Stockholder vs Stakeholder

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Enron's ex-role: model of ethics
For the gurus of socially responsible investing, what lessons from a tarnished star?

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By Laurent Belsie, Staff writer of The Christian Science Monitor / March 4, 2002 Perhaps the ultimate irony about Enron Corp. is how it charmed ethical investors, even the pros, for so long. The Houston-based energy giant not only said the right things, it also invested in solar energy, addressed questionable labor practices at overseas facilities, and supported diversity in the workplace. Small wonder, then, that it earned a spot on the respected Domini 400 Social Index. Or that last March, the socially minded Calvert Group added the company to its index. Or that just months before the firm filed for bankruptcy in a still-unfolding tale of apparent financial chicanery, the nation's oldest socially responsible fund - Pax World Balanced Fund - still held Enron as its top holding. How did ethical-investing professionals get tangled up with such an unethical company? That story, plus the lessons those professionals have learned since Enron's downfall, could help socially responsible investors navigate through the minefields of corporate balance sheets to find truly great and good companies. But first, a caveat. While the gurus of SRI (social-responsibility investing) are wiping egg off their faces, so are many other Wall Street pros. Fraud of the kind alleged at Enron turns out to be very difficult for outsiders to detect. "Everyone has gone back and done a postmortem on this," says Anita Green, director of social research at Pax World Funds, in Portsmouth, N.H. "It simply wasn't there to see." That's why many SRI mutual funds are pushing the government for rules that would force more disclosure. "We learned what everybody has learned," says Julie Gorte, interim director of social research at Calvert, based in Bethesda, Md. "We need a better system of disclosure and transparency. It's really the bedrock of all investing." Of course, corporate officers who collude to hide transactions aren't going to reveal them, no matter how stringent disclosure rules become, these analysts say. The trick, then, is to beef up firms' internal oversight. SRI experts point to two areas of special concern: auditors and independent board members. Even before the Enron scandal broke, Pax World last year adopted a rule of thumb: If an auditor made at least 75 percent of its revenues from consulting with (rather than auditing) a firm, the fund would vote against the auditors at that firm's annual meeting. At the time, Ms. Green thought the standard too loose. Even so, Pax World wound up voting against the auditors 37 percent of the time. "It's very alarming," she says. With auditors earning such a high percentage of their money from consulting, "how can you possibly be independent?... I think you're going to be looking at us significantly lowering that threshold." Another problem: the independence of the corporate board. "This whole thing is a wake-up call for the SRI community," says Jay Falk, president of SRI World Group in Brattleboro, Vt., which runs several Web sites on social investing. "Investors don't have a whole lot of say in who is on their board of directors. It doesn't make any difference how many people vote against candidates if they're the only ones running." At the very least, he says, the board's audit committee should be run by a board member who is truly independent of the company, he says. But assessing that independence can get tricky. Outside directors can have ties to companies that aren't always apparent. "If that information is not available, it's extremely difficult to determine how clean a corporation's governance is," Mr. Falk says. Another caveat: Just because a company shows up on an SRI index doesn't mean it's a good investment. Typically, a listing means the firm has passed certain criteria - such as no involvement in tobacco - that a...
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