I used to think I was a campus radical. Back in 1970, about the time the students were shot at Kent State, I heeded a call by the Honeywell Project to buy a single share of Honeywell stock so that I could show up at the annual meeting and protest their weapons division.
The meeting was a fiasco. Police in riot gear stalked the halls. Protesters sprayed saliva beyond the microphones. Board members blinked over their bifocals. TV reporters parsed the debate. Weeks later, the protest group sold the stock block and I learned my share was down about 21% from the purchase price, with commissions.
I realize I sought the company's downfall, but personally losing $12 seemed an awfully high price to pay. I learned something awful about myself that day, and haven't been able to protest with a good conscience ever since.
But the impulse lives on, in better people. I was aware, of course, of people demanding college and university divestiture from South African holdings. But it never hit home until I gave a $25 gift of a mutual fund to a newborn baby last year, and got the check back. "We checked out your money," said the baby's father, suffering perhaps from a touch of postpartum occlusion, "and it's dirty."
It turned out that of some 50 stocks on the fund's portfolio, two had some degree of South African presence, neither company having more than 2% of its holdings there. I was taken aback. First of all, it was hard sledding to find a fund that would sell me a $25 certificate (this was Twentieth Century Vista, of Kansas City). Second, I felt bad being told my gift was, you know, evil, an unethical investment.
But what is this mercurial new realm called "ethical investment"? To begin with, it is itself an industry. Ethical investing encompasses numerous businesses which assist people in investing their money wholesomely, as opposed to plowing it into companies that will do despicable things with it.
Ethical investments have positive and negative screens. The negatives are what one tries to steer clear of: military weaponry, South Africa, tobacco companies, unfair treatment of women, nuclear power, etc. The positives are signs of a commitment to what passes for "social responsibility" these days: solar power, chemical-free farming, environmental technologies, fair employment practices and the like.
The local avatar of the ethical investments movement is John Schultz, president of Ethical Investments, a two-room command post with a picture of Don Quixote on one wall, in Minneapolis' warehouse district.
Schultz' business is just like a regular investment adviser's but with a twist. In addition to furthering clients' financial objectives, he sees to it that their money works toward worthy social objectives. It is that "second bottom line" that drew him out of the straight financial world eight ears ago.
"Even way back when I was working for Lehman Brothers in New York, I used to complain that business never gave consideration to any factor in a deal except that those that related to profitability. There are other factors, and I wanted to get them up on the table where they belonged, and discuss them.
"We do have to take the entire balance sheet into consideration, not the apparent balance sheet. We have to add into the balance sheet what happens when you dump crap into the river. We have to consider the ultimate expense involved in felling an entire rainforest. Because once it's cut down it's kind of late to do much about it, you know?"
Schultz doesn't tell clients what's ethical and what isn't. "I let clients do that. The usual evils pinpointed by ethical mutual funds are smoking, alcohol, gambling and South Africa. Smoking -- who wants to make money killing 50,000 people a year?"
Schultz's first client, in fact, was a woman who, having made a lot of money off her Philip Morris stock, wished she had made it some other way. What good is it to live in a fancy house with a private drive if you maintain it by pushing cigarettes and beer? Schultz got her on the straight and narrow path, and his business was off and running.
His business mission, to move money away from the big bad people and toward the good little ones, is an uphill struggle to be sure. Schultz's working assets total about $8 million -- the sort of sum that makes most investment advisers blow milk through their noses. Clients suffer from the stereotype of "little old ladies in tennis shoes," irrelevantly satisfying themselves that the excesses of industry are not their fault, even as they clip their quarterly coupons and reinvest their dividends. But Schultz is girded for the struggle.
"We're not into just 'feelgood politics,'" Schultz says. "We want to make money, just like the big guys. But our money is going to be clean. That's the difference."
I am impressed with Schultz' career decision, and with his clients' fervent wish not to do ill while doing well. But I question whether there is such a thing on the jaundiced face of our world as a clean dollar. Or whether, for that matter, it's possible to say what good outweighs what evil. Pioneer Three, for instance, lists Geo. A. Hormel on its mutual fund portfolio. I daresay most people have a fine impression of Hormel nationwide, but there plenty of folks here at home who have sworn eternal enmity for breaking up its local union, P9.
Pioneer Two likes Control Data, and CDC, too, is admired worldwide for its commitment to education and social programs. But again, here at home there are people furious about its golden parachute policies, and its frittering away of corporate resources. A laid-off employee might ask which justice is greater, preserving real jobs or lancing illusory windmills.
Financial analysis is a rickety chair by itself, but this extra area of social analysis is postively vertiginous. Measuring a multinational corporation's virtues is complicated, multi-layered stuff, yet ethical investors cheerfully make binary judgments about it every day. Try analyzing McDonalds. Here's a company which does many good things -- it has a good record with employee treatment, with minority advancement, and with corporate charity (Ronald McDonald Houses). Yet it is accused of burying us in unnecessary plastic packaging, with supersaturating us all with cholesterol, and endangering our entire biosphere through its role in deforestation of the Amazon. Is McDonalds good, bad, ugly, what?
And aren't most companies guilty of slighting at least one of its publics somehow -- in terms of the environment, in terms of product safety, in terms of creating wholesome employment opportunities? How can you do all those good things and still make money? Can a company that is 100% "good" have a whole lot of entrepreneurial hunger?
There are shades of virtue. Coca Cola licenses bottlers in South Africa. Westinghouse engineers nuclear power plants. Amoco sells jet fuel to the Pentagon. Are these things as bad as actually selling racists soda, operating a leaky nuclear plant, or assembling frag bombs? Opinions vary.
Finally, one person's good is not the same as another's. Recently, animal rights has become a standard negative screen, along with South Africa, nuclear power, gay rights, women's issues, unionization, and the rest. Some investors want to apply some screens but not all. Some have strict one-issue consciences. Others will bring new negatives to the table: an abhorrence of companies involved in hostile takeovers, or companies not giving 2% of pretax earnings to charity, that sell birth control devices, or advertise on Married, With Children. Pretty soon the band of angels is in a hell of a ruckus, fighting over what the best good is.
What kinds of companies do Schultz and others like? They like high technology. Apple, DEC and Intel are portfolio perennials. They like down-home, consumer brands like Quaker Oats, Maytag, Rubbermaid, and Smucker. And they like Minnesota: ethical thumbs-up go to Deluxe Check Printers, St. Paul Companies and H.B. Fuller of St. Paul; Dayton Hudson, Jostens, Norwest Corp., and Control Data of Minneapolis. It was interesting to see that (routinely reviled) corporate raider Irwin Jacobs' Navistar International made one mutual fund's list.
Socially aware funds profess to like environmental and alternate energy technology companies, but the social funds typically don't go charging off into risky emerging growth companies. Small wonder: Parnassus Fund spoke glowingly of $24 million refrigeration company Margaux Controls in Money last year -- then Margaux turned up on the Chapter 11 rolls. Nope, socially conscious fund portfolios are dominated by blue chip, large cap companies with superior dividends. Social investing is long-term, and eschews the power play -- it is tough to think of working ethical arbitrage point spreads, market timing, programmed bundling or dividend-spearing. This is just sane, sensible, read-your-quarterly-reports-and-go-back-to-sleep investing.
Schultz takes comfort from the fact that none of his clients has ever been upset upon discovering a negative in a company's closet -- though they might sell upon learning of it. The important thing in ethical investment appears to be honest intent, as opposed to omniscient perfection.
So how does he attract additional ethical investors? Schultz advertises. Thinking "ethical" had something in common with "religious," he once advertised in the Twin Cities' largest church publication, and got zero responses. Zero. Chalk that one up as a lesson in naivete. He has since found better media.
One his favorite magazines is the small but sinless new age periodical The Utne Reader, published in Minneapolis' posh Linden Hills neighborhood. A recent survey showed that fully 93% of its readers fell into the "socially conscious" psychographic slot. Considering that only 12% of the general population fall into that slot, advertising for concerned investors there is like shooting ducks in a barrel. Schultz also advertises in Minnesota Monthly.
Advertising has helped Schultz rake together an asset pile of $8 million, but he wants lots more -- he needs at least twice that to be a going concern -- and he's confident he'll get it. His business is growing, and the entire niche appears to be absorbing more and more people, and more and more money, every day. California Business recently estimated that the net total of social investing in 1988 came to $450 billion. Franklin Insight, a "socially responsible investment adviser" in Boston standing guard over $170 million in individual and institutional accounts, publishes a biweekly newsletter, Investing for a Better World, charting companies' progress on both the finance and social responsibility fronts (subscription, $19.95, sample copy free (617)423-6655).
All told, there are enough ethical investment counselors around today that they have started a national association, the Social Investment Forum, also headquartered in Boston. Schultz is director of the midwest chapter, which recently hosted a group convo attracting 150 professionals.
"We fill a need that the big guys not only don't want to fill, but are incapable of filling," Schultz said. Conspiracy theorists believe that the big wire houses -- the Dean Witters, Prudential Baches and Merrill Lynches of the world -- are so beholden to the large companies whose stock and bond issues they underwrite that the temptation to push those same issues onto their retail investors is nigh onto irrestible. On the less paranoid end of the stick, the last thing Payne Webber (or whoever) will tell an investor after underwriting a big stock for Exxon (or whomever) is, "Now, you might not like Exxon -- they want to bring back foot-bundling."
The typical reaction to ethical investments at brokerages is aggravated eye-rolling. The broker of the day at Merrill Lynch in Rochester, who asked not to be named, said that it was all in the course of a typical stock transaction to determine the customer's comfort level with a given company. "It frequently happens that a client simply would rather invest in something other than defense, or alcohol, or tobacco," he said. All clients want to know what they're investing in -- roping off a select menu of clean companies may be presumptuous and could easily be wrong.
At Minneapolis-based Craig Hallum, sales manager Victor Greenstein, answers calls. "When we get a special request like that, we usually refer them to a specific mutual fund that meets their needs. In truth, however, it's a rare thing. In my experience I can remember only two instances where investors became upset about the social dimension. The one was years ago, a woman who refused to invest in anything to do with liquor. The other, more recently, was a woman who wanted to sell Micro Foods [producers of Crystal Light eggs] after reading an article about conditions on poultry farms."
Paul Stoner, 37-year registered representative, Dain Bosworth, St. Paul office, takes the dimmest view of the ethical investments movement. "Some time ago 3M was on the list because it had a 2% presence in South Africa. For years people protested against Honeywell making bullets and guns. I'm anxious to see who will complain when the 5,000 people Honeywell lays off off [Honeywell has announced the dismantling of its defense weaponry division] hit the street."
Schultz thinks the caricature is unfair -- ethical investment is an unwieldy area at times, but its practitioners are not fools.
"I'm not St. Francis, and I'm not a preacher -- I speed up when I pass a church. I'm simply coming at investment from an angle, one that says it's time to start decapitalizing the bad guys and start capitalizing the good guys. No one person doing this alone can make a difference, but get a bunch of us doing it together and you'll see. We got people's attention on South Africa."
The feeling is mutual ...
Mutual funds are the easiest, surest way for socially conscious investors of modest means to get into the action. Here is a list of the main contenders in the field:
Michael Finley is a St. Paul-based writer specializing in issues of finance, management, and quality.
Copyright © 1993 by Michael Finley. All rights reserved.