Corporate Governance

Investment Companies and Social Responsibility

By J. Robert Brown

The topic of social responsibility, something occasionally explored on this Blog, is not limited to operating companies.  A couple of weeks ago, Fidelity Funds held their annual meeting.  Shareholders had submitted proposals designed to promote human rights.  What exactly did the proposal state?

• In order to ensure that Fidelity is an ethically managed company that respects the spirit of international law and is a responsible member of society, shareholders request that the Board institute oversight procedures to screen out investments in companies that, in the judgment of the Board, substantially contribute to genocide, patterns of extraordinary and egregious violations of human rights, or crimes against humanity.

Management opposed the proposal, mostly because it interfered with the investment choices of the funds.  "The Fidelity Funds Board of Trustees recognizes and respects that investors, including those investing in this Fund, have other investment opportunities open to them should they wish to avoid investments in certain companies or countries. Shareholders of the Fund, however, have chosen to invest in this Fund based on its specific stated investment policies. If adopted, this proposal would limit investments by the Fund that would be lawful under the laws of the United States. For this reason, the Board of Trustees recommends that you vote "AGAINST" this proposal."

The proposals were rejected but not after displaying considerable support.  As the WSJ reported:

• In results revealed at an emotionally-charged meeting this morning in Boston, 25% of the shares in Fidelity's $12.3 billion Mid-Cap Stock Fund voted for the proposal. The tally was 21% in Fidelity's $12.5 billion International Discovery fund, 22% in the $8.5 billion Overseas Fund, and 23% in the $4.4 billion Canada Fund.

Investors who want to invest in socially conscious funds can select funds that promise to invest accordingly as a matter of investment strategy.  Most investors, however, are more concerned with maximizing returns and not worried about investments in firearms or gambling or cigarettes.  But in competing for funds, it is possible to combine both and achieve a competitive advantage.  

Proposals like the ones considered by Fidelity theoretically can impair return.  But in fact, it is likely that the number of investments foregone as a result of the policy would be modest and that the funds could still produce a favorable return.  For investors selecting a fund, therefore, would it influence their decision to know that the investment companies had in place a system of ethics that sometimes, in narrow circumstances, resulted in the avoidance of investments that  "substantially contribute" to immoral behavior such as "genocide, patterns of extraordinary and egregious violations of human rights, or crimes against humanity?"

Perhaps.  Said another way, social responsibility can be good for the bottom line.

Full post as published by The Race to the Bottom on April 22, 2008 (boomark / email).