Can you invest while keeping an eye on social concerns, or should the two be mutually exclusive? The objective of any investment strategy is, obviously, to maximize returns. The objective of life, one might argue, is to do good while avoiding evil. Therefore, some investors' interpretation of the latter goal means compromising the former one.
TUTORIAL: Value Investing
Some investors, indeed the managers of some mutual funds, refuse to place their money with tobacco companies, casino operators, firearms manufacturers and/or military contractors. Others take a positive approach, seeking out wind power companies and their ilk. Then there's USA Mutuals, with its candidly named Vice Fund (Nasdaq:VICEX) that picks up specifically those stocks that their more restrictive counterparts want no part of.
If any company remains in business long enough, and achieves some modicum of profitability, sooner or later some interest group will accuse it of exploitation. Some groups advocate that McDonald's makes children fat. Environmental groups go after American Airlines for producing greenhouse gases, International Paper for destroying the rainforest and Exxon Mobil for poisoning the air.
Even what is arguably the best-loved company in America isn't let off the hook. Apple's (Nasdaq:AAPL) mammoth vendor Foxconn, the company that actually made your iPad and iPhone, achieved notoriety in 2010 for a series of employee suicides. But Foxconn is so enormous, with 920,000 employees in China alone, that a handful of suicides would seem statistically inevitable.
What's more, Foxconn isn't under Apple's auspices. It supplies just about every tech giant you can think of, including Microsoft (Nasdaq:MSFT), Cisco (Nasdaq:CSCO), Dell (Nasdaq:DELL), IBM (NYSE:IBM), Hewlett-Packard (NYSE:HPQ), Motorola (NYSE:MSI), Toshiba (OTCBB:TOSYY) and Amazon (Nasdaq:AMZN). But Apple is Foxconn's highest-profile customer, and Foxconn itself doesn't plaster its own logo on every item that leaves its factory, therefore it's Apple that bears the brunt of the criticism.
However, purely from an investment standpoint, does being indirectly tied to employees jumping off buildings mean anything? Mere months after the Foxconn suicides began, Apple bypassed Exxon Mobil (NYSE:XOM) to become the world's largest corporation by book value. (For more insight into analyzing companies with less-than-great repute, read Playing The Sleuth In A Scandal Stock.)
There are few words as loaded to First World sensibilities as "sweatshop." It conjures up images of downtrodden laborers operating under the hand of an angry floor boss; or worse yet, that of a cold and impersonal corporation populated by empty suits on the other side of the world.
In the 1990s, critics saw Nike as the primary beneficiary of cheap labor, allegedly exploiting innocent workers in Southeast Asia while marking up prices extravagantly. It could be argued that for many people in Cambodia, a nation where 58% of the populace work as subsistence farmers, a Nike factory job is seen as a good career.
In Cambodia, few prospects are as enticing as indoor employment, where you get to sit down, work set hours and have days off. Given the purchasing power of the nation's currency, a Cambodian job that pays less than American minimum wage may still provide a decent standard of living.
Still, for a clothing manufacturer, even the faintest association with the word "sweatshop" means devoting resources to a defensive public relations campaign and fending off accusations. Even today, Nike remains an easy punchline, largely because of the company's name recognition.
Negative PR, justified or otherwise, has minimal impact on a company's long-term prospects. In the early 1980s, before tamper-resistant packaging became commonplace, a murderer in Chicago added potassium cyanide to several bottles of Tylenol and killed seven people. It's hard to imagine a worse development for a company than that, yet today Tylenol maker Johnson & Johnson (NYSE:JNJ) remains a staple of the Dow 30. (For more on how bad public image can affect a company, read Does Bad PR Make For A Good Investing Opportunity?)
To our knowledge, no company has suffered lasting damage as a result of opening a factory in a poor country, printing its catalogs on paper from old-growth forests, or in the case of Tommy Hilfiger, having its founder falsely accused of racism.
When a company has its ethics called into question (excluding business ethics and adherence to law, a completely different subject), it's rarely the end of the world. Usually, all the company needs to appease the indignant (and get back to making money) is a brief mention on the company website about its commitment to corporate responsibility, loaded with words like "virtues," "stakeholders," "ethical," "progressive" and "fairness."
The Bottom Line
Borders Group never incurred the wrath of any nationwide protest movement; it merely sold books and coffee. Hollywood Video had business practices as ecologically sustainable as anyone else's. Lehman Brothers didn't produce anything physical, nor did it hire people at slave wages (far from it, in fact.) Yet all three went out of business in spectacular fashion in the last couple of years, because of obsolescence or excessive leverage. Unsustainable leverage, if you will.
Thus, it may not sound palatable to investors who espouse social responsibility, but non-economic objectives have little correlation to a company's bottom line. (For more on companies with a rough history, read Stock Scandals: Why Some Companies Survive.)
Bonds & Fixed IncomeThis derivative can help manage portfolio risk, but it isn't a simple vehicle.
EconomicsBusinesses use quality control to ensure their products and services meet a certain standard, as well as any industry regulations.
ProfessionalsRegulators, sales people and clients all look to communications professionals to help them navigate the markets.
Investing BasicsHow and why Mondelēz spun off from Kraft. Where the company is going, and how it profits on multiple continents.
EconomicsServant leadership emphasizes innovation, employee empowerment, and the development of leaders who serve an organization’s stakeholders first.
EconomicsCorporate culture encompasses the beliefs and behaviors that determine how a company and its employees interact and how they work with customers.
Economics3rd Q earnings season, a weak global economy, a strong dollar and collapsing energy prices suggest that the U.S. may be in the midst of a profit recession.
InvestingInfluential talks for 21st century managers chosen from TED, a nonprofit dedicated to spreading ideas worth sharing.
Investing BasicsDo great CEOs mean better returns for investors? Here are 14 stocks that show it might just start at the top.
Fundamental AnalysisCEOs, CFOs, presidents and vice presidents: learn how to tell the difference.
The first and primary benefit of a business stopping operations after crossing a shutdown point is that it won't run the ... Read Full Answer >>
Penny stocks are common shares of public companies that trade at a low price per share. These companies are normally small, ... Read Full Answer >>
Social responsibility is important to a business because it demonstrates to both consumers and the media that the company ... Read Full Answer >>
One way to provide employees with effective social responsibility training is to base training sessions on resources offered ... Read Full Answer >>
A number of factors play a part in making a business profitable, including expert management teams, dedicated and productive ... Read Full Answer >>
Starbucks CEO, billionaire and former sports tycoon Howard Schultz has several pieces of advice for would-be moguls and, ... Read Full Answer >>