SOCIAL TOPICS (Archive): HISTORY OF WALDEN ASSET MANAGEMENT/SRI

Published, April 1995

       by Robert Zevin

       Socially Responsive Investing (SRI) started at United States Trust Company when I came in 1975 with small group of clients who cared about the moral results of their investments, as well as their financial returns. These clients were early pioneers of SRI. I was fortunate to have been their (initially skeptical) student since 1967. By 1975 I was converted from a skeptic to a true believer.

       In the beginning I had accepted the conventional wisdom that applying social criteria to investments in stocks and bonds would necessarily harm results. My first eight years of experience did not confirm this belief. Clearly investors who applied social screens could do quite well.

       My other misgiving about SRI in 1967 was that it seemed better suited to making investors feel good than to improving society, in our view the ultimate purpose of SRI. By 1975 a number of new organizations, including the Corporate Data Exchange, the Council on Economic Priorities, and the Investor Responsibility Research Center provided investors with much more accurate and complete information about which companies were doing what and where. The Interfaith Center on Corporate Responsibility under Tim Smith had begun to organize and to focus and obtain wider participation in dialogues and shareholder motions with corporations. Although we could claim few victories in 1975, social investors had the tools and more important the intention to do good in the world.

       And so for the next 20 years USTC became the leading proponent of the idea that SRI enables one to do well while doing good, although we did not coin that epigram.

       A similar evolution took place in socially positive alternative investments where investment funds support cooperatives, low-income housing, worthwhile films and publications, democratic community development and other projects that are too unconventional and too small to be in the realm of traded securities or conventional loans and mortgages. As a rule, the alternative investments made in the 1960’s and early 1970’s were not successful. In retrospect I believe this was caused by a perhaps unconscious desire of individuals and institutions to use investment vehicles as disguised gifts.

       The emergence in 1973 of another exemplary institution, Chicago’s South Shore Bank, was symbolic of a new determination in our movement to be businesslike about all investments and to accomplish the greatest possible good with every investment as well as every gift.

       SRI funds managed at United States Trust Company grew from $10 million in 1975 to $40 million in 1980. In that year Stephen Moody joined us after six years of experience at the Council on Economic Priorities and as a foundation consultant. Stephen organized our social research criteria and methods, laying the foundation for our present extensive capacity for social research and advocacy.

       Until the early 1980’s, most of our social clients were relatively young people with inherited wealth. We were often asked to explain to a suspicious parent or reluctant family trust officer that social investing was entirely compatible with financial prudence and investment success. In the late 1970’s there was increased pressure on institutions to become more responsible in their investments, and in particular to divest holdings of companies doing business in South Africa.

       In 1980 we produced a pioneering study for the state of Connecticut on the (virtually non-existent) impact of different levels of South African divestment on prospective investment performance, encouraging that state to provide leadership in divesting, albeit to a modest extent. We took the “doing-well-while-doing-good” argument to city councils, state legislatures, university trustees, foundation investment committees and treasurers of religious organizations. From 1980 through 1987 we made well over 100 presentations to these organizations from Boston to Austin, New Hampshire to Washington, and Dartmouth to University of California. Our testimony and analysis was widely used by the divestment movement.

       In 1982 we were instrumental in creating the Calvert Social Investment Fund, which was the first mutual fund to adhere to a policy of divestment as part of a comprehensive set of social criteria. In 1986 we co-authored another major study of divestment, with SEI Corporation, for the State of Michigan. The state followed with a divestment initiative. The same was true of Boston, Austin, Nashville, Washington D.C., Baltimore, Cincinnati, Houston, Berkeley, Los Angeles, Wisconsin and numerous other cities and states.

       Also in 1986, we took on most of the professional investment community with our testimony on divestment to the Regents of the University of California. This was followed in 1987 by our devoting considerable resources to providing the City of Baltimore with the only expert testimony it could obtain in a suit challenging its divestment ordinances. The city prevailed in that landmark case. The State of California along with its university divested shortly thereafter.

       The real victories and lessons of the divestment struggle were beyond the confines of divestment itself. When New York City and the State of Texas reached beyond selling company stocks to threaten withdrawal of deposits from banks doing business in South Africa and of orders from textbook publishers remaining in that country, the results were nearly instantaneous. These withdrawals, especially of the banks, led to a severe South African currency crisis. Moreover, consumer boycotts and threatened boycotts by cities, states and universities prompted the likes of IBM, Coca-Cola, General Motors and Eastman Kodak to withdraw. Again, we played a critical role in developing the response of the anti-apartheid movement to these withdrawals, distinguishing genuine departures like Eastman Kodak’s from sham divestitures like General Motors’ which continued to supply South Africa with its brand names and technology and left open the option of regaining full ownership of its operations at any time.

       The energized constituencies from the divestment struggles in states and cities, colleges and hospitals, unions and churches created the political momentum to make the Anti-Apartheid Act the law of the United States in 1986 with even more profound effects on South Africa.

       We are proud of the role we played in this successful struggle and all concerned investors should be pleased with their contributions. At the same time, we must never lose sight of the important lesson that the role we all played as investors was only part of a movement for social justice that succeeded because it involved a broader coalition of constituencies.

       In some ways the divestment struggle was an exception and not the rule. It would not be practical or beneficial to put many countries on a divestment list in response to any but the most profound and prolonged abuses of human rights as in present day Burma. It is not always as feasible for a company to comply with our demands as it was for most companies to leave South Africa. For example it may not be realistic to ask tobacco companies to stop making cigarettes or defense contractors to stop making weapons or oil companies not to drill in places that the states and the federal government deem legal. These are all issues that need to be addressed by government policy more than corporate choice.

       Moreover, where corporate choice is the issue, investors have far more leverage if they retain ownership and speak out than if their only action is to sell stock. For these reasons social investing at USTC has been increasingly a matter of shareholder activism and dialogue with management rather than simply identifying companies that pass and fail various social screens.

       Our first foray into formal shareholder activity was our 1987 proxy proposal filed at Angelica Corp. which, at the time, was refusing to bargain in good faith with its labor unions. Ultimately, labor leaders credited our action with prodding Angelica managers to the bargaining table the next year to negotiate a suitable contract.

       Growing concern about corporate environmental performance in the late 1980’s spawned a spate of shareholder resolutions requesting that companies endorse the CERES Principles (then called the Valdez Principles), an environmental code of conduct. In 1989 we were one of the first sponsors of a CERES-based resolution at Consolidated Papers, a specialty paper producer held in portfolios of many of our social clients. In response, Consolidated published its first environmental report based on the 10 CERES goals. In subsequent years we filed resolutions at Gannett which ultimately produced a report, and at Oregon Steel Mills where we argued in favor of our proposal at the company’s 1992 and 1993 annual meetings when management would not address our concerns. Concurrently, USTC signed the CERES Principles and was humbled to experience the difficulties of producing an environmental report.

       As we entered the 1990’s the increasing demands of shareholder activism required an expansion of social research staff and resources. The research group swelled from one to five, and we expanded our resources relating to the environment, weapons contracting and equal employment opportunity. Our unique collaboration with Nuclear Free America to identify more precisely weapons contracts resulted in a state-of-the-art database which we made available to other social investment managers. We welcomed new initiatives at the Investor Responsibility Research Center and the Council on Economic Priorities to provide more comprehensive reporting on corporate environmental performance than previously available. Our capability to tap electronic databases vastly broadened the scope of our research.

       With these solid underpinnings, we began to apply the lessons learned from environmental shareholder activism to the virtually neglected area of equal employment opportunity (EEO). As in our environmental advocacy, we focused on the need for better public disclosure about company policies, programs and practices. In 1993 we first challenged Albertson’s to report the composition of its workforce. We targeted the supermarket giant because of a class action sex discrimination suit by a group of employees in 1989. Ensuing dialogue over the past several years finally came to fruition when the company announced in February it would be publishing a comprehensive report on its employment record this year. This is an example of where our long-term commitment to companies pays off.

       Similar efforts at R.R. Donnelley & Sons culminated in a special report published in 1994 and assurances of further discussions about EEO in the next annual report. In the past two years we have filed EEO proposals at four other companies and followed through with presentations at annual meetings. Five of the six targeted companies are now releasing EEO information.

       In addition to initiating EEO shareholder proposals in conjunction with our clients, we began to query portfolio companies and to scrutinize proxy statements for information about composition of boards of directors with respect to race and gender. Encouraged by our client the Sisters of Notre Dame de Namur, we broke new ground by voting against board slates without women and minority directors for clients concerned about more representative corporate decision-making. We are pleased that others in the industry are now voting likewise. Because of dismal EEO performance at top management levels at most companies, we testified in 1994 before the President’s Glass Ceiling Commission to promote better disclosure of EEO information.

       Our pioneering commitment to EEO shareholder activity prompted us and others to sue the Securities and Exchange Commission because it allowed Cracker Barrel Old Country Stores to omit an anti-discrimination shareholder proposal from its 1993 proxy statement. The initial ruling by Judge Kimba Wood favored our position that the SEC could not arbitrarily change its policy on the exclusion of shareholder resolutions. However her decision was subsequently overturned on appeal. We are now pursuing a decision by a full panel of judges since much is at stake for the rights of social investors to address actions of management.

       Of course there are innumerable ironies in these and all other aspects of SRI. If we are using the tools of shareholder activism to promote a better society, then we have an interest in protecting those rights. But shareholder rights are ultimately the right of a group with the most money or willing to pay the highest price to buy a majority of the votes. Shareholder democracy is dollar democracy. In any case, whether it is shareholders or dollars that rule the roost, neither attributes much implicit value to workers, the environment, sustainability or the community.

       These conflicts will occupy us for the next 20 years and will continue to make SRI a realm of challenge and excitement.