How much of a company’s Reputation is related to its social responsibility initiatives?

Here’s a new take on screening for Socially Responsible Investing.   Boston College (see our Useful Links) and Reputation Institute released a survey of the 150 largest corporations in terms of people’s perceptions of them, rather than what these firms actually did to improve their Corporate Social Responsibility (CSR) (e.g., improving governance).  Quite an interesting take on Do what I say, not what I do.  The theory goes, when companies do good, the word eventually gets out, and reputation eventually rises.

Hence, investors could search for top rankings in Boston College’s Corporate Social Responsibility Index.  Leading the list (Top 10) are:  Johnson & Johnson, Walt Disney Co., Kraft Foods, PepsiCo, Hershey, and SC Johnson (maker of Windex, and biologically friendly versions thereof).  Browsing through the top 50, it appears these are indeed potential SRI candidates.  (The exception is SC Johnson, as it is private.)

Missing from the list are Monsanto, BP (British Petroleum) Wal-Mart, and other controversial firms.  To Wal-Mart’s credit, the company’s rapidly changing its ways for the better !   Curiously, Green Mountain Coffee Roasters made it to the list (#15) even though the company is small relative to its blue-chip peers in the survey.  Further, it is currently under an SEC investigation over its inventory accounting with a key vendor.  It’ll be interesting to see how that investigation, and results thereof, affect its ranking.

While I do think this type of list that examines CSR is interesting, as it’s showing another angle to CSR, I still favor direct measures such as those tabulated by CR Magazine, or Fortune’s Best Places to Work for list.  Further, I do worry whether the results of this ranking of Reputation can be manipulated via a corporation’s heavy ad spending, etc.  Lastly, individual/industry rankings could be volatile depending on the ebb & flows of headline news (e.g., ah, those “evil banks”).  Hint, Hint:  notice few banks have made this year’s list !

When is the opportune time to make Socially Responsible Investments?

This is a question I get often.  As a long-term investor, I believe the time for Socially Responsible Investing is now…right NOW.  Long-term investors are not concerned over the current level of the stock market and whether the Market’s going to rise or fall the next day.

I propose investors be “fully invested” in equities most of the time.  Being “fully-invested” is different for different people depending on age, risk tolerance, etc.  As a Heuristic, I suggest being 75% long equities as a “base-case” level.  The remainder would be invested in bonds, real-estate, hard assets, and alternative/exotic investments (e.g., natural gas, platinum, rare-earth anyone?).

With that being said, there are certain times that are better to invest in the market.  Rather than choosing tops and bottoms based on certain fundamental criteria (e.g. price to earnings ratio), I have developed two Market Timing Indicators.  These indicators help me maintain objectivity with regards to my investment positions, as I have no influence on them.  They were designed during late 1992 and have been updated weekly since.

The two major indicators are:

1.    Sentiment:  based on human behavior, and supported by theories backed by Behavioral Finance. 

2.    Technical:  which measures market breadth, or underlying strength in the broad market.

These indicators are used to obtain my Portfolio’s Investment Position.  Note, they do not know, or represent market levels.  They are measures of perceived risk, especially the Sentiment Indicators.  I have often taken mental notes of how everyone seems to clamor to buy things when their expected rate of returns are minimal compared to their inherent risks.  Would you like a current day example?  Just take a look at the bubbling Corporate Bond market.  Companies like IBM, and Microsoft are borrowing at historically low rates, which are just a tad above Treasury rates.

This website will include three simple colored (traffic) signals.  Green for “Buy” (i.e, low-risk levels) which means allocate your portfolio to a fully-invested equity position.  For me, that’s about 75-80% invested, but it could be lower for a more-risk adverse, or retired individual.  Yellow, means caution, risk levels rising.  Red means “High-Risk”; investors should reduce their investment positions to conservative levels perhaps 30-40% equity.  The remainder could be in treasuries, gold, high-grade corporate bonds, etc.

What are the Indicators saying now?  My Indicators are now flashing “Yellow” making a case for rising risks.  The market could continue climbing under the “Yellow” signal; however, it’s more susceptible to sudden downward moves.

Feel free to contact me for additional clarity or to answer other questions.


They’re three methodologies utilized in Socially Responsible Investing.  I only favor one of them.  Read on to see which one and why.

  1. Negative Screening (“Exclusionary”)
  2. Positive Screening (“Qualitative”)
  3. Shareholder Activism (“Value Enhancing”)

There’s another lesser-known strategy called Impact Investing that’s used by foundations (i.e, Acumen, Rockefeller).  In this strategy, an investor (not individual) will actively seek to place direct capital in businesses that give social returns and $$$ returns.  The key here is direct investing.  Impact Investing is similar to venture capital as the investor might take an active role leading, or mentoring the company.  An example would be microfinance. We won’t spend any more time on Impact Investing as we’ll be focusing on ownership of public shares.

1.  Negative Screening:  is one of the first strategies historically used for SRI.  In this methodology, companies are excluded based on specific criteria.  Most of these screens focus on the avoidance of “sin stocks.”  These include the usual suspects:  Casinos, Weapons, Alcohol, Tobacco, and Nuclear Power.  Nuclear Power, you ask ?  It is easy to bulls-eye Nuclear Power given its association with nuclear warheads, and recollections of Chernobyl.  Then there’s the dillema of nuclear waste.  However, since Nuclear Power helps reduce Global Warming, I think their benefits far outway their disadvantages, and our fears.

2. Positive Screening:  This is a qualitative approach that invests in companies that serve their local communities, have ethical products, operate within a sustainable manner, and are very well aware of people/stakeholders.   This not only includes their direct labor, but supply chains (i.e, in Vietnam), and at an even higher level, international human rights.   Positive Screening will be utilized in this blog, and real concrete examples will be examined.

3.  Shareholder Activism:  In this strategy, an investor, in this case, an Asset Manager/Pension Fund, tries to enhance value by engaging the company.  Hence, the “activism” label.  The asset manager will identify underperforming companies in need of better management, which may be accomplished via proxy voting.  Or the Asset Manager might be protesting unjustly high executive compensation.  Shareholder Activisim is a more recent trend of SRI.  I disfavor this for several reasons.  For one, the individual investor has no involvement.  It is the machinery of a large asset manager that is making the decisions.  The other strategies are more personal, whereby the individual investor seeks to align his/her personal values with specific (long-term) investments.  Which segways me to my next concern – shareholder activism is more short-term oriented, and portfolios may not be very diversified as the asset manager needs to accumulate large share positions to gain voting power.  And do we really want the Carl Icahns of the world labeled Socially Responsible?  There is a place for Shareholder Activism in the world of investing. I’m just not sure it’s in the SRI realm.

What the heck is SRI ?

Before I start making specific recommendations, some house-cleaning is in order, well, more like “Back to Basics. ”  SRI stands for Socially Responsible Investing.  In some walks of life, one might consider this term Communist/Socialist.   Could this be true?  Social implies Socialism – not much of a stretch…  Responsible implies doing good (an action) for the common good.  You see my point ?  Well, in truth, it probably is a tad on the Socialist side.  I’d rather describe it as investing with the soul for all souls.

Should we be thinking w/ our Head or our Heart ?
There’s a sort of warm & fuzzy feeling I get when I read about a SRI-oriented company like Starbucks.  You can’t put your finger on it, but there’s something there, and you know it when you see it.  The purpose of this Blog will be to locate concrete tangibles I can share w/ you about these special companies.  ‘Cause, I don’t think a portfolio manager would accept,  “I gotta good hunch about this company” as a valid reason for making an investment decision.   And if he did, the asset manager would be subject to litigation for disregarding the Prudent Man Rule.

I’ve searched the Internet for the best information on SRI.  These are provided to you on the right side of this blog (“Useful Links…“).   Unfortunately, everyone’s definition of SRI is a different shade of blue.  Below, I’ve compiled them into one broad definition.  Later, I will discuss trends in SRI, including how this definition’s changed over time, as well as the 3 major strategies utilized.

Socially Responsible Investing (“SRI”) is generally an investment strategy that seeks maximum profits by investing in companies that exhibit ethical behavior. 

What’s in a name ?
SRI is sometimes called socially-concious (as opposed to anti-social & unconcious ?), or ethical investing.  In layman’s terms, Passive, or Index Investing would be considered somewhat of a polar opposite investing methodology.  Note that Index Investing is an excellent strategy for maximizing profits.  Stay tuned for my posting on whether SRI investing is a worthwhile endeavor.

Most researchers report SRI may date back to the Quakers (circa 1758), who prohibited members from participating in the slave trade – you know, the buying/selling of human beings (which still exists today in a different form).  I doubt SRI started as recently as 1758 as we tend to view history from our American (Western) point of view.  In my view, it likely started during the early days of global trade (perhaps hundreds of years earlier !)

Well, this ends my first official blogpost.  If you have any questions, please feel free to contact me.  And join my blog !

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