Workers' Rights and Human Rights
Another issue that concerns ethical investors is how companies treat people,
especially their workers. Many ethical investors base their definition of human
rights on the UN Universal Declaration of Human Rights. The fundamental idea
behind this declaration is that all people should be treated with dignity, and
should enjoy the following freedoms and rights (to name just a few out of
several dozen):
- Freedom of speech
- Freedom from fear
- Freedom from discrimination
- Right to life, liberty and personal security
- Freedom from slavery and freedom of movement
- Freedom from torture
- Right to recognition and equality before the law
- Right to property ownership
- Freedom of opinion and expression
- Right to peaceful assembly
- Freedom from compulsory association
- Right to work and to choose one's employer
- Right to equal pay for equal work and fair remuneration
- Right to rest and leisure
- Right to basic living standards sufficient to ensure
health and well-being
An ethical investor would probably
look unfavorably upon a company that made its workers feel fearful, used
discrimination, slave labor or violated any of the other freedoms and rights
listed above. Some companies might think it's necessary to rely on such tactics
to make a profit, but wiser companies know that such behavior is shortsighted
and will eventually bring the company problems.
The Business Case for Human Rights
A publication called "A Guide for Integrating Human Rights into
Business Management," jointly produced by the Business Leaders Initiative
on Human Rights, the United Nations Global Compact Office and the Office of the
High Commissioner for Human Rights, instructs business managers on how to achieve
human rights objectives while also meeting the company's financial objectives.
The report identifies numerous business benefits that result from supporting
human rights:
- Improved stakeholder relations
- Improved employee recruitment, retention and motivation
- Improved risk assessment and management
- Reduced risk of consumer protests
- Enhanced corporate reputation and brand image
- A more secure license to operate
- Strengthened shareholder confidence
- More sustainable business relationships with
governments, business partners, trade unions, sub-contractors and
suppliers
Indirect Human Rights Violations
The same publication points out that
a company can have an important role in human rights violations even if it
doesn't commit them directly. If the company is aware that an entity it works
with (like a supplier, subcontractor or government agency) abuses human rights,
the company is complicit in the abuse if it allows, encourages, tolerates or
ignores that entity's behavior.
The report outlines four primary ways a company can indirectly participate in
human rights violations:
1. The company provides a government with products, services or information
that it knows will be used abusively.
2. The company knows that a government it is working with is likely to commit human
rights violations in order to execute an agreement.
3. The company benefits from violations committed by others.
4. The company is aware of ongoing rights violations but remains silent.
Businesses can assess their
strengths and weaknesses regarding human rights, and choose to eliminate their
weaknesses. A company that violates human rights subjects itself to numerous
risks.
Major Areas of Concern
Here are a few common areas a company should be concerned with when
considering its approach to human rights.
Health and Safety in Working Conditions
An employee's working conditions will have a major impact on their quality
of life, health and longevity. Dangerous working conditions include those that
are unsanitary, noisy, have high temperatures, aren't adequately ventilated,
have insufficient lighting, involve dangerous chemicals, are in confined
spaces, demand physical labor that exceeds the employee's capabilities and
entail physical or psychological abuse from other employees or managers.
Employees should also have sufficient break time and access to bathrooms, and
should have the physical freedom to leave the job site.
Ethical investors should know that unsafe working conditions don't just happen
in other countries. In the United States, for example, a 2009 article from
"Gourmet" magazine reported that tomato pickers in Florida were being
held as slaves, forced to live in cramped quarters without a toilet or running
water, deprived of their paychecks, refused time off when ill and physically
abused. In twelve years, more than 1,000 captive workers had been freed, and
more were likely undiscovered.
Health and Safety for the Surrounding Community
The health and safety of the
surrounding community will be a bigger issue for some businesses than others. A
retail store might not have much to worry about at its actual store, but
further up the supply chain, the companies that manufacture the goods sold in
the retail store might have to be concerned with their use and disposal of
chemicals, for example. Agricultural operations, meanwhile, must consider the
impact of fertilizers and pesticides.
Wages and Benefits
Investors have a wide range of
beliefs about what wages and benefits companies should provide to their
employees. Some advocate a "living wage" that pays workers enough to
live comfortably in the same communities where they work. Some believe that the
federally mandated minimum wage is sufficient. Still, others believe companies
should be allowed to pay anything, and workers should be allowed to accept jobs
at any wage, even if that pay rate is below minimum wage. Some investors are
concerned about the disparity between what the company's entry-level workers
earn, and what its executives earn.
Some ethical investors want to see companies offer employees a wide range of
benefits. The most basic benefits are health insurance, paid sick leave, paid
holidays, paid vacation and retirement benefits. Other benefits, a company
might offer, include life insurance, disability insurance, stock options, an
employee stock purchase plan, training and advancement programs, tuition
reimbursement and flexible work hours.
Chances are you can find a company to invest in that treats its workers the way
you think they should be treated. One good source of information on companies,
that treat their employees well, is annual surveys of best places to work.
Finding out where employees are most satisfied, and why, can help guide
investment decisions.
Almost as important as knowing which companies are good choices, is knowing
which companies to avoid. Watchdog organizations such as the Institute for
Global Labour & Human Rights can help investors weed out companies whose
treatment of workers seems unacceptable.
Corporate Governance
Corporate governance looks at how
companies manage themselves and their relationships with shareholders and
stakeholders. Ethical investors want to make sure that corporations are being
honest and transparent, and that management isn't looking out for its own
interests to the detriment of others.
Research Assistance
Investors who want help analyzing a company's governance can turn to a number
of resources:
- Standard & Poor's GAMMA score (GAMMA stands for
governance, accountability, management, metrics and analysis) evaluates
the governance of companies in emerging markets, according to shareholder
influence, shareholder rights, transparency and board effectiveness.
- Institutional Shareholder Services (ISS) has an
executive compensation database, and its Governance Risk Indicators
measure companies' governance performance on audit, board,
compensation/remuneration and shareholder rights issues.
- The Investor Responsibility Research Center Institute
funds corporate governance research, and makes it widely available to the
public. For example, it published a report in July 2010 called
"Compensation Peer Groups at Companies with High Pay" that
examined a number of S&P 500 companies whose executive compensation
was out of line with the executives' performance, and the compensation
provided by similar companies.
- Governance Metrics International (GMI) develops risk
ratings and research related to companies' environmental, social,
governance and accounting practices. It examines all the companies in the
MCSI world index, the DJ STOXX 600 and the S&P 1500, and updates its
data monthly.
- Glass, Lewis & Co. helps investors evaluate the
risk of investing in a company as it pertains to governance, business,
legal, political and accounting issues. It also provides proxy research
and voting recommendations.
Areas of Concern
Let's examine the major corporate governance issues that concern ethical
investors.
Accounting
Many corporate governance issues have to do with accounting. Is the company
honest and accurate in its accounting methods and disclosures? Has the company
faced any regulatory sanctions, and if so, has it corrected the problems that
got it into trouble?
No investor wants to hold shares of a company that commits accounting fraud, or
is sloppy in its accounting practices. According to ISS, investors should be
concerned if an auditor issues an adverse opinion, if the company has to
restate its financials or if the company has been subject to enforcement
action. Investors should also look out for the financial expertise of the audit
committee and for weaknesses in internal controls.
Investor Relations
Investors are part-owners and have a financial stake in how well the
company performs - perhaps not as large of a stake as the company's employees
and managers, but an important stake nonetheless. Therefore, they should care
how the companies they invest in treat their shareholders.
Some companies issue different classes of stock that have different voting
rights, and investors in the lesser classes have fewer voting rights. In other
companies, one share equals one vote. Other voting issues include whether all
common shareholders have a say in the election of all board members; how the
board handles popular shareholder resolutions; whether shareholders have a say
in approving or denying proposed mergers, acquisitions and restructurings and
whether the company has a poison pill policy. Investors want to see policies in
their favor - for example, being able to vote on a proposed stock incentive
plan, since too many stock options create the potential for significant share dilution.
Executive Compensation
Shareholders may want to see executive pay tied to stock performance. If
the stock performs well, executives earn more; if it doesn't, they earn less.
However, even if executive pay is not formally linked to performance, an underperforming
CEO can be ousted in a takeover.
Some ethical investors want to limit CEO pay, to a multiple of what the
company's lower-paid workers earn, but such limitations on pay may not be in
the company's best interest. CEOs who are highly paid are more likely to remain
with a company, and as long as they are performing well, stability can be good
for the stock. Under the Dodd-Frank Act, companies must allow shareholders a
nonbinding vote on executive compensation packages, and publish the results in
their regulatory filings.
It matters who sits on the board of
directors, how they manage their responsibilities and what other associations
they have. Board members should attend at least 75% of meetings. If they sit on
more than one board, they should have enough time to meet all of their
obligations, and their positions should not create conflicts of interest.
Ethical investors may prefer that a high percentage of the board's directors be
independent; if they are not executives or otherwise affiliated with the
company, they may be better able to guide the company toward choices that are
best for shareholders. A CEO who is also chairman of the board creates a
conflict of interest.
Regulatory Compliance
When it comes to regulations like Sarbanes-Oxley and the plethora of other
Securities and Exchange Commission rules that affect companies, how does the
company you want to invest in measure up? Regulatory non-compliance might pay
off in the short term, but in the long run, it's likely to be detected and
penalized.
Political Contributions
Sometimes companies make
contributions to political candidates with the implicit understanding or
expectation that if that person is elected, the company will receive some sort
of special treatment from the government. Other times, companies make political
contributions in an attempt to dissuade politicians from passing new
regulations that would threaten their businesses. Ethical investors may not
want to be affiliated with a company that engages in crony capitalism.
Illegal Behavior
A company that engages in illegal behavior puts all of its shareholders and
stakeholders at risk. Types of illegal behavior that companies might engage in
are insider trading, kickbacks and bribery. Sometimes it can be difficult to
evaluate how problematic these practices are, because practices that are highly
frowned upon in the United States, like bribery, may be essential to conducting
business in foreign countries.
Governance as a Practical Matter
Corporate governance, like other matters in ethical investing, is not just
a feel-good issue. It's a significant factor in determining the company's
bottom line and its long-term viability.
In the next section, we'll look at how investors can take action to get
publicly traded companies to change their behavior.
Investor Activism and Shareholder
Advocacy
For some people, buying stocks in
companies, whose actions they support, isn't enough. Activist investors seek to
directly change the practices of targeted companies. As Amy Domini, founder and
CEO of Domini Funds, states, "Socially responsible investing is not only a
way to align your investments with your values - it is also a way to make
corporations behave more responsibly." Here are the methods activist
investors commonly use.
Voting
Proxies allow shareholders who cannot attend annual, or special, meetings to
vote on the same issues that shareholders who do attend the meeting will vote
on. Either electronically or by mail, shareholders cast their proxy ballots to
make their opinions known. Typically, for every share an investor owns, he or
she gets one vote. If a shareholder owns a stock class with special voting
rights, he or she will get multiple votes per share.
Many investors toss out their proxy ballots because they are too busy to research
the issues up for vote, and make an informed decision. Their abstention reduces
the total number of ballots cast. For ethical investors, however, voting is an
opportunity to be heard, and possibly to create change.
How do ethical investors know which way to vote on the issues? Often, they look
to more experienced investors for guidance. For example, institutional
investors might publish proxy voting guidelines on their websites, explaining
how they chose to vote and why. Investors can decide to vote with the
institution or against it, depending on whether they agree with the
institution's position or not.
Institutional investors can have a great deal of influence on the outcome of
elections, because their large size allows them to own large numbers of shares.
Therefore, it may take a consolidated effort from large numbers of small-time
investors to influence a vote's outcome. Ethical investors are most likely to
have an impact if they join a coalition of like-minded investors.
Socially responsible mutual funds' published proxy voting policies are also a
good source of information for individual shareholders. For example, the
"Calvert Family of Funds' 2010 Global Proxy Voting Guidelines" states
that Calvert espouses the following positions:
- The Fund advisor will oppose non-independent directors
candidates nominated to the audit, compensation and/or nominating
committees.
- The Fund advisor will oppose executive compensation
proposals if we determine that the compensation does not reflect the
financial, economic and social circumstances of the company (i.e., during
times of financial strains or underperformance).
- The Fund advisor will ordinarily support proposals
requesting that companies avoid exploitative labor practices, including
child labor and forced labor.
Shareholder Resolutions
To take things a step further, some
investors introduce their own issues to vote on. These are called shareholder
resolutions, and in order to propose one, you must have a meaningful stake in
the company. The SEC defines this stake as 1% of all outstanding shares, or
$2,000 worth of shares, held for at least one year prior to the resolution
submission deadline.
The resolution itself must follow
specific guidelines in order to be accepted (e.g., it can't be longer than 500
words). Also, the person or group (or their representative) who files the
resolution, must attend the meeting to present the resolution. Companies don't
have to accept resolutions, and even if they receive a majority vote, they
don't have to implement them. However, shareholder resolutions give investors a
chance to present their ideas to companies and to other shareholders. Also,
shareholder resolutions may garner media attention that can pressure companies
to make changes.
What kinds of changes do shareholder resolutions seek? Some ask corporations to
disclose information about their impact on the environment. Others ask
corporations to make a specific change, such as taking an action that would
decrease the company's waste production. Shareholder resolutions allow
investors to influence company policies, and bring to their attention to
issues, that, if not addressed, could adversely affect shareholder value.
Electing New Directors
Ethical investors can try to get board members, whose views they disagree
with, replaced by board members whose views they do agree with. The policies
for nominating directors vary by company, but can be found in the company's
proxy statement. However, a company may not even look at a nomination from an
unknown shareholder, let alone take it seriously. Companies already have
established procedures for locating prospective board members.
In recent years, activist investors have pushed for open nomination policies to
get their suggestions put on the proxy ballot. Such a policy would publicize
nominations and put them to a vote. However, in July 2011, the U.S. Court of
Appeals ruled against a proposed SEC rule that would have allowed shareholders,
owning at least 3% of outstanding shares for at least three years, to put their
nominees on the proxy ballot.
Divestment
A single individual selling a few shares of a company to protest its
practices is unlikely to have any effect. Getting a significant percentage of
shareholders to do so, however, may put enough pressure on a company to
convince it to change. To succeed in this strategy, it is usually necessary to
win over institutional investors.
Divestment is considered a last resort, after other methods of shareholder
advocacy have failed, and it is usually only used in extreme cases. The most
famous example is that American students in the late 1980s convinced some
universities, whose large endowments classified them as institutional
investors, to sell their shares in companies tied to South African apartheid.
Other large investors, including some city, county and state governments,
followed suit. It's difficult to say whether divestment created enough economic
pressure to force South Africa's rulers to change their ways, but it certainly
brought increased attention to the human rights abuses occurring in the
country.
How To Research Ethical Investments
Researching ethical investments
means examining both company ethics and investment performance. Let's start
with ethics.
Perusing Corporate Websites
It seems like every corporate website, these days, has a section on
sustainability. But can you believe what you read? When are a company's
practices truly sustainable, and when is the promotion of sustainability just a
public relations strategy? Let's examine how you can get to the truth.
If you want to invest in individual stocks, company websites aren't a bad place
to start your research. Publicly traded companies generally have two websites -
a consumer-focused website and an investor-focused website. The
investor-oriented site is where you'll most likely find the information you
seek.
Here are some examples of the types of information you're likely to find:
- Community Impact
Walmart states, "we
believe in a philosophy of operating globally and giving back locally. . .
. [we help] to provide financial and volunteer support to more than
100,000 charitable and community-focused organizations."
- Commitment to Workers
Google states, "We provide
a standard package of fringe benefits, but on top of that are first-class
dining facilities, gyms, laundry rooms, massage rooms, haircuts,
carwashes, dry cleaning, commuting buses - just about anything a
hardworking employee might want."
- Environmental Responsibility
Clorox states, "The Clorox
Company is committed to minimizing hazardous waste in its facilities. We
ensure that any waste that is generated is properly handled by approved
vendors and that it is properly tracked throughout the process."
- Human Rights
Gap states, "Gap Inc.
seeks to ensure that the people working at various points along the supply
chain are treated with fairness, dignity and respect - an aspiration that
is born out of the belief that each life is of equal value, whether the
person is sitting behind a sewing machine at a factory that produces
clothes for Gap Inc., working at one of our stores, or wearing a pair of
our jeans."
Be cautiously optimistic, though: companies know that by
promoting the ways that they protect the environment, benefit the communities
where they operate and more, they may attract increased numbers of customers
and command higher prices for their products. So it's safe to assume that if a
company has any ethical practices, whatsoever, it will promote them on their
website. Unfortunately, it's also true that companies that aren't particularly
ethical sometimes cover up, or stretch, the truth to promote a positive image
of themselves. That's why you shouldn't rely, entirely, on what a company says
about itself on its website - you should verify the information with reliable
third parties. For example, look for news articles on the company's activities,
and make sure that the articles haven't just relied on the company's own press
releases and internal data as sources.
Screening Tools
There are also websites and companies that will help you screen for
socially responsible investments. They've done the hard work for you and can
save you some time. Here are some examples.
- The American Customer Satisfaction Index (ACSI) is not
specifically geared toward socially responsible investors, but it's a
useful tool for locating companies that customers are happy with and,
that, consequently, are probably doing well financially. The ACSI evaluates
more than 225 companies in 47 household consumer industries, looking at
customer expectations, perceived value, perceived quality, customer
complaints and customer loyalty to determine how satisfied customers are
with a company.
- The Social Funds website's Corporate Research Center
lets users search for companies by name to find independently produced
social responsibility profiles of those companies. For example, the site
will help you locate a report on Amazon produced by Calvert (a socially
responsible investment company). Site visitors will also find recent news
related to sustainable investing.
- The Global Reporting Initiative (GRI) website gathers
corporations' own corporate social responsibility reports. GRI developed a
sustainability reporting framework to guide companies on the issues the
public may want to know about, such as the monetary value of any
environmental fines a company has paid, the number of company contracts
that have undergone human rights screening and the percentage of employees
covered by collective bargaining agreements.
You can also use the list of companies that make up a
socially responsible mutual fund, or ETF, as a starting point to select
individual stocks.
f you're looking for socially responsible mutual funds, a number of screening
tools will help you find the right fund to achieve your goals. Exclusionary
screens weed out companies, and funds, which invest in things you don't like,
while inclusionary screens find companies, and funds, that invest in causes you
support.
- Calvert's Know What You Own service lets users look up
any mutual fund (not just Calvert funds), choose an issue that's important
to them and then see which companies in that fund (if any) do not meet
their criteria.
- The Calvert Social Index starts with the 1,000 largest
companies in the United States by market capitalization, and narrows down
the list by evaluating each company's performance in the areas of
government and ethics, environment, workplace, product safety and impact,
community relations, internal operations and human rights and indigenous
people's rights. The company also offers a number of other stock, bond and
money market funds that are more tightly focused on specific social goals
or financial goals.
- The Forum for Sustainable and Responsible Investment
helps individual investors compare socially responsible mutual funds by
cost, performance, screens and voting records. "Bloomberg"
provides the financial performance data. Users can graphically see whether
a fund excludes investments in certain categories (such as
defense/weapons), seeks investments with a positive impact in certain
categories (such as labor relations) or seeks to avoid poor performers in
certain areas (such as human rights).
Once
you've determined that a company meets your ethical criteria, it's time to see
if it meets your financial criteria (you could also do these steps in reverse
order - start with whichever one is easier for you). You can use the same
methods traditional investors do, to evaluate an investment's financial
performance, such as annual reports, prospectuses etc.
Benefits And Drawbacks Of Ethical
Investing
There are many reasons to pursue
ethical investing - and many reasons why people avoid it. Here, we take a
closer look at their motivations.
The Feel-Good Factor
Ethical investing certainly has a large emotional component. People who choose
to follow an ethical investing strategy let their feelings, about how workers
should be treated, how the natural environment should be cared for, how
corporations should treat their shareholders and so on drive their investment
decisions. One of the benefits of this style of investing, is the potential for
good feelings when a company, whose actions you support, performs well
financially, bringing good returns to your portfolio, and benefits to all of
its stakeholders.
The downside of this emotional component is that if a company violates one of
the principles you thought it stood for, can bring massive feelings of
disappointment. The same thing can happen if the company's principled stance
fails to bring good financial returns, or even brings financial losses.
Compounding the Effects of Everyday Choices
If you already live your life in strict accordance with a particular belief
system, ethical investing is a logical addition to that system. The decisions
that large corporations make have a much bigger impact than the decisions that
one person makes, after all. It doesn't make a lot of sense to ride your bike
everywhere, and only use canvas bags for your groceries while holding shares in
a company with a poor environmental record. Of course, if you're an average
investor with a few shares, or even a couple hundred shares, you're too small
to have much influence on a company, but you'll probably sleep better at night
knowing that your investment choices are aligned with your living principles.
Deciding Where to Draw the Line
It can be difficult to find investments that perfectly meet your criteria,
which means that you have to decide what's most important for you and where, if
anywhere, you're willing to compromise. What if 5% of a company's operations
involve something you don't approve of, and the other 95% in something you do?
Do you invest? What if you like a particular company, but you don't like its
parent? What if you invest in a company you support, and then it gets purchased
by a company you hate? If you have to choose a lesser evil, why invest at all?
What about socially neutral investments - do they have a place in your
portfolio? You have to overcome difficult decisions, like these, if you want to
be an ethical investor. Not investing isn't an option if you want to be
financially successful.
Forgoing High Returns from
Investments that Don't Meet Your Criteria
When you screen out investments that
don't meet your environmental, social or governance criteria, you'll inevitably
be screening out some high performers. You won't necessarily earn lower returns
by pursuing an ethical investing strategy, but it will take more work to track
down the right investments.
Expending Time and Effort
Socially responsible investing is not a passive strategy. It takes a lot of
time and effort to track down and review all the research you'll need to make
your decisions - more time and effort than it would take if you were solely
focused on financial performance. Once you've found investments you like, you
have to keep tabs on them to make sure they meet the ethical and financial
goals you expect them to. Sometimes you'll have to sell investments that fall
short and find new ones to replace them. If it all sounds like so much work
that you feel totally discouraged from investing at all, you might want to
invest conventionally and commit to donating a percentage of your profits to
charity.
Overcoming High Fees
If you choose to invest in socially responsible mutual funds, you might
have to overcome higher expenses than you would as a conventional investor.
Essentially, what you're paying for is to have someone do all the difficult
research on ethical and financial performance for you. If you're busy and if
you trust the mutual fund company, this price may well be worth it. But high
expenses can really drag down your returns, especially over the long run. Will
you still be able to meet your financial goals if you're paying expenses of
1.2% annually instead of 0.2%?
Going Against the Tide
Socially responsible investing is still a small part of the overall market. The
majority of investors don't decide what to buy or sell based on the same
criteria that socially responsible investors use. Lots of investors don't give
much thought about what they invest in - they just choose the options that their
401(k) manager recommends given their anticipated retirement date, or they pick
an S&P 500 index fund and forget about it. Once again, you'll have to work
harder to find the news and information you'll need to make your investing
decisions - you may not be able to find it in conventional financial reporting
sources.
Courtesy : Investopedia
