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Resources and Advisory Services
If you're
an investor that wants to turn around an underperforming portfolio company,
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Management
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A blog post from last week (below) produced quite a reaction, as one might expect.
For those that have followed this subject, we note three interesting items that came up in the wake of that post: - A friend alerted me to a fascinating debate among Milton Friedman, John Mackey (CEO of Whole Foods, a complicated man and a paragon of social responsibility), and T.J. Rodgers (CEO of Cypress Semiconductor, one of the more blunt and acerbic executives of the past several years) about corporate social responsibility that appeared in Reason magazine in 2005.
- Many saw this article from the New York Times about the "Nuns Who Won't Stop Nudging", the Sisters of St. Francis in Philadelphia, who push a pure corporate social responsibility agenda, and don't seem to care very much about what sort of returns they earn for their retirement funds.
- Another friend left an interesting comment on the blog, in relevant part:
Say that you have informed yourself about a company that, for example, makes genetically modified seeds that drive unsustainable methods of agriculture and are certain to lead to massive lawsuits down the road. Would it make more sense to actively challenge that strategy--to get shareholders and directors to re-consider and ultimately to realize there is something wrong here[?]
Let's reply to this last item, which essentially asks if an investor should agitate for change if he thinks a given "social" position (in this case, producing genetically-modified seeds) will lead to material cash flow problems ("massive lawsuits"). Setting aside the presumed certainty of the link between the social position and the cash flow problems, the question becomes, to what extent should an investor intervene if he thinks a given social position will hurt a portfolio company's business prospects?
We've heard this argument before, that sustainable and ethical practices are good for business. The question boils down to this, though: does the investor care more about the sustainable business practice, or the business's sustainable profits? And, how can we distinguish between the two perspectives?
Maybe another question can help test an investor's motives: would that investor agitate for change on another basis, completely separate from the social responsibility issue that led them to the company in the first place? In the case of a company that makes genetically-modified seeds, would that investor also submit a shareholder resolution on executive compensation? on paying excess cash as a dividend? or on any one of many other bases for becoming an activist investor?
It's easy to answer "yes". But, we've seen very few such business-oriented proposals from socially-responsible investors. Until we do, we will find it difficult to take seriously an investor that promotes only social responsibility at a portfolio company. |
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The Folly of Socially-Responsible
The social responsibility of business is to increase its profits.
- Milton Friedman
I may lose some friends this way, but socially-responsible activist investing wastes time and money. Shareholder proposals on corporate social and environmental responsibility matters at annual meetings distract investors, directors, and executives from much more important problems in governance and management. There, I've said it.
In a current blog post, we consider what Milton Friedman and Michael Jensen have to say about this subject, and show how socially-reponsible activism defies economic logic, as well.
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| You can find other useful resources at the TAI website, including our research on "Effective Activism, on the Cheap", the new guide to executive compensation, bibliography of academic research on the returns to activist investing, and our white paper with the basics on activism. |
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