Hey did anybody else find this story featuring Jim Keady in the
NYTimes on Saturday? The reporter is a longtime NYT staff guy, too.
You can say what you want about Jim, but he sure is "earnest"! This
also might help some people understand what Educating for Justice -
Keady's company - actually does. This stuff that came up at that
council meeting about Jim's business benefitting by his helping
homeless people find a place to stay is really misguided.
Maureen
Well-Meaning but Misguided Stock Screens
By JOE NOCERA
In a small, packed meeting room at the Manhattan headquarters of TIAA-
CREF, an earnest man named James W. Keady rose to make a speech. TIAA-
CREF, as you probably know, is a huge financial services firm, with
more than $400 billion in assets. Mr. Keady, 35, a former college
soccer player with a master's degree in theology, is the founder of a
group called Educating for Justice, which consists, essentially, of
himself and his wife. It has a budget of $80,000.
TIAA-CREF's primary mission is to manage the retirement accounts for
over three million academics, researchers, hospital workers and other
members of the nonprofit universe. (The initials stand for Teachers
Insurance and Annuity Association-College Retirement Equities Fund.)
Educating for Justice's mission is narrower: Mr. Keady wants to bring
the giant Nike Corporation to its knees.
Or at least to force Nike to drastically improve the pay and working
conditions of the thousands of people in developing countries who
work in the factories that produce its footwear. In 1997, Mr. Keady
was forced off the St. John's University soccer coaching staff
because he objected so strenuously to a multimillion-dollar deal the
school was negotiating with Nike. He has made Nike his life's work
ever since, even living in Indonesia for a while to better understand
the working conditions of the factory employees.
"Nike executives feel certain that the wages earned by people
producing Nike products are sufficient for meeting an individual's
basic needs in the local towns where goods are produced," he said
Tuesday at the TIAA-CREF mutual funds shareholder meeting, his eyes
ablaze with passion. "Unfortunately, based on Educating for Justice's
ongoing research of the same, we are not as convinced."
Like many activists, Mr. Keady was making his complaint to TIAA-CREF
largely because of the firm's reputation for a kind of genteel
activism. It also supports what's called socially responsible
investing: that is, investing in companies that have strong records
in areas like the environment and human rights, and avoiding
companies with poor records. In 1990, in response to complaints by
some of its academic clients who wanted to avoid investing in mutual
funds that held oil, tobacco, military and other "bad" stocks, TIAA-
CREF began offering its first "socially screened" investment product.
It currently has two; one of them, the CREF Social Choice Account, is
the largest socially responsible investing vehicle in the country,
with $9 billion in assets. And it clearly plans to do more. A few
weeks ago, TIAA-CREF came out with an updated policy statement on
corporate governance that stressed its desire to "engage with
companies on governance, environmental, social and performance
issues." One of its executives, John Wilcox, does nothing but manage
the firm's work in this area.
Indeed, after the meeting, Mr. Wilcox approached Mr. Keady, and they
huddled for about 10 minutes. Mr. Wilcox listened respectfully, and
offered to meet with Mr. Keady for a longer discussion.
But then I spoke to Mr. Wilcox, and discovered something that
surprised me. Nike, which had been kicked out of TIAA-CREF's socially
responsible funds back when it was first engulfed in controversy over
the treatment of workers in overseas factories, was reinstated in the
summer of 2005. Which means that TIAA-CREF had come to the view that
Nike had earned the right to rejoin the ranks of socially responsible
companies. But what, exactly, was that judgment based on?
I should concede right here that I've always harbored some suspicion
about socially responsible investing. The longstanding complaint from
skeptics is that it forces investors to accept lower returns
because lots of rising stocks are excluded for dubious social good.
But performance isn't really the problem. A number of socially
screened mutual funds have done just fine, and the benchmark Domini
400 index, which is made up entirely of companies viewed as socially
responsible, has actually outperformed the Standard & Poor's 500-
stock index over the course of its 16-year existence. Besides, most
mainstream mutual fund managers don't consistently beat the market,
so why should socially responsible fund managers be held to a higher
standard?
No, my problem is that socially responsible investing oversimplifies
the world, and in so doing distorts reality. It allows investors to
believe that their money is only being invested in "good companies,"
and they take foolish comfort in that belief. Rare is the company,
after all, that is either all good or all bad. To put it another way,
socially responsible investing creates the illusion that the world is
black and white, when its real color is gray.
Take oil companies. It's fair to say that the socially responsible
crowd has no use for energy companies. For years, the only oil
company such funds would even consider was BP, because of its early
warnings about global warming and its embrace of environmental
values. But in 2005, a BP refinery in Texas had a major explosion,
killing 15 workers and injuring more than 100 others. And last year,
the company spilled oil in the North Slope of Alaska. The world woke
up to the fact that BP had a pretty shoddy safety and maintenance
record.
At the other extreme is Exxon Mobil, a company many socially
responsible investors detest, because of its longstanding (and
recently abandoned) reluctance to embrace the global warming
consensus. Yet Exxon has a terrific worker safety record, and it
hasn't had a serious oil spill since the Exxon Valdez in 1989. So
which is the "real" good company here? You can probably guess which
way I'd vote.
The Nike case offers, I think, an even better illustration of the
underlying contradictions of socially responsible investing. It turns
out that the reason TIAA-CREF put Nike's stock back in its socially
responsible portfolio is that a company in Boston, KLD Research &
Analytics, had given Nike its seal of approval. KLD is a small firm
that constructs socially responsible indexes, including the Domini
400. Its 40-member staff includes about two dozen researchers who
supposedly dig into companies and decide which should be included in
its indexes and which should be excluded. Its biggest index, the
KLD Broad Market Social Index, uses the Russell 3000 as its universe,
which it has whittled down to 2,050 companies it deems acceptable.
TIAA-CREF is a client of KLD. That means that in addition to
licensing the KLD Broad Market Social Index and KLD's research
products, the larger firm accepts KLD as its ultimate arbiter of
which companies are socially responsible. Indeed, the prospectus for
TIAA-CREF's socially responsible equity fund specifically states that
its criteria for choosing companies are based on the KLD broad market
index.
Thus, last year, when KLD decided to toss Coca-Cola out of its
indexes for reasons including "controversies over how they market
the product to schools," according to Eric Fernald, KLD's research
director TIAA-CREF automatically followed suit. (I should point out
that this applies only to TIAA-CREF's socially responsible funds, not
its other investment products.) Although not every one of its clients
accepts KLD's word as gospel, the firm's screening methodology is
widely accepted among socially responsible fund managers, and it
consequently has a great deal of sway.
I spent a lot of time this week talking to people at KLD, including
its co-founder and president, Peter Kinder. They are smart and
likeable, and their heart is in the right place. But I came away
thinking that that sway was undeserved.
Consider, first, the size of the place. Two dozen researchers are
monitoring 3,000 companies and writing in-depth reports? How is
that even possible? It's not. Mr. Kinder told me that the employees
almost never go abroad to do on-site inspections, but rely on media
reports, blogs, interactions with activist organizations and
conversations with the company itself. That hardly seems like enough
to make a decision on whether a company is good or bad.
Then there's the question of how KLD goes about reaching its
conclusions. Nike's relationship with its manufacturers abroad was
first brought to light by activists in the 1990s, who wanted to find
a big brand that captured people's attention. As the largest seller
of athletic shoes in the world, Nike was the obvious target. But Nike
was using the same factories as Reebok and other shoe manufacturers,
including Timberland, a darling of the socially responsible crowd.
While Reebok and Timberland stayed, only Nike was ousted from the KLD
index.
When I asked Mr. Fernald to explain why Nike was bad, but Reebok was
good, he said, "We wrestled with that at the time." Reebok, he said,
had taken some positive steps, but more than that: "Nike was the
market leader. And there is an extra burden for the market leader."
In other words, Nike was being punished because it had beaten its
competitors in the marketplace, not because its practices were any
worse than anyone else in the industry.
Today, a decade later, there is no doubt that Nike has done a lot to
change its ways. It monitors its supply chain rigorously. It
publishes data on its Web site. It has become a company deeply
invested in corporate social responsibility, with 97 employees
working solely on that division. Hannah Jones, who leads Nike's
efforts, told me that corporate responsibility was now embedded in
the fabric of the company.
Ms. Jones also said that the company has come a long way in helping
those factory workers. And virtually everyone I spoke to, with the
exception of Mr. Keady, agreed.
But it is also true that for most of those workers, pay is still low,
conditions are still less than ideal and change is slow in coming,
something Nike is pretty forthright in conceding. There are still
lots of problems at the factories that make Nike sneakers.
Yet Nike is now back in KLD's good graces. Which is fine. But when I
read a recent KLD report about Nike I had no sense that the firm had
any deep knowledge of what is actually going on in those factories
and how much of it is Nike's responsibility. Mostly, it was compiled
from news clips and the like, much of which was from 2004 or even
earlier.
"To throw them out was a questionable decision," said Dara O'Rourke,
an associate professor at the University of California, Berkeley, who
has closely studied Nike's overseas outsourcing. "And to put them
back in was equally questionable." In his opinion, both decisions
were based more on public perception than reality.
Surely, he's right. It would be nice if we could invest our money
only in companies that had terrific human rights record, fabulous
environmental values and wonderful compassionate cultures.
Too bad it's impossible.
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