creating Codes of Conduct in Multinational Corporations (New York: John Wiley & Sons, 2003).
SOCIALLY RESPONSIBLE INVESTING: IT’S A MUST BECAUSE THERE IS NO BETTER ALTERNATIVE
Under prevailing conditions of imperfect markets and concentration of capital and technology, an exclusive or even primary emphasis on return on capital would inflict enormous harm on the maintenance of free enterprise system, however imperfect. At the macro level, it would make the current system even more irresponsible with the apparent failure of corporate governance and the resultant enormous increase in agency costs as reflected in top management compensation. For the long term, the unfairness of the allocation of returns to various factors of production would undermine not only the market-based capitalism, but also the foundations of democracy and rule of law. Furthermore, by ignoring the environmental and human consequences of economic actions, it would tantamount to giving the corporations a carte blanche to pillage the commons and thus do irreparable harm to the well-being of current and future generations. In that context, social investing is essential, even considering the fiduciary concerns raised by its critics.
Robert J. Palacios, Senior Pension Economist at the World Bank
Mr. Palacios is a member of the team that produced the 1994 World Bank Policy Research Report, Averting the Old Age Crisis: Policies to Protect the Old and Promote Growth. He has written extensively on pension reform and has been involved in pension reform operations in many countries. He worked for several years with the Hungarian government on the pension reform passed in 1997. Since then, he has worked on pension reform in Bosnia, the Dominican Republic, Eritrea, Korea, India, Senegal, Slovenia, and several other countries. He currently manages an applied research paper series, the Pension Reform Primer, which can be accessed at www.worldbank.org/pensions.
MANAGING PUBLIC PENSION RESERVES: LESSONS FROM INTERNATIONAL EXPERIENCE
Mr. Palacios discusses the prevalence of public pension funds, governance, and investment policy and performance in five countries––Canada, New Zealand, Japan, Sweden, and Ireland––and the lessons that other countries can take away for their experiences.
Jarol B. Manheim, George Washington Professor of Media and Political Science
Mr. Manheim is the founding director of the GWU School of Media and Public Affairs. His research on strategic on political communication has been published in leading academic journals. His latest book, Biz-War and the “Out-of-Power Elite”: The Progressive-Left Attack on the Corporation (Lawrence Erlbaum, March 2004), examines the development and uses of anti-corporate networking and communication strategies as mechanisms for movement building. Reviewers have described his 2001 book, The Death of a Thousand Cuts: Corporate Campaigns and the Attack on the Corporation, as the definitive work on that topic.
CORPORATIVE DISSONANCE: THE STRATEGIC USE OF CSR INVESTING
Mr. Manheim contends that a corporation is a social institution whose purpose is to balance reinforcing and contradictory interests with diverse goals, only some of which are economic. This notion of “corporative dissonance” is a variant of the so-called “stakeholder theory” advanced by liberal scholars Edward Freeman and Margaret Blair, which has been employed by advocates of social investing to argue for the importance of ethical behavior in business. This paper analyzes the systematic exploitation of “corporative dissonance” by social investors to achieve social goals. It examines how the social investment community and its allies manipulate power structure relationships, systemic changes in shareholders’ rights, and proxy battles over corporate policy, and the intended and unintended consequences of these efforts.
Peter D. Kinder, president, KLD Research and Analytics
Mr. Kinder cofounded Kinder Lydenberg Domini in 1988 and Domini Social Investments in 1997. KLD provides institutional investors with social research, compliance services, benchmarks, and consulting and is best known for the Domini 400 Social Index, the first for socially screened U.S. equity portfolios that it created in 1990. He is coauthor of The Social Investment Almanac (Henry Holt, 1992) and Investing for Good (HarperBusiness, 1993). He has served on the board of the Social Investment Forum. He previously practiced law, first as an assistant attorney general in Ohio, then in Boston as a staff lawyer for a foundation, and finally in private practice.
PENSIONS AND THE COMPANIES THEY OWN: EMERGING FIDUCIARY DUTIES IN A CHANGING SOCIAL ENVIRONMENT DICTATE NEW APPROACHES
In its January 2003 proxy voting regulations, the Securities and Exchange Commission altered the traditional application of “fiduciary duty.” Investment companies and investment advisers must apply a “governing” standard––long advocated by social investors––in evaluating proxy resolutions and, perhaps, ownership itself. This rule will become the general rule for all fiduciaries, whether subject to the SEC’s jurisdiction or not. A governing standard––how the company is actually run, in whose interests, and to what effect on the environment and society––has the potential to force fiduciaries to wrestle with questions that extend well beyond what is now termed “corporate governance.” They go, for instance, to the extent and nature of externalized costs. The new fiduciary standards inevitably raise issues about the effectiveness of current forms of oversight. For example, can the board fulfill the roles the corporate model assigns to it? They also raise questions about the nature and obligations of share ownership. By adopting implicitly social investment’s position on shareholders obligations as owners, the commission has opened issues that have not been addressed since the last wave of corporate reform in the first decade and a half of the 1900s.
Charles E. Rounds Jr., professor of law, Suffolk University Law School
Mr. Rounds is a fellow at the American College of Trust and Estate Counsel and a member of Advisory Committee of the Cato Project on Social Security Choice. He is the author of the annual edition of Loring: A Trustee’s Handbook, as well as dozens of publications on fiduciary responsibility involving charitable trust funds, private pensions, and trust accounts established under a privatized Social Security system.
WHEN THE STATE GETS INTO THE INVESTMENT BUSINESS, SOCIAL INVESTING IS INEVITABLE AND THERE IS LITTLE THE LAW CAN DO ABOUT IT
Mr. Rounds asks: why, when the “state” gets into the business of administering other people’s money, legal safeguards designed to limit the state’s agents from engaging in social investing are not worth the paper they are printed on. Social investing is a precarious investment philosophy that reflects the personal financial, social and/or political predilections of the investor, and which are often independent of fiduciary responsibilities. With respect to Social Security tax receipts, if one is concerned that there be legal accountability for those who socially invest, then to entrust the United States with the responsibility for investing in corporate equities and bonds is not the way to go. Those who advocate that the federal government get into the investment business appreciate neither the limits of the law nor the fallibility of human nature. If meaningfully fiduciary accountability for social investing is desirable, then Social Security privatization is the only option that brings with it legal safeguards that have teeth. FICA payments must be segregated and the legal title to them transferred to private fiduciaries. Without these reforms, social investing, with all its unintended and perhaps reckless fiduciary and social consequences, is an inevitable by-product of the government getting into the investment business.
Sarah Fuhrmann, partner, v-Fluence Interactive Public Relations
Mrs. Fuhrmann leads the v-Fluence health care, mining, and corporate social responsibility practices and is on the executive committee of the Public Relations Society of America’s Strategic Social Responsibility section. She has provided PR strategic counsel on corporate social responsibility in English, Spanish, and Portuguese to Fortune 500 and other businesses on two continents. She is a former Associated Press reporter in Latin America and was the communications director on a U.S. Senate campaign.
CORPORATE PHILANTHROPY IN UNFRIENDLY TIMES: THE CONSEQUENCES OF SOCIAL INVESTING ADVOCACY
Corporate social responsibility and socially responsible investing comprise a multi-billion-dollar industry in which some well-funded anti-corporate advocacy groups have established a strong foothold. Many of these groups tactically identify target companies they can portray as being “irresponsible” in order to generate resources and promote policies that end up undercutting efforts by companies to be more socially responsive. In the absence of set corporate social responsibility/social investing standards, companies are subject to the whims of groups that shift their criteria. The linchpin for this ideological agenda is the Internet, which proponents use to organize shareholder resolutions, e-mail action alerts, letter-writing campaigns, and more. Given these conditions, there is an enormous risk that even companies committed to improving stakeholder relations will end up as targets. The consequence of this anti-corporate ideology is that many well-meaning companies are reluctant to work with social investing activists and may in the future disengage from some philanthropic investments.
George Gay, CEO, First Affirmative Financial Network
Mr. Gay chairs the FAFN Investment Committee and serves as vice chair and on the board of directors of the Social Investment Forum. Since 1990, he has produced and hosted the annual Socially Responsible Investing in the Rockies Conference. He is a West Point graduate and served as a financial and business manager at the Army’s base at Ford Carson, Colorado.
Coauthor Johann A. Klaassen is vice president of managed account programs for FAFN and serves on the FAFN Investment Committee. He has lectured widely on ethics and economics, and his articles have appeared in journals such as Philosophy in the Contemporary World, The Journal of Value Inquiry, and The Journal of Social Philosophy.
RETIREMENT INVESTMENT, FIDUCIARY OBLIGATIONS, AND SOCIALLY RESPONSIBLE INVESTING
Within the retirement investment industry, the question of the permissibility and fiduciary responsibility of “socially responsible investing” (SRI) must be addressed with increasing frequency. Whether it is brought about by the recent corporate scandals, by a desire not to profit from alcohol and tobacco, or by a growing concern for environmental sustainability, more plan participants express a desire for a coherent system of selecting investments based on criteria beyond conventional analysis, with a focus on societal goals beyond investment returns. But in what circumstances, and to what extent, might such an investment strategy be permissible? May those charged with making decisions about retirement investments reasonably choose SRI? Our position is that consideration of the fiduciary obligations of the trustees of retirement plans shows that SRI investment strategies are not in and of themselves impermissible. On the contrary, we argue that the farther we move from self-directed defined contribution plans toward institutionally-invested defined benefit plans, the narrower the range of allowable investment options becomes; and yet SRI investment strategies are always at an acceptable option.
Timothy Smith, chairman, Social Investment Forum
Mr. Smith joined Walden Asset Management in Boston in 2000 after twenty-nine years at the Interfaith Center on Corporate Responsibility, twenty-four of them as executive director. ICCR provides research and action plans for some 275 Protestant denominations, Jewish agencies, Roman Catholic orders, healthcare agencies, dioceses and other concerned religious investors, which together have investments of over $110 billion. He was active in bringing social concerns to corporate attention through dialogue with management, open letters, public hearings, legal actions, stockholders resolutions, and divestments. He is also a former board member of Domini Social Equity Fund and past chair of the Calvert Advisory Council.
SOCIAL INVESTING: CHALLENGING INSTITUTIONAL INVESTORS TO MEET THEIR FIDUCIARY RESPONSIBILITIES
Mr. Smith discusses social investing in theory and practice, including what motivates religious investors, activist state or city pension funds, labor unions, and foundations, and how each understands their fiduciary responsibilities. He provides an overview of the industry, including its investment strategies and its international growth prospects. The paper discusses current trends in social investing in corporate governance and key social issues such as global warming. He suggests the interest in social investing and its growth reflects not only a fundamental shift in social values but also a more nuanced understanding of fiduciary responsibility and how it contributes to competitive performance.
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