2006 Lane Reports

Investors Advocating for a Change?

Wednesday, March 1, 2006
by Marc J. Lane


Socially responsible individuals and institutions seeking to realize competitive profits on their investments need not sacrifice their core values to do so. And investment advisors who shrug off their fiduciary duty to give voice to their clients' values sell their clients short.

Both in the boardroom and in society at large, socially responsible investing (or mission-based investing, as institutions call it) can effect positive change. Take the leadership role played by the California Public Employees' Retirement System in challenging the outsized pay package Dick Grasso received from the New York Stock Exchange, and in forcing The Walt Disney Company to separate its CEO and Chairman functions and thereby promote independence and accountability.

The potential for shareholder-driven change in corporate America - - and in society - - is huge. Yet, most investors and their investment advisors haven't armed themselves with the enormous power of "Advocacy Investing," the positive strategy of aligning one's core values with those of the companies that share them.

They may salve their consciences by choosing the more limited, and sometimes deceptive, negative screens offered by traditional SRI strategies -- declining to buy tobacco stocks or to fund the war machine, or by steering clear of other businesses they find objectionable. Or, fearing that screening out whole industries might sabotage their investment returns, they may hold their noses and honor the guiding principle of Modern Portfolio Theory that a prudent investor grows wealth through broad diversification.

Advocacy Investing is a more prudent strategy that actually empowers the ethical investor. It promotes the individual's values -- or drives the institution's mission -- without increasing a portfolio's volatility or sacrificing investment returns. The portfolio reflects the investor's convictions in a meaningful, yet practical way.

So, an investor who is dedicated to promoting human rights or cleaning up the environment can be true to himself (or its mission) and invest only in companies that have exemplary human rights or environmental records, while insisting that every company pass all the exacting financial tests it should.

For example, investors concerned about social justice might favor companies such as General Electric Company, Bank of America Corporation, and Johnson & Johnson, whose boards are diverse, whose working conditions positively impact persons with disabilities, and whose workplaces are among the best for working mothers. But they might steer clear of Computer Sciences Corporation, News Corporation, and Newmont Mining Corporation, whose diversity practices are poor and whose pensions are substantially underfunded.

And those who are concerned about the environment might want to back companies such as Baxter International, Inc., Agilent Technologies, Inc., and Xerox Corporation, whose commitment to clean energy, recycling and environmentally friendly products sets them apart from their peers. They might shun Valero Energy Corporation, Kerr-McGee Corporation and Duke Energy Corporation, which are among the top emitters of toxic pollutants, have accrued millions to cover their environmental remediation liabilities, and face continuing regulatory problems.

Investment selection becomes a finely honed process where the investor's social or environmental concerns are matched against the company's performance.

It is also a process characterized by laser-like precision. Principled investors aren't monolithic. Each has his/her own unique take on issues other environmentally or socially responsible investors may deem more or less important. If, for example, one individual investor cares about the way indigenous peoples living near a company's operations are treated, another might be more concerned about a company's innovations in child care, elder care or flextime. And an institution whose stated purpose is to limit the emission of toxic chemicals might be noncommittal about a company's choice not to make use of recycled materials, the very mission of another charity. Each investor's portfolio should represent only those companies whose business practices are fully consistent with the investor's beliefs or institutional mission.

My original research, tracking corporate behavior over an eight-year period - - through good markets and bad - - found that the companies that earned the highest marks in advancing social justice and treating the environment with respect outperformed the Russell 3000. And empirical evidence strongly suggests that a company's social and environmental performance is irresistibly tied to shareholder value.

Corporate responsibility requires funding and involves trade-offs among business priorities. A company that voluntarily remediates its environmental hazards is usually perceived by its lender as more creditworthy, so its borrowing costs are bound to be lower; its return on equity -- and stock price, higher. Similarly, a company that treats its employees well is likely to suffer less turnover, incur lower recruitment and training costs, and enjoy greater productivity. And a company that markets safe products surely gains reputational value, earns greater customer loyalty, and builds more valuable brands.

The companies that demonstrate they're accountable to all their stakeholders are simply better bets. They're also likely to be more transparent, better governed, and shielded from the invidious risks and liabilities which led to the enactment of Sarbanes-Oxley. In short, they're likely to give their investors both a fair shake and a fair count.

But Advocacy Investing need not stop with an investment portfolio's design and construction. Proxy voting is the primary way shareholders govern the corporations they own. Voting one's shares is every investor's right, and the values-based shareholder's responsibility. Through proxy voting and shareholder initiatives, the strategy invites the ethical investor to the table where corporate decisions are made.

Like-minded shareholders, galvanized around issues of common concern, can form potent voting blocs to address proxy issues more strategically than ever before. When a unified coalition of investors weighs in on a company's labor or vendor standards, the climate risks it poses, or its sexual orientation policies -- management listens and, over time, is likely to act.

The case of ExxonMobil is instructive. Despite management's staunch opposition, a vocal minority of shareholders have voted to add sexual orientation to the company's nondiscrimination policies every year since Exxon Corp. merged with Mobil Corp. And every year the activist shareholders have seen their numbers climb. On May 25 their vote reached a whopping 29.5 percent, up from 13 percent in 2000. It's only a matter of time before ExxonMobil joins all the other Fortune 50 companies in explicitly protecting its employees from discrimination due to sexual orientation.

Advocacy Investing is the 21st century's answer to Rousseau's social contract. Once every company's management is held to account for its behavior, along with its financial results, we will all be better off. And the savvy investors who lead by example will leave a legacy measured by more than money.


Marc J. Lane is the President of The Law Offices of Marc J. Lane, a Professional Corporation, and of its financial-services affiliates. He is a business and tax attorney, a Master Registered Financial Planner, and an Adjunct Professor of Law at Northwestern University School of Law, Mr. Lane pioneered Advocacy InvestingSM, a proprietary approach to values-based investing which is discussed in his 32nd book, “Profitable Socially Responsible Investing?” With Advocacy InvestingSM, both equities and fixed-income securities are selected first by exacting financial and governance standards, as well as criteria reflective of each investor's unique social and environmental concerns.


View Todd Medland of WYIN interview Marc Lane about Advocacy Investing on February 28, 2006, click here


Please visit our new website www.AdvocacyInvesting.com and learn how Advocacy InvestingSM can help you achieve your financial goals while promoting your values and beliefs.

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The Lane Report is a publication of The Law Offices of Marc J. Lane, a Professional Corporation. We attempt to highlight and discuss areas of general interest that may result in planning opportunities. Nothing contained in The Lane Report should be construed as legal advice or a legal opinion. Consultation with a professional is recommended before implementing any of the ideas discussed herein. Copyright © 2007 by The Law Offices of Marc J. Lane, A Professional Corporation. Reproduction, in whole or in part, is forbidden without prior written permission.

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The Mission-Driven Venture: Business Solutions to the World's Most Vexing Social Problems

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