Price on Value

The Five Percent Principle

John Price,Ph.D.

We all want the world to be a better place to live in. We may not agree on all the details but I think we can agree on some of biggies that we would like to reduce and even eliminate. Starvation, wars and crime would be a start. Exploitation of other human beings another. Protection of our earth for future generations is becoming more urgent every day.

Or, turning it around, we would all like to live in a peaceful world where everyone has the opportunity to recognize and live their full potential. As individuals we would like harmony with our neighbors and as nations we would like harmony with other nations.

Most of us are not in a position of sufficient power or influence to do much about these things on a large scale. This is where the five percent principle comes in. The idea is that we start from where we are and make a five percent increase in our efforts and actions towards bringing about positive changes in areas that concern us.

You are probably thinking what does this have to do with money and investing. The link is in two parts, both related to your own values. The first part is through investing in companies with products and services that you believe in. The second is through supporting causes that you care about. Just a small, but widespread, increase in these activities can bring about a hugely different world. But before I talk about this, I would like to give some general examples.

Family, society and the five percent principle

Do you care about your parents? If so, I am suggesting that you increase the time you spend with them by five percent. Or, perhaps even better, spend the same amount of time with them, but increase by five percent the amount of attention you give them. Be a five percent better listener.

The same applies to your children. Be five percent more appreciative and supportive of them.

Why five percent? Why not ten percent, twenty percent or more? Or two percent or one percent? All I can say is that both from my own experience and talking to a lot of people in my investment workshops and elsewhere, this seems to be the most effective level. When you try to implement a lower level you can have the impression that it is so low that it is not worth doing. When this happens it slips out of your awareness and you stop doing it.

On the other side, higher than five percent can end up making you feel too pressured and once again you stop implementing the principle. It is like making New Year resolutions. We start with a great flurry of excitement and determination, but if we set the bar too high then we quickly give up.

So five percent is a happy medium. It is high enough that you have the feeling that you are actually doing something. It is worthwhile starting. At the same time it is low enough that you are not overwhelmed by the task. It does not require superhuman resolve, nor is it so demanding that you quickly give up.

Of course, we can't really measure whether we are being a five percent better listener or whether we are five percent more supportive. It is more an inner benchmark that you set for yourself and which you are comfortable with. And no one is checking up on you to see whether you are five-percenting or not.

The idea of the five percent principle is that you can apply it to any, or all, areas of your life. Suppose you read in the newspaper about an increase in crime in a particular area, perhaps where you live. This upsets you. How does the five percent principle apply?

The first thing is to look at the problem from a personal perspective. You could start with the fact that all crimes are committed by the children of someone. Few of us imagine that our children would use drugs or steal from liquor stores. Yet clearly, on average, we have to do more to help our children to be stronger in resisting the pressures from their peers to be involved in illegal activities. The five percent principle could be implemented by being more open to the problems faced by your children, by spending more time with them, or by being more supportive.

Another approach could be to become more active in community planning meetings when they are discussing the issue of crime. Or more supportive of youth clubs or rehabilitation programs.

  This is one of the general ideas of the five percent principle. Wherever you see something that disturbs you, simply take a small step to increase your understanding of the problem and then, if you are able, take some action in whatever way you can.

You might be thinking that you see so many things that disturb you that even if you only take small steps in relation to each one, you will still need 25 hours in the day. Don't worry. Just focus on the five percent of the areas that you find most disturbing or are the most important to you.

This is the five percent principle applied to the unsettling areas of your life. On the other side, we can apply it to the positive areas of our life. Being kinder and more considerate to our friends, our children, our parents. Giving others the benefit of the doubt and wishing them well in our hearts. Having tolerance for people's shortcomings. These are all ways that we can do our part to make the world a better place to live in.

Before looking at investing, there is one final point which may well be the most important point of the whole article. When you are trying to be more forgiving, more compassionate, more friendly, make sure you include yourself in this. If we always strain to 'do what is right' by the other person, then too often we become resentful, angry and mistrustful. This is not good for us and frequently not good for the other person since we can begin to take on a righteous, I-know-what's-best-for-you attitude.

Investing and the five percent principle

How does the five percent principle apply to investing? A first step could be to become five percent more aware of the social, political and environmental goals that you would like companies to have. Then you could compare these with the actual policies and actions of the companies you invest in. This could be followed by a five percent modification of your portfolio away from companies that don't meet your goals and towards those that do.

You can increase the proportion of socially responsible companies in your portfolio through avoidance screening and affirmative screening. Avoidance screening areas include alcohol, animal rights, genetic engineering, environmental issues (global warming, pollution and toxic products), gambling, human values, labour discrimination and exploitation, nuclear power, repressive regimes, tobacco, and weapons and the military. Examine your attitudes to these. Do you have any strong feelings about any of them?

Affirmative screening areas include clean transportation, environmental repair, natural foods, recycling, reforestation, renewable energy and conservation, and sustainability. What are your attitudes to these?

Another route to implement the five percent principle in investing is through putting some money in areas such as community development banks and credit unions, community development loan funds, and international microcredit banking.

The original community bank is South Shore which started more than 25 years ago when the current owners purchased a failed bank. It focuses on serving the inner city Chicago areas where it is located. "All our community loans are loans other banks probably wouldn't make," said Jean Fogge, a bank representative. "And loan losses are at or below industry standards."

Microcredit banking is the practice of making extremely small loans to people who would have no collateral and therefore no chance of getting a loan from a conventional bank. The Grameen Bank provides credit to the poorest people in rural Bangladesh. It is the largest rural finance institution in the country with more than 2.3 million borrowers, 94 percent of whom are women. Through over 1000 branches, the bank provides services in 38,951 villages, covering more than half of the total villages in Bangladesh. The repayment rate on its loan, which average $160, is over 95%.

Finally there is shareholder activism through dialogue, shareholder resolutions, and public strategies. Starbucks is a company with a commitment to environmental care. This probably made it easier for the stockholders and customers who expressed their concern about the effect on songbirds of Starbuck's methods of growing coffee. The company responded by forming a partnership with Conservation International to develop coffee production methods that are friendly to birds.

Another example of a company that tries to be a 'good' neighbor is Reebok. It commissioned an independent report on labour conditions in its Indonesian factories involving 1,400 hours of studying conditions and interviewing workers. Full credit goes to Reebok for making public the results of the report. Many were decidedly unfavourable but the company has been systematically implementing solutions ranging from installing new safety systems to providing education for workers on their labour rights and means of resolving complaints and disputes.

In the United States, roughly 13 percent of all money under management is invested in a socially responsible manner according to a 1999 study by the Social Investment Forum. This amounts to $2.16 trillion in assets, up a strong 82 percent from 1997 levels.Another area where individuals can and do make a difference is through donations to charitable and philanthropic organizations. The latest report from Giving USA states that US foundations distributed $13.37 billion in 1997. In many cases the donations do not have to be large to make a meaningful difference. Also you could consider making donations in terms of time or of expertise.

Phase transitions

I recall reading that someone said that not only did change come about through the joint action of individuals, but that this is the only way it takes place. This is really the heart of the five percent principle. When enough people begin to act even slightly in a new way, then change is inevitable. Also it may not need to be a large proportion of people. For example, many physical and biological systems exhibit a phenomenon whereby just a small change in a few of the components brings about a dramatic change in the whole system. This is called a phase transition.

On a personal level the five percent principle can certainly bring a phase transition to increased quality of individual and family life. If adopted by a sufficient number of people, I believe it can do the same on community, national and international levels.

I hope you will join me in having more 'five percent' days.