MULTINATIONAL MONITOR: How has socially responsible investing changed over the last ten years?
TIMOTHY SMITH:In the 1970s, it was mostly the churches [that] were filing shareholder resolutions or divesting of stocks in companies that were in South Africa, or who were looking at the question of screening portfolios [to avoid] companies that they felt were socially irresponsible. There were, of course, a number of individuals who were concerned about [corporate social responsibility] a decade ago.... In 1988 ... institutions and individuals with [a combined] $250 billion portfolio are filing shareholder resolutions to hold companies accountable on issues like fair employment in Northern Ireland or South Africa or Star Wars.

In this category, you would have institutions like TIAA/CREF, the Teachers Insurance Annuity Association/College Retirement Equities Fund, which is the largest pension fund in the world, the State of New York's pension fund, the City of New York's pension fund, the State of Wisconsin [and] the state of Minnesota, [all] using shareholder leverage ... along with the churches and a number of individuals and organizations like Common Cause....

There are [also] institutions who have decided to divest, to sell their stocks in companies with which they have a serious disagreement. For example, the State of California, the Smithsonian Institution, the cities of Washington, D.C. and Philadelphia and hundreds of churches, universities, foundations [and] state and city pension funds are divesting of stocks of companies that are in South Africa. And those institutions also have a [combined] portfolio worth [approximately] $250 billion.

So if you add institutions who are using shareholder pressure and those who are using avoidance, the divestment approach, on the South Africa issue alone you have institutions with $500 billion who are taking a position asking companies to leave South Africa.

MM: And how large is the total market?
SMITH: TIAA/CREF and the State of California often own 1 to 2 percent of a company's stock but you're not talking about coming anywhere close to a majority of the market yet.

MM: As far as shareholder resolutions go, how long has ICCR been in operation now?
SMITH: Almost 20 years. From the late 1960s when we had a research group that was our predecessor. But the first shareholder resolution was sponsored by the Episcopal Church in 1971.... It was on South Africa. And since that time, when we had to struggle to get about 3 percent of the vote, we now see some of these resolutions getting between 10 and 25 percent of the vote....A shareholder resolution is most effective when it's combined with a series of other pressures, when it's in the midst of a campaign.

So, for example, when you're running a campaign on baby formula abuse or equal employment opportunity in South Africa, the resolution can play an important part. For example, in about a third of the cases where these resolutions are filed, they are withdrawn by the sponsor because the company and the sponsor come to an agreement, a meeting of the minds. Now sometimes, that meeting of the minds can be a very specific policy change--'We want company x to leave South Africa and cut all ties there; we want bank y to end all loans to South Africa.' And after discussion and maybe debate and maybe pressure, the bank or the company agrees and the resolution is withdrawn because you have an agreement and a policy change.

MM: What are some of the leading examples of policy changes that have occurred because of this kind of pressure?
SMITH: Long before the anti-apartheid act was passed in 1986, the churches and others had been actively involved in putting pressure on banks to stop lending to South Africa. And by the time the act had passed, virtually every major American bank had committed itself to stop lending to the government and its agencies in South Africa and [to] most [of] the private sector as well. That was very much the result of combined pressures from local community groups, shareholder action and withdrawal of accounts from some banks that refused to be responsive. ...

I think shareholder resolutions played an important role in the baby formula debate. With Nestle being a Swiss company the major tactic there was the boycott, but the shareholder resolutions were used with U.S. companies....

On issues like equal employment opportunity, although they won't get the headlines ... shareholders can say to management, 'We don't care what the signal is you're getting from Washington, in terms of being willing to backslide on equal employment opportunity and affirmative action, we want you to stand firm on this.' ... J.P. Morgan was refusing to post the jobs that they had available within the bank, and therefore employees within the bank really had no knowledge of job openings that they could apply for, and the 'old boy's network' really worked well. A number of women's groups within the bank that we supported were asking for posting and a more affirmative action approach to employment, and we supported [them] with shareholder actions. [The proposal] was opposed for a year, and then the next year the bank decided to do it.

MM: Has any shareholder resolution ever received more than 50 percent of the vote?
SMITH: Very seldom.... A couple of times if management didn't ask for a vote against it, but if management opposes a resolution, I think in the history of shareholder resolutions there have only been a handful that have been able to pass....

Mr. Gilbert, who has been a traditional corporate gadfly for decades and raises questions of protecting shareholder rights has gotten some of his resolutions [accepted].... He goes back over 50 years in terms of pushing companies to do very simple things, like not always having their annual meeting in Wilmington, Delaware, or having a secret ballot. He also tries to get shareholders the best financial deal [possible]. So most people see the issues he raises not to be social justice issues, but more shareholder rights issues. But he's certainly plowed some ground for the rest of us who have been in this vineyard.

MM: Do most unions vote their pension funds with shareholder resolutions?
SMITH: No. The irony is that many unions gave away the power of the proxy years ago when they bargained and worked out their pension plans.... Unions who have the power of the proxy, do ... vote [their shares]. A few, like the United Auto Workers, have actually put on the bargaining table concessions that they wanted in the pension plan. For example, the UAW asked [auto companies] ... to allow [the pension plan] to exclude certain companies that are in South Africa. And that was agreed to by the management. But that was an uphill struggle, in other words, they did not automatically have the power of their leverage as shareholders.

MM: What would the impact be of unions controlling the voting of their pension funds?
SMITH: It would be significant not simply in the volume of the shares that would come into the debate, but the leverage. From my point of view, we're still not at the stage where we're talking simply about the number of shares--we're talking about the prestige of the institutions who are using them.

I understand that Harvard University recently decided to support resolutions that call for companies to leave South Africa. Now that's very late in the process, if you will, but I think what's important for the companies is not the number of shares that Harvard is going to vote or the letters they're going to write, but the prestige of that university.

So when the Smithsonian, which has George Bush on its board, voted to divest from all companies in South Africa, that sent a message too. If you're a CEO of a company, it may not simply be that you're worried about the 10 percent or the 20 percent or the 30 percent of the shares that were voted a certain way but you're watching ... these institutions develop a credibility gap with the company, and you worry about that as well.

MM:Have divestment campaigns been aimed at targets other than South Africa?
SMITH: A little bit. There now is legislation that has passed a number of states on fair employment in Northern Ireland, saying that if a company is in Northern Ireland and doesn't subscribe to the MacBride Principles, a set of fair employment principles named after Shaun MacBride, the Nobel Peace Prize winner, that they should either divest of that company--the State of Connecticut has legislation like that--or use their shareholder leverage to put pressure on the company.

South Africa's a rather unique issue; it's helped break open the mold. Now institutions are asking questions about management on a whole range of issues. Corporate governance concerns are being very vigorously pressed by state pension funds in the State of California or the State of Wisconsin, which are opposing 'golden parachutes' for top management or 'poison pills' to stop takeovers.

MM: How do you select targets?
SMITH: I think it's clear that in the ethical investment movement there is no pure corner. [People] who think that simply because they've done some screening of their investments or where they buy goods or services or where they bank [that they therefore] have no social problems ... [are] deluding themselves. It's a question of degree.

You could have a socially screened portfolio with a very narrow screen. Some people might traditionally have decided not to invest in companies that were involved in liquor, tobacco, or gambling--it's still a socially screened portfolio, but a very narrow screen. But institutions like the Calvert Fund and the U.S. Trust Company in Boston, Fidelity Bank in Philadelphia and Working Assets Money Fund all have very intricate screens, where they have taken the key social issues that they hear people asking about and have said that they are going to apply those screens.... If you're an institution or an individual that doesn't want to invest in any company that's in South Africa or has ties to South Africa, it's pretty clear that you can say company x is either in or out of South Africa, so you've applied that screen.

But what do you do with companies involved in the nuclear arms race?... Well, most churches wouldn't invest in Lockheed or invest in companies that make nuclear weapons. But what do you do if somebody is providing a part for somebody else who is making weapons? It's not a science, it's a series of judgment calls, and on issues like that or on the environment or equal employment opportunity, you have to say, "Looking at the company's record, and taking it into account, that the company is not meeting minimal standards." In one given year, you might say that a company because of South Africa and its environmental record is on the 'No Buy' list. But two years down the pike its environmental record might have really turned up and it might have decided to leave South Africa and it can go on the 'Buy' list.

MM: What is the real impact of someone simply not investing in a company?
SMITH: Well, if you're an individual, you might want your mutual fund to reflect your values--that's not unimportant. But company x doesn't know they were avoided while company y was invested in. A few funds will write companies and say, 'We have just learned this about you, and we're going to be forced to sell your stock unless you change your policy.' But if there's a major campaign the pressure is felt much more at corporate headquarters than it is by the small amount of money represented by the social investing community.... The impact is more general than specific.... There is a change of attitude, a change of atmosphere of expectations of corporations.

MM: Where do socially responsible investment funds put their money?
SMITH: Many of the stock choices of the social investing funds tend to be smaller capital companies, small capital stocks. But there still are some in the Fortune 500 that Working Assets might buy.

I think John Deere Tractor is not in South Africa anymore, for example, so that some social investment funds have bought their commercial paper. You won't see Chevron and Mobil and GE and IBM, generally, in social investment portfolios. As long as one doesn't try to pretend that you're dealing with the question of purity here--that you're investing in companies where there is no compromise. Of course there are compromises. But there are some companies that ... professionals in this area would lift up as examples they are very proud of. Ben and Jerry's ice cream or H.B. Fuller are often raised as examples by Franklin Management. There are other examples of companies that they say aren't simply companies that give you a good rate of return and pass the screen that is put in the portfolio, but companies they feel have a top record in terms of employee relations [and] community outreach....

I would say at least a portion of the social investment fund portfolios, would not necessarily [be] companies that you would say you're going to give an award to. They would simply be companies that have passed the screen and weren't involved in nuclear weapons, or South Africa or whatever.

MM: What is the Chicago South Shore Bank?
SMITH: The South Shore Bank, over a decade old now, is not simply a bank, it is a community development organization. It is a financial institution whose commitment is to serve and develop the community. They have not only brought vision to that process, but capital. [They] work with people locally to rebuild the South Shore of Chicago, which is a black neighborhood.... [Its capital] came from some individuals, some foundations, some churches.... It's one of the most popular places for people who are concerned about alternative investments to, for example, purchase certificates of deposit.

They even have certificates that they call "development deposits." ... South Shore's development deposits are attractive [even] for a fiscally conservative institution, [because] you can buy a certificate at South Shore just like you can with Chase Manhattan and you're going to get virtually the same interest rate and you're going to be insured to a certain degree by the FDIC, and you can be quite confident ... that you're not just earning your market rate of interest, but you're also having your money go to work in redeveloping that community in Chicago.

MM: Do these funds buy Treasury bills and government securities?
SMITH: I think some do and some don't. Some of the government securities they buy would be very specific, like Fannie Mae and Sally Mae, housing and student loan pools, that kind of thing, rather than a straight T-bill.

MM: Is it possible to get a market rate of return with socially responsible investing?
SMITH: Yes.... Again, [several] years ago as these things were beginning to be launched, there was a great deal of skepticism from Wall Street. [They felt] that you were going to pay a 'conscience penalty,' you were going to get less because you had excluded some good opportunities for investment. And the fascinating thing is that these funds have done as well as, and sometimes better than, the market.

MM: How is that possible?
SMITH: Because there are thousands of companies out there one can invest in. You don't have to invest in Chevron to make a dollar. You can invest in H.B. Fuller or Ben & Jerry's. But don't forget, in this case we're not talking about billions of dollars in these social investment funds. The leaders are at the $200 million mark.

MM: Doesn't it contradict the laws of economics to say that it is no more profitable to invest in countries with slave labor economies, it's no more profitable to just dump your waste in the river, it's no more profitable to try to cheat your workers?
SMITH: I understand your point. There is a logic to what you're saying, but there is also a logic to saying that a company that has an extremely good working relationship with employees ... therefore has a tremendous amount of employee energy and involvement that's unfolding and that those companies are flourishing. You can talk about positive social values that work in the workplace in terms of productivity.

MM: It seems to have been shown in this country over the past few years that if you go by the profit-making principle you're just not going to provide low-income housing--that it just doesn't pay.
SMITH: Housing projects certainly make an adequate profit, but they're not trying to make the excessive profits of a Donald Trump.

MM: Can enterprises that offer solid investments, that offer reasonable return and are socially responsible have hope of drawing capital?
SMITH: A church pension fund is as committed to making a profit for a pensioner as the state of New York's pension fund, or as the United Auto Workers pension fund.

MM: Do they have the same legal obligations as far as their fiduciary responsibility?
SMITH: Yes, they do. The rule of prudence and so on.

MM: Are they committed to seek maximum return?
SMITH: Well, the rule of prudence doesn't use the word maximum.... You don't just go for the big bucks that you can lose your hat on. But I think the major concern for a church pension fund or a state pension fund would be that you're investing someone else's money that they're going to live on in retirement, and you're very careful with that.

My point is that in those cases, those investments aren't going to [be] made totally ignoring what the return is. If you're investing in a company or in an alternative investment that you know is helping build low-income housing, you have to pay attention to the bottom line, just as you have to pay attention to the social bottom line.... There are numerous ... excellent investment opportunities, which are going to make a very solid return for an individual investor or an institutional investor, and [have] a solid corporate social responsibility record.

MM: Is one of the ideas in this kind of investing that there is really nothing wrong with the capitalist ethic itself, with making a profit, that it's just a problem of policy, that companies go about it the wrong way?
SMITH: I think you'd find a wide range of thinking on that question, and it's a key question, obviously. Some people will use the slogan, 'You can do good while doing well,' and that your social investments can make you as much return as anywhere else. [Others] are saying, as the Roman Catholic Bishops did in their pastoral letter, that the free enterprise system has severe problems, it causes extreme harm to many sectors of our population, it ignores many sectors, it does not include them, and therefore we can't just sail along saying the free enterprise system shouldn't be examined, shouldn't be critiqued. So you've got people all the way from one end of the spectrum-- people doing good while doing well all the way to people who are intent on building cooperatives, or supporting worker owned businesses, or supporting a local community development credit union.... It seems to me that that's a different vision.

MM: If you accept the perspective that the capitalist system is basically unjust, what kind of investment policy does that leave you with?
SMITH: That's a key question because you get caught in a bind of having a vision of a different system that in fact serves people rather than hurts them, and at the same time you live in the present day, where you have to put your pension money to work. I would say that for a diocese or a Protestant denomination that hopes to see an economic system that's [more] fair, more just, more responsive in the long-term, but lives in the present day, they need to be activist shareholders, putting pressure on companies on social issues. They need to have social screens where necessary, not to invest in some companies, and they need to be committed to alternative investments in a much more vigorous way--putting their money to work to rebuild on the grassroots level.

MM: What is the record of the big foundations in terms of their portfolios?
SMITH: In general the foundations ... use a different term--they have very limited program-related investments, or alternative investments. The Ford Foundation does have some ... but it's a very limited world. Some are active in voting their shares, but aren't involved in filing shareholder resolutions, and a few have socially screened their portfolios. The foundation world has not been very active in any of these areas. No foundation, except the New World Foundation, has filed a shareholder resolution.

MM: And do they support campaigns like yours?
SMITH: No, they don't. I'm not saying they're antagonistic, but at present they are not actively involved in corporate responsibility efforts.

MM: And do they seek to avoid holdings in South Africa and polluting companies?
SMITH: I don't think so. The list of foundations that I know of that have screened investments is a rather short list.

MM: What shape is the issue taking with state and city pension funds?
SMITH: First of all, there's a variety of approaches at work-- shareholder activism, divesting and putting some money into alternatives, where some of that money is invested in solid investments, but ones that are really aimed at housing, for example. And I think we'll see more of that in the future, all three of those approaches being used more actively.