Last week I wrote about two arguments for putting money in a “socially responsible” mutual fund. One is simply to avoid being a part-owner of a company you think is no good. The other is the trickier proposition that socially responsible investing might bend the behavior of various nefarious villains of corporate America to meet their higher standards. Supporters of the latter idea point to how popular the social-investing notion has become. I’ve seen numbers—floated by groups who have an obvious bias—suggesting that as much as 12.5 percent of money under professional management is in one sort of socially angled fund or another. According to some numbers from Morningstar, which does not have any bias on the question that I can think of, the real figure is more like 0.3 percent. Maybe it depends on the definition. But even if you believe in that higher number, it’s not as if all that money is united behind some single common cause; there are funds screens tailored to match many points of view—religious, gay, pro-animal, etc. So the question of influence has to be brought down to specific cases.
Earlier this year Kinder, Lydenberg, Domini & Co. Inc., which determines what stocks may be included in the Domini 400 Social Index, gave the boot to Wal-Mart. The Domini Social Equity Fund, which seeks to track that index, is sort of the big kahuna among social funds, with about $1.2 billion in assets under management.
Wal-Mart is not exactly known as a poster child for progressive corporate behavior. It’s routinely criticized for wiping out mom-and-pop competitors and is roughly treated in, for instance, Barbara Ehrenreich’s current best seller, Nickel and Dimed, for its hard line against unions and supposedly callous behavior toward employees. Nevertheless, it had been blessed by Domini since the index’s inception in 1990—to the great benefit of Domini investors, by the way, since WMT has risen about 300 percent over the past decade. The main reason it got the ax (KLD explained in May) was a belief that the firm doesn’t do enough to make sure that its overseas suppliers aren’t running sweatshops that violate basic human rights standards.
So is Wal-Mart likely to change its behavior to get back in the good graces of Domini? If so, the company is being very quiet about it. On the one hand, KLD’s action got some publicity. On the other hand, according to this company profile in Yahoo!’s finance section, the two mutual funds that hold the most shares of Wal-Mart are the Vanguard 500 fund (assets around $75 billion) and Fidelity Magellen (assets around $85 billion). These also happen to be the two most popular funds in America. Hell, even Ralph Nader has put money in Magellan, which alone holds about $1.5 billion in Wal-Mart shares—a figure higher than the total size of the Domini fund. Some 2,952 institutions hold about 34 percent of Wal-Mart’s shares.
All this matters because, while I’m sure Wal-Mart doesn’t want negative publicity, there is meanwhile still the matter of these actual shareholders who are motivated solely by rising share prices. This past June, at the company’s annual meeting, an anti-sweatshop resolution was voted down, opposed by 91 percent of shareholders. I’m sure Magellan, on behalf of Nader and everyone else with money in the fund, joined the majority. The idea that a $212 billion company like Wal-Mart—or another major firm that’s widely owned by huge, popular investment vehicles—would behave differently so that some niche fund will buy in is wishful thinking.
A more plausible take on this question involves socially responsible funds trying to use their influence in companies whose shares they do own. A frequently cited example among people I spoke with was Home Depot, which a few years ago agreed to stop selling wood gathered from certain kinds of forests. This came about due partly to pressure from environmentalists and shareholder activists. (Domini, which owns Home Depot shares, played a role.)
Shareholder activism isn’t a new thing, and often the term is used in connection with the efforts of big pension funds and others to prod a company’s management into performing better for shareholders (targeting executive compensation schemes and so on). But the same tactics, including shareholder resolutions, can be put to use for a “social” agenda. An advantage is that it’s harder for management to ignore a shareholder than to ignore an outsider. In fact the Sierra Club, whose consideration of starting a socially responsible fund got me started on all this, has bought shares in G.E. and various “environmentally egregious” firms and will embark on its own owner-activist strategy in the months ahead. (It usually takes a year of ownership before a holder can sponsor a resolution.)
Of course, even in a best-case scenario, shareholder activism is a slow and imprecise tool. Its success ultimately depends both on ability to generate a certain kind of publicity and a company’s sensitivity to that publicity. Home Depot promotes itself as a socially concerned company, yet at its most recent shareholder meeting, management recommended against voting for a proposal to introduce tougher rules related to the labor practices of its vendors, and the proposal failed. This doesn’t mean shareholder activism is a waste of time; it’s just that it isn’t easy. And it still seems more likely to have an effect when criticism comes from within the ranks of shareholders than from without.
Actually, if you take that contention to its logical conclusion, maybe it’s possible to imagine something like a Brazen Hypocrite Fund: This would hold a broad range of companies engaged in activities that are presumably profitable yet somehow offensive to the fund-holders, who would then devote themselves to making those companies change. Whenever a firm cleaned up its act, the fund would drop it immediately, thus dodging any negative effects on the share price. It’s the best of both worlds! I’m kidding, of course, but then again, in a mutual fund market increasingly made up of specialty offerings, nothing would surprise me.