Price on Value

Conscious Investing™:
Putting Your Money Where Your Beliefs Are

John Price, Ph.D. and Sandy Price

Imagine the scale on your ‘beliefs’ meter ranges from ‘wonderful, I fully agree’ to ‘indifference, it makes no difference to me’ to ‘outrage, this behavior should be stopped.’ Where did these first questions register on your meter?

Okay, now let’s change them around a bit. What is your response to these same questions if these benefits were available to your neighbor but not to you? Did you give the same response or a different one?

Now we’ll go a step further. What if their availability was so widespread that you were taxed the equivalent of two weeks’ pay every year to fund them? How did you go this time?

Those who read the articles by Bartlett and Steele know that taxpayers around America are getting deals like this. These taxpayers are called corporations and Bartlett and Steele label the deals corporate welfare. In the articles we read that in 1993 a foreign car manufacturer received a subsidy of $253 million from Alabama to build an automobile-assembly plant to employ 1,500 workers. The result: a subsidy of $169,000 for each job.

In 1994, Guymon, Oklahoma, put together an economic package worth $21 million to attract an agribusiness to set up a hog-slaughtering operation. Later, tax breaks for this business from Oklahoma totaled $100 million. At the same time, Bartlett and Steele explain that because of the hog farms and the open-air sewage ponds, life in Guymon has deteriorated to the extent that many residents seldom go outside without a face mask.

Increasingly investors are respecting their own beliefs and values when making investment decisions. No longer are quarterly earnings enough. For example, so many people are investing in socially responsible mutual funds that the total investment is now over one trillion dollars. Many others are following their own paths to clarify their investment values and act on them. The process of bringing as much honesty as possible into investment decisions we call Conscious Investing^TM.

Warren Buffett, the chairman of Berkshire Hathaway, remarked to the shareholders in 1997 that he was offered the chance to buy a company that manufactures chewing tobacco. He and Charlie Munger, his vice chairman, knew that it was going to do very well and subsequently it has. They did not, however, go through with the purchase. As Buffett explained, "We sat in a hotel in Memphis in the lobby and talked about it and decided that we didn't want to do it."

On the other hand, Buffett does own the Buffalo News which takes cigarette advertisements. Remarking on this, he said, "I just know that the one bothers me and the other doesn’t bother me. I’m sure other people would draw the line in a different way." Munger added, "I think each company, each individual has to draw its own moral lines," a comment which sets the theme for this article.

What are the benefits of investing in a company? From the side of the company, a common belief is that when you buy its shares through a public stock exchange, you are providing capital for that business. This is not the case. They got the capital from your new shares at the time of the IPO. You are, however, helping to make life easier for the company and its management.

Each purchase in the stock market creates upward pressure on the price of the stock. In turn, higher prices for its stock benefit a company and its management in three main ways.

1. It makes it easier for the company to raise further capital by issuing more shares. If the stock doubles in price, the same amount of capital can be raised by issuing half the number of shares, so less dilution of earnings and equity.
2. Management and founders of the company generally hold large numbers of stock and stock options; these people benefit from higher stock prices.
3. Management security is threatened by the possibility of a takeover. Higher stock prices make a takeover more expensive and hence less likely.

From the other side, the side of the investor, if you purchase stock you benefit from the profits that the company makes, whether these profits come through the sale of cigarettes or the provision of services to recycle waste products. These benefits come to you through dividends or capital gains.

We often read that the primary duty of a public company is to create profits for its shareholders. For example, in his editorial for the series of articles on corporate welfare, Norman Pearlstine, the editor-in-chief of Time, wrote that he does not view the companies mentioned in the series on corporate welfare "as villains." "Business enterprises like General Motors and General Electric are designed to make money," he writes. "They would be derelict if they didn’t seek to avoid taxes and gain special subsidies. No, the villains are the federal, state and local governments that reward some companies while denying similar largesse to other corporations and individual taxpayers."

How do Pearlstine’s comments register on your belief’s meter? How much bigger do you think governments would have to be to regulate fairly corporate welfare and close down loopholes?

Another question arises when individual welfare is considered. What if we consider welfare for the unemployed or single mothers. In your opinion, would such people be "derelict if they didn’t seek to avoid taxes and gain special subsidies."

Other people think that the responsibilities of a company go beyond maximizing profits for shareholders on a quarter by quarter basis. Stated goals include the creation of share-owner value over the long term hand-in-hand with the promotion of a stable, healthy society, social well-being and environmental protection. Some CEOs argue that the companies with the greatest long term value will turn out to be those with the strongest commitment to the use of sustainable energy and conservation of resources.

Long term value may also require not putting offside the suppliers and customers of a company. Warren Buffett even brings into the picture the people he associates with. "We would rather achieve a return of X while associating with people whom we strongly like and admire than realize 110% of X by exchanging these relationships for uninteresting or unpleasant ones," he wrote in the 1987 annual report. But this sort of action may actually bring an even higher return because it attracts the top management and provides them with the security to perform at their best.

When thinking about the social behavior of a company, the first question is what does it produce. Tobacco, alcohol, gambling equipment and services, genetically-engineered food, armaments and nuclear energy are products that raise a red flag for many people. The second question is how does the company go about this production. Is it a major cause of pollution or does it try to use renewable resources? Does it market products in a misleading or deceitful way or is its marketing open and honest? Does it exploit its employees or does it treat them in a dignified and cooperative manner? Does it entice people into financial over-commitment or does it encourage financial responsibility?

The next step is to use your beliefs meter and ask yourself how you feel about this company’s products or activities. The final step is to decide whether you are going to modify your investment activities. For some this means not investing in a particular company. For other investors it means the opposite. They invest in a company precisely so that they can go to its meetings and put forward their opinions.

Peter Kinder of Kinder, Lydenberg and Domini recommends another alternative. If you decide to divest yourself of a stock because of its products or activities, then write to the company and tell them why. "Even better," he says, "do that and let your friends know and write a letter to your local newspaper about your action." On the other side, if you like what they are doing, tell them so.

It may not seem like it, but things do change. Consider the fact that smoking is banned on most airlines around the world and tobacco companies have been ordered to make major financial settlements.

Whatever you do, in the end its your decision about how conscious you are about all aspects of your investments. But, as Shakespeare wrote,

To thine own self be true,
And it must follow, as the night the day,
Thou canst not then be false to any man.