Peter Kinder is the president of Boston-based KLD Research and Analytics, an institutional investment social research firm which has investing screens that allow investors to avoid stocks deemed to be socially irresponsible.
There are now six KLD indices, with $7 billion of funds under management. The largest is the Domini 400 Social Index, which mirrors the S&P 500 and covers 250 of the largest US companies.
I interviewed Peter last week on the trends driving corporate social responsibility and investment. We also discussed the future of Sarbanes-Oxley.
SOX FIRST: Corporate social responsibility has been identified as one of the top trends changing business practice. But it was a marginal issue only a few years ago. What's changed? Can you see it becoming a mainstream issue?
KINDER:No company I know of wants to be known as 'socially irresponsible'. Going back to the 50s and beyond, companies wrapped themselves in the toga of social responsibility. And many took it and take it very seriously.
What changed was Milton Friedman and the neo-classical economists redefining social responsibility as the company's duty to shareholders to maximise share value within the limits of the law. This gave moral cover to managers and directors not inclined to concern themselves with other stakeholders' interests while providing the Friedmanites with a simple, tangible means of measuring performance without having to concern themselves about intangibles like employee well-being, community relations, the environment….
At least in the US, there is a real war going on over the definition of CSR in the economics and law faculties. The US Supreme Court has at least four judges who are deeply influenced by Friedmanesque dogma.
I think it's a race between the ideologues who wish to incorporate 'shareholder primacy' into the law and those who have a broader notion of CSR. So far, the latter are losing because the 'shareholder primacy' notion is so intuitive, albeit wrong as a matter of law and ethics. After all, they 'own' the corporation….
SOX FIRST:The debate about climate change is still raging. Has the ground shifted there?
KINDER:I think the debate over global warming ended last year. The combination of a record hurricane season, the incompetence of the Bush II administration in the wake of Hurricane katrina and the accumulation of outrage over the administration's anti-environmental programmes stopped it.
We've still got a rearguard action going on led by ExxonMobil. But from my perspective it's like watching the final days of Big Tobacco's defense of smoking. What is disheartening, however, are the numbers of companies leaping to take advantage of the last gasp of the old regime — 120+ proposed new coal-fired plants, etc.
The public knows the seriousness of the problem and wants it dealt with. As others — whom I can't cite off the top of my head — have said, in a democratic society interest groups small in numbers but with resources can block action the general public wants for a long time.
I'm more concerned that the 'debate' has shifted to what types of 'trading schemes' and 'market-driven solutions' to adopt. I believe we need a new regulatory framework with ambitious objectives that the schemes and solutions would support. We also need a neo-Keynesian job creation program that supports this effort and compensates for the depredations of globalisation.
SOX FIRST:Companies can be removed from KLD Analytics 'Domini 400 Social Index if they are deemed to have poor social and environmental performance. How does that work? How often do you assess the rankings? You recently removed Wal-Mart. Why was that? Are there any others that have been removed?
KINDER: Companies leave the DSI for social reasons in one of two ways.
First, they acquire or get into a business social investors don't want to own. For example, years ago Black & Decker acquired a conglomerate (Emprise, as I recall) filled with the proverbial 'cats and dogs'. One of the latter manufactured, as I recall, triggers for nuclear weapons, a violation of our military/nuclear weapons screen. So, Black & Decker had to leave the DSI until it divested itself of the unit — which it had tried to do from the point of acquisition. Today Black & Decker is on all three of our benchmark indexes, including the Domini.
Second, they prove unwilling to change after a long period of engagement. In the case of Wal-Mart social investors had engaged Wal-Mart for several years on 'sweat shop' problems. In 1999 or 2000, matters reached an impasse, and we decided to drop the company from the DSI. They are still off.
Yesterday, 20th April I heard a most impressive presentation from Wal-Mart's Sustainability director. Matters have, I believe, improved on supply chain issues. Depending on how they perform over the next years — we believe in evaluating performance rather than policies or promises of performance — we will consider putting them back in our indexes.
As a general matter, we update company profiles and rankings on a continual basis. So, if a clip appears that indicates company X has gotten into a major imbroglio with environmental regulators, we will check the information with the company and, if there's disagreement, with the regulator and other sources. We then add the information to the company's profile and publish it to our clients.
Depending on the nature of the dispute, its size, etc. and whether the company is on any of our indexes, the company may be flagged for review by the appropriate index committee(s). The committees have detailed processes they follow before they add or drop a company — including further discussions with the company.
SOX FIRST: In different countries, some governments have looked at the prospect of enshrining corporate social responsibility in law by setting down legal requirements for companies to look after stakeholders. What's your view on this?
KINDER:Since I'm a lawyer with a regulatory background, my perspective on the interface between law and CSR may be different than other people's.
I view laws and regulations as statements of the minimum behaviour acceptable by the polity. Given business's ability to water down implementing regulations and to limit prosecutions, and most importantly the gross imbalance of resources in the large corporation's favour in any dispute with government, the minimum expressed by statute often becomes a regulatory sub-minimal.
Codifying what might be CSR best practices bothers me not a whit. The good guys will continue doing what everyone should have been doing, and the not-so-good guys will be dragged — kicking and screaming — along. All to the good, I say. Let's remove incentives to race toward the bottom.
SOX FIRST: Has Sarbanes-Oxley pulled companies into line? Critics of Sarbanes-Oxley have recommended various changes because of the enormous compliance costs. What's your assessment? Does it need to be changed?
KINDER:SOX has surely pulled a lot of chains, but I doubt it's done much to pull malefactors into line. For those complaining about the costs of complying, I offer the sincere hope that they recall that eleven years ago most large public corporations lined up to destroy a much less invasive — but effective — regulatory mechanism that was completely 'free market'.
Many companies either directly or through conservative 'think tanks' supported 'tort reform', especially in the form of the Securities Litigation Reform Act of 1995. In both obvious and subtle ways, that Act virtually destroyed the shareholder's derivative action as a means of keeping management honest. If you want to understand why so many US companies felt they had a license to do as they pleased at the end of the 90s, you need look no farther than the removal of that check on managerial behaviour and record keeping.
So, when Congress had to do something in response to Tyco, Enron, et al., they were left with a lot of bad alternatives, almost all of which — by design — showed up in SOX. Why by design? Because Rep. Oxley strongly opposed any kind of legislation, and added provisions he — very wrongly — believed would kill the bill. SOX is the ultimate example of why one must always examine 'reform' bills sceptically.
All other things being equal – which they never are – I'd give the companies some relief from SOX. In fact, I'd back junking the whole thing in return for the total repeal of the Securities Litigation Reform Act. I see nothing in SOX that's better than the law pre-SLRA. If its repeal is not on the table, I wouldn't even discuss amending SOX except to make it more burdensome.
I expect there to be a lot of pressure to amend SOX as word of an increasing number of off-shore listings filters through the investment industry.