Money Matters - Simplified

Sin Stocks Revisited


"Socially responsible investing" has always been a frustratingly hazy term. While SRI finally received long-overdue respect in 2010, its definition hasn't gotten any less uncertain. But in 2010, the criteria for "socially responsible" investments -- and their opposite number, "sin stocks" -- began to expand in intriguing and unexpected ways.


It's far easier to define what socially responsible investingisn't. So-called "sin stocks" like gunsmith Smith & Wesson, weapons merchant Lockheed Martin, brewer Anheuser-Busch, and tobacco seller Altria obviously hold no place in any self-respecting socially responsible investing portfolio.

But earlier this year, the Appleseed Fund stretched its definition of socially irresponsible stocks to also include "too big to fail" banks, including Bank of America (NYSE: BAC),Citigroup, and Goldman Sachs (NYSE: GS). Compared to financial institutions whose reckless policies helped lead to an economic meltdown, a company that peddles booze suddenly sounds like a small fry in the ocean of corporate vice.

Put down that chainsaw
More recently, The Chicago Tribune posed an interesting question: Does the SRI fund community ignore layoffs when seeking out supposedly ethical companies? It pointed out that most SRI funds are reluctant to screen out businesses that have slashed workforces, even though treating employees well is a logical requirement for a "socially responsible" investment.

One notable exception is the Parnassus Workplace Fund, which seeks to invest in companies that offer solid benefits such as health insurance, 401(k) matches, workday flexibility for mothers, and severance pay in the event of layoffs. It also seeks out stocks of companies that don't pay their CEOs millions more than rank-and-file employees.

More SRI funds (and SRI investors) should probably try to follow Parnassus's lead. While it's understandable that financial need will sometimes drive companies to lay off employees, that justification becomes flimsy when those companies' CEOs continue to bank gigantic paychecks amid the onslaught of pink slips.

Last summer, the Institute for Policy Studies outlined "Layoff Leaders," revealing that companies that instituted the most mass layoffs during the recession happened to have the highest-paid CEOs.

Conventional wisdom's not always so wise
As much as SRI funds may feel like they're doing the logical thing by not screening out stocks for mass layoffs, workforce cuts might not always be quite so rational a path to long-term success -- especially if the CEO's feeling no pain. According to the American Management Association, 88% of businesses executing layoffs report declining employee morale.

Several surveys further contradict the "conventional wisdom" that downsizing boosts returns. One such survey studied the 1979 through 1997 timeframe, revealing that companies that announced layoffs produced negative investment returns. The greater the downsizing, the more negative the effect on the stocks.

Proponents of stakeholder capitalism recognize that happy employees help create products and foster environments that more consistently satisfy customers. Happier customers are more loyal, and less likely to defect to rivals. Sounds like a logical path to profitability to me!

Evolve or die
Compared to socially responsible investion, the more concrete rules other schools of investing thought offer are probably more appealing to many investors. Crunching numbers and poring over spreadsheets doubtlessly seems a lot simpler than pondering how corporations' actions will ultimately affect all of their many stakeholders.

However, while the SRI philosophy is ever-evolving and notoriously subjective, it may better reflect one great truth. Our marketplace is constantly changing, and the public's opinion of a specific corporation can make or break its competitive advantage over the long haul.

Social responsibility in its many forms certainly has been subject to a lot more attention -- and dialogue -- in 2010. In 2011 and beyond, investors of all stripes might benefit from keeping a close eye on its continued evolution.

© 2010 UCLICK L.L.C.