Does Gender Influence Corporate Responsibility?

A recent study, Gender and Corporate Social Responsibility, from Catalyst and Harvard Business School found that companies with more women serving on their boards and more women among the ranks of corporate officers contribute significantly more than companies with fewer or no women in senior roles.  Average donations of companies with three or more women directors were 28 times higher than those of companies with no women directors.  Companies with 25% or more women corporate officers as of 2007 made annual contributions that were 13 times higher than by those with no women corporate officers.

A cynic might say that higher charitable giving has a negative impact on the bottom line; after all, the money given away represents a cost to the company.  But could it be that women are better able to recognize the value of targeted philanthropy?  Corporate philanthropy is a cornerstone of corporate social responsibility—women may help companies tap into the benefits of integrating responsible philanthropy into their business models.

By the Numbers

A report by Catalyst, The Bottom Line, Corporate Performance and Women’s Representation on Boards indicates that Fortune 500 companies with the highest representation of women board members attained significantly higher financial performance, on average, than those with the lowest.

The study also revealed stronger-than-average performance at companies with at least three women directors on three key indicators.  Companies with the highest percentage of women on boards exceeded average return on equity by at least 53%, return on sales by at least 42%, and return on invested capital by at least 66%.

A Missed Opportunity

Women are woefully underrepresented in corporate boardrooms worldwide.  The 2011 Corporate Boards Report from Governance Metrics Inc. (GMI) found that of the 4,200 companies covered worldwide by GMI, the aggregate percentage of board seats held by women was only 9.8%.  In the United States, the aggregate percentage of female directors is just over 12%.  Even the most progressive of companies seldom have three or more women board members.  But as evidence continues to mount in support of the observation that gender diversity in boardrooms and executive suites can produce better outcomes for companies, shareowners, and communities, companies seeking to outperform their competitors need to re-evaluate how they choose board members and why.

For a full report on the benefits of increasing the number of women on corporate boards and the ongoing efforts by shareowners to improve gender diversity, read The First Affirmative publication, Deeper Thinking: A Woman’s Place in the Boardroom.

According to the Interfaith Center on Corporate Responsibility (ICCR), “Traffickers in the sex trade are gearing up for their most profitable weekend of the year.” Members of ICCR have been working with hotels and law-enforcement venues in the cities that host mammoth sporting events, including the 2010 World Cup in South Africa and last year’s Super Bowl in Dallas,to raise awareness of the risks of child sex trafficking that takes place during these events. ICCR targets hotels where much of the illegal activity takes place, providing assistance for training their staff to recognize trafficking when it occurs and how to report it to authorities.

Human trafficking reaches far beyond sporting events; it is prevalent throughout the entire global economy. According to the U.S. State Department’s 2010 Trafficking in Persons Report, an estimated 12.3 million people are victims of forced labor and human trafficking, and 1.2 million children are trafficked every year, primarily for sexual exploitation and child labor. Global annual profits made from trafficking—the modern world version of slavery—are estimated to be $31.6 billion.

Because much of the human trafficking is hidden within the global supply chain, Rep. Carolyn Maloney, D-N.Y introduced H.R. 2759, the Business Transparency on Trafficking and Slavery Act. If passed, the law will require companies with gross revenues in excess of $100 million to disclose existing policies and management systems designed to address trafficking, slavery, and other forms of human rights abuses within their supply chains. H.R. 2759 would apply to publicly traded or private entities and have far-reaching global impact. This bill expands upon the first of its kind California Transparency in Supply Chain Act, which enforces similar provisions on all retailers and manufacturers doing business in the state of California.

Socially conscious investors strongly support this bill to combat human trafficking. A coalition of institutional investors, research organizations, and investment firms, representing $42 billion dollars of investments under management, sent a letter to the leadership of the House, where support appears to be weak. The letter requests “the Republican leadership to ensure that the Financial Services Committee places H.R. 2759 at the top of its agenda and moves it to the House floor in an expeditious manner.” First Affirmative Financial Network is one of the 80 signatories.

Through April 2011, stocks performed well despite spiking oil prices after revolutionary unrest in the Arab world, and a global supply-chain disruption caused by the Japan earthquake and tsunami.

In late April major U.S. stock indexes reached their highest level since 2007, while small company stock indexes reached all-time highs.  Prices then retreated as investors’ focus turned to Europe’s debt crisis and congressional bickering over the U.S. debt ceiling.

Debt Crisis

Stocks churned throughout the summer, jumping for a week or two, and then falling back, as European policy makers scrambled at summit after summit to ward off the debt crisis.  Almost like clockwork, concerns about Greece defaulting, and even the possibility of breaking up the euro-zone, alternated with expectations that a crisis would be averted.

In early August, following a showdown in Washington over the U.S. debt ceiling, the rating agency Standard & Poor’s (S&P) downgraded the U.S. government’s credit rating.  The stock market reacted swiftly and violently.  The Dow Industrials gave up and then regained 400 points or more for four consecutive days.  Even after that wild week, volatility remained high for months, with the VIX* reaching sustained levels not seen since the fourth quarter of 2008.

Stocks Go Nowhere in 2011

For all the ‘sturm und drang’ that characterized the financial markets in 2011, the S&P’s 500 finished the year virtually unchanged.  But even this disappointing result is better than what well-diversified investors achieved.  Small and mid-cap stocks both lost ground in 2011.  International stocks got clobbered, especially emerging markets.

In spite of the slow economic recovery, American companies generated record profits last year, but the stock market’s positive fundamentals were no match for the unceasing parade of negative headlines from Europe (debt crisis), Asia (Japan earthquake, tsunami and nuclear crisis), the Mideast (the “Arab Awakening”), and the U.S. (legislative gridlock).

Amid the uncertainty, investors rushed to safety wherever they could find it.  Among the various categories of stocks, big, steady, dividend paying stocks did relatively well.  The Dow Jones Industrials Average beat the Russell 2000 Index (small-cap stocks) by its biggest margin in 13 years.

High Volatility, High Correlations

Volatility and correlations among stocks increased.  Last year there were 69 days in which 90% of the S&P 500 stocks moved in the same direction—more than the combined total from two other very volatile years, 2008 and 2009.

Will 2012 provide a return to normalcy, where stock prices are supposed to reflect fundamental valuations?  We can only hope.  True, stocks are attractively priced, with expectations for continuing corporate profit growth intact and price-to-earnings ratios at relatively low levels.  On the other hand, the political stalemate in the U.S. has not been remedied, and is not likely to improve in this, an election year.  Europe’s debt crisis is still unresolved as well.  With so much geopolitical uncertainty out there, it would be unwise to expect normal markets any time soon.

Why Fundamentals Matter

The headlines about European and American debt crises mattered more than fundamentals last year. If the market just ignores fundamentals, why should investors pay any attention to them?

In The Intelligent Investor, Benjamin Graham wrote, “In the short run, the market is a voting machine, but in the long run it is a weighing machine.”  This sentence is an apt description of how the financial markets operate.

The voting machine combines behavioral finance, high frequency trading, money flows, demographics, trading on rumors and news, etc.  When critics refer to the financial markets as a casino, they are referring to the voting machine.

But the market is also a weighing machine.  This is the essential reason why financial markets exist—to determine the value of financial instruments.

The voting machine element of the market causes securities to become mispriced in the short term.  The weighing machine aspect of the market causes securities to become accurately priced over the long-term.

Fundamentals Are Improving

In a recession, top-line growth (increasing revenues) becomes difficult, and so companies typically manage what they have more control over, which means they are very focused on managing costs.  This explains why companies have been slow to hire new workers, and inventories are being kept low.

A positive surprise on the economy causes consumers and businesses to spend, which translates into increased corporate revenues.  With extraneous costs having been squeezed out, every additional dollar of revenue flows right through to the bottom line to enhance earnings.  We have seen recent strengthening in U.S. economic indicators—never mind the bad news in Europe and in D.C. Furthermore, a strengthening trend can set a virtuous cycle in motion.

The S&P 500 Index ended calendar year 2011 at about 1,258. For the year, the Index generated about $97 of profits per share, a record.  Thus, its price/earnings ratio was about 13 (1258 divided by 97).  If 2012 earnings for the S&P 500 companies reach $107 per share (a reasonable estimate), and if the market’s price-to-earnings ratio doesn’t budge, the Index will rise more than 10%.

Is this a prediction?  No; we are simply pointing out that fundamentally, stocks are attractive.  What we cannot say is whether investors will notice.  In 2011 they didn’t, because the market behaved more like a voting machine.

Sentiment: A Contrarian Indicator

Normally, sentiment is a contrarian indicator.  When there is excessive optimism, the market becomes extended, frothy, and vulnerable to a pullback, or worse.  Conversely, excessive pessimism often causes stocks to become bargain-priced.

Market followers will recognize that they are not immune to the effects of emotion, and the urge to buy or sell at inopportune times.  How concerned were you in the depths of the 2008 financial crisis?  In retrospect, that was a good time to invest.  Did you get caught up in the dot-com bubble of 1999-2000?  If so, you probably got burned.  Except for Apple and just a handful of other companies, technology stocks that survived are nowhere near their 2000 highs, twelve years later.

Current sentiment readings indicate that today there is still a fair amount of pessimism priced into stocks.  In 2011 investors piled into Treasurys, despite the historically low yields available there, and the momentum has not yet shifted back toward stocks.

What Surprises Lie Ahead?

Perhaps the biggest surprise of 2011 was the gravity of the situation in Europe.  Now that we are more aware of the challenges there, it is hard to see how Europe can continue to produce negative surprises.  Certainly other surprises are in store; but will any of them disrupt the markets as much as the European debt crisis did in 2011?

Conversely, there is the promise of at least some clarity.  One way or another, on November 7, 2012, the results of the U.S. Presidential election will be in.  The stock market hates uncertainty, and in an election year, some amount of certainty is pre-ordained.  As far as the stock market is concerned, it may not even matter very much what the election outcomes are—just knowing that there will be a certain outcome may be beneficial.

Summary

If the hyper-attention to headlines that characterized investor behavior last year gives way to fundamentals, and assuming the US economic recovery continues, there is good reason to expect stocks to do well in 2012.  Competing investments are not very attractive: bond and savings deposit yields are low, and offer no growth potential.  Meanwhile, corporate balance sheets are very strong. Sentiment is pessimistic, a favorable indicator.  And although election years are not always good for stocks (e.g. 2008), when political gridlock is one of the major problems, the promise of clarity may provide a boost.

In 2011 investors fled from risk.  At some point, the fundamental case for stocks will once again attract investors. Maybe this year…

* Often referred to as the fear index or the fear gauge, the VIX represents one measure of the market’s expectation of stock market volatility over the succeeding 30 day period.

Kevin O’Keefe, Managing Member and Chief Investment Officer of First Affirmative Financial Network, LLC, is responsible for due diligence and monitoring of mutual funds and separate account managers.

 B Corps offer an alternative to “business-as-usual.”  A new class of corporation, B Corps are legally required to pursue the creation of a material positive impact on society and the environment, while meeting higher standards of accountability and transparency.  Current law requires corporations to prioritize the financial interests of shareholder over the interests of workers, communities, and the environment.

 B Corps are structured to maximize profits for society, not just for their shareowners.  With the growing public demand to move away from corporate greed and corruption, B Corps offer a much needed solution to better serving the “99%.”

 In December 2011, New York became the seventh state to legally recognize B Corps; joining California, Hawaii, Virginia, Maryland, Vermont, and New Jersey.  Similar legislation is pending in North Carolina, Pennsylvania, Michigan, and Washington DC, and will be introduced in Colorado in early 2012.

As of the date I am writing (December 9, 2011) the S&P stands at 1255.19.  Since July 1, 1999, we have experienced Y2K, 9-11, the Bear Market of 2001-2002 (one of the three worst in the past 100 years), the Financial Crisis of 2008-2009 (also one of the three worst Bear Markets in a century), and we are now living through the potential meltdown of the European Union.

In twelve and a half years, stock prices, like a roller coaster, have finished where they began; but the ride has been terrifying for many people.  This performance (or lack thereof) is being referred to as the “Lost Decade,” an especially chilling appellation for Baby Boomers nearing retirement age.

Possible Good News #1:

The Dividend Yield on the S&P 500 is higher than the Ten-Year U.S. Treasury Bond.

Stocks of large U.S. companies are extremely inexpensive relative to government bonds.  I would, personally, much rather own a portfolio of equity income focused blue chip stocks that are paying dividends of around 3.5%—and that also have the likelihood of both increasing dividends over time AND increasing in value—than owning 10 year Treasurys that will pay me 2% for ten years and then merely give me my money back.

Possible Good News #2:

Stocks are much more reasonably priced compared to earnings.  At the beginning of what is now being called the “Lost Decade,” stocks were more highly priced relative to 10-Year Trailing Earnings than ever before.  Investors paid a very high historical price, and failed to receive any reward.  (A possible corollary to gold today?)

 With stock prices versus trailing earnings at a much more reasonable ratio today, it is quite possible that the performance of equity markets over the next ten years will be much closer to “normal.”

Possible Good News #3 and #4

#3:  For each of the rolling 60-year periods ending from 1986 to 2010, the compound average growth rate of the stock market (as reflected in the S&P 500) has been over 9%.  This analysis includes the last eleven periods that include the “Lost Decade!”

#4:  Periodic investments into the markets[iii], such as in 401(k) retirement accounts, can still succeed.  This chart shows the history of an actual client who invested in 1996, and who has made monthly contributions to her IRA ever since.  Despite the “Lost Decade” her account is worth 51% more than the value of her contributions over time. 

Obviously, no one can accurately predict what will happen in the weeks or months to come.  But looking at longer-term trends and ratios can give an idea of what “normal” behavior is for markets and what is not.

[ii] Past performance is not a guarantee of future results.

[iii] Dollar Cost Averaging is a method of investing which can reduce the impact of short-term price fluctuations on your investment portfolio. It involves the investment of a fixed dollar sum at regular intervals over time, the result of which is an average price, based on the number of shares or units obtained at each of the prices prevailing on the dates of purchase.  Dollar Cost Averaging will not guarantee a positive return in a declining market.

As the Moderator of a panel on this subject at the 2011 SRI in the Rockies Conference, held in early October in New Orleans, I had the pleasure of interviewing Tom Hicks, Deputy Assistant Secretary of the Navy for Energy, and Vice Admiral (Retired) Dennis McGinn.  To listen to a tape

For reasons such as those identified above, the Secretary of the Navy identified the following sustainability goals in 2009:

“Energy Security  is critical to our success.  We will safeguard our energy infrastructure and shield ourselves from a volatile fuel supply.  We will:

•  Deploy the 21st-century ‘Great Green Fleet’

•  Aggressively reduce our reliance on fossil fuels

•  Secure a sufficient, reliable, and sustainable energy supply

Energy Efficiency  increases our combat effectiveness.  We will expand our tactical reach and minimize operational risks, saving time, money, and lives. We all take responsibility for energy efficiency.

We will:

•  Incentivize industry to be more efficient

•  Accelerate energy efficient technologies through greater investment in RDT&E

•  Adapt operational policies and doctrine to value energy as a strategic asset

Environmental Stewardship  is our responsibility. We will reduce the environmental impacts of our energy use,  lead in reducing greenhouse gas emissions, and promote sustainability.  We will:

•  Swiftly adopt cutting-edge low-carbon technologies

•  Consider carbon emissions in our daily operations and our procurements

•  Replace energy from fossil fuels with energy from alternative and renewable sources” 

To switch focus to another branch of service, the Army, which spent $1.2 billion on energy costs in 2010, is under legislative mandate to reduce its energy consumption 30 percent by 2015. To that end, one effort is the New Zero Energy Installations (NZEI), calling for installations to produce as much energy as they use in a year.  But even the U.S. Army is limited in investment options as funding for energy efficiency or renewable energy projects can be inconsistent. So the military is committed to working with utilities to reduce energy consumption, save money, and find creative sources of funding for energy projects. For utilities, working in conjunction with army installations can help increase profits, improve the company’s image, and meet their own energy conservation goals.

Fort Carson, adjacent to Colorado Springs, has one the most active and longest-running installation sustainability programs, which has included a large emphasis on energy conservation issues. Stretched across 138,303-acres, Fort Carson has about 750 buildings with 12.865 million square feet of heated space. With a long-term goal to reach 100 percent conversion of renewable energy for facilities by 2027, Fort Carson has developed the largest solar photovoltaic project in the Army, a 2-MW ground-mounted array on 12 acres atop a former landfill. In addition, with the direction of installation staff support, Fort Carson is interested in building a 7-10 megawatt wind farm, though construction is pending.

What does this have to do with investing?  As we learned from the space program and other government research programs (remember that the Internet and GPS systems for example,  began as  projects of the Defense Advanced Research Projects Agency- DARPA), when government agencies begin procurement spending projects, private sector businesses benefit.  When the Pentagon decides that renewable energy is needed, whether for national security, budget pressures or troop safety reasons (and all three apply), defense spending decisions will impact the profitability of the suppliers chosen.

Let us hope that the rest of our government agencies take on the commitment to renewable energy that the Department of Defense has pioneered.

 Raising the debt ceiling has, in the past, been a noncontroversial step—but this time Congressional Republicans seized the opportunity to link it to plans to bring the Federal budget much closer to balance in the long run.  This has led to deadlock, with the leaders of both parties having tremendous trouble bridging the gap between their positions on the proper balance between spending cuts and tax increases.  (See CNN’s “Cheat Sheet” for a handy summary: http://www.cnn.com/2011/POLITICS/07/15/debt.talks.cheat.sheet/index.html.)  We are now about one week from the end of this story—one way or another.

 But how it will turn out, and what that might mean for the economy—both the American economy and the world economy—are still unclear.  Will our politicians manage to put together a deal before the deadline?  If they do, what sort of a deal will it be?  And, either way, what will happen to the economy, and the markets?  The press is full of people who are willing to make predictions, and the scenarios they are spinning range from catastrophe to a major “relief rally.”

 First Affirmative’s Investment Committee has been monitoring the situation closely, of course.  It is impossible to say how the serious political problems will be resolved, or what that resolution could mean to the global economy and the financial markets.

 At the moment, the markets are relatively stable and appear to reflect a consensus expectation that Congress will come to terms on a deal in time to prevent a default.

 It is important to keep in mind that investment decisions are entirely about process, and not about outcomes, precisely because outcomes are uncertain and can only be known after the fact.  Outcomes matter, of course.  But the best way to achieve desired investment outcomes is by following a disciplined investment process, and such a process must be designed around the fact that uncertainty is ever-present, even when it may appear otherwise.

 To put it another way: if we believe we have a good investment process, we must follow that, even when it is hard to do so.  To achieve investment success, it is important to believe our beliefs and doubt our doubts.

 No one knows what the outcome of this crisis will be, or how the financial markets will behave.  What we do know is that historically, periods of heightened anxiety—which would have worried many investors to the point of selling risky assets and taking cover in safe assets—usually turned out relatively well, much to the detriment of those investors who bailed out.

 To our investment clients: We recommend that you consult with your investment advisor and discuss the investment policy you currently have in place—and call or write your elected representatives, to let them know what you think.

 “You don’t have to believe in the problem, to believe in the solution.”  This is the premise of Climate Capitalism, the sequel to the global bestseller, Natural Capitalism, both co-authored by Ms. Lovins.

 Hunter spoke at the First Affirmative BaseCamp in New York in mid-June and used some of the case studies and vignettes from the book to illustrate how smart businesses are integrating sustainability best practices into their operations, reducing emissions, saving energy, and enhancing profitability.  In the process, they are realizing competitive advantage, attracting top talent, and enjoying higher market valuations.

 ”It is a competitive issue, an issue of the long-term share performance of companies,” she said. The investment community is starting to realize that if you put money into companies of the future, they will do very well, and that “their money is at risk if they persist in putting it into companies that don’t get it.”

But it is difficult to devote oneself to a cause—to believe in it, to work for it, to invest in it—while simultaneously accepting that the future is essentially unknowable.

An investment example illustrates this point: As fiduciaries, we know that it is not prudent for employees of a company to invest their entire 401(k) in the stock of the company for which they work. And yet some people do. Why? They may believe they know their company well enough to justify taking such risk. They probably don’t perceive how risky this strategy is. In many such cases, they are confusing desire for a positive outcome with what a rational expectation should be.

We like knowing what to expect.

Humans have a need for a high level of certainty. We are neurologically hard-wired in such a way that we need to predict the future. Consider that in many areas of our daily lives, we predict the immediate future very well. When I get up in the morning, I expect there will be two newspapers in my driveway, and I am rarely disappointed. I expect the coffeemaker to work when I flip the switch, and for water to come out of the showerhead when I turn the faucet. I expect the garage door to open when I press the button, and I expect the car to start when I turn the key. The point is that for many of us, the immediate future unfolds in most ways exactly as we expect it to—and we like it that way.

But with investing, the markets often fail to meet our expectations. When that happens repeatedly, it is natural to seek to understand why this is so, and to fix it.  And so we look to experts to explain what happened and to tell us what the future holds.  (Notice how easily those two parts go together: and therein lies the trap.) 

The first part— a satisfying explanation for what happened —sets us up.  By establishing credibility, when the so-called expert shifts from explaining the past to predicting the future, nervous investors have been set up by means of a cognitive “bait-and-switch” to give credence to the forecast.

Which experts do we seek out when we want to know what to expect? It is a well-known phenomenon that we gravitate toward those who express views that we prefer and avoid those with opposing views. But to make matters worse, when our emotions are running high, we are especially selective about whom we choose to listen to. Emotions cause us to be less rational; so rather than seeking objective information, we seek confirmation for our biases.

Isn’t the future somewhat predictable?

Next week, for most people, the world will probably look very much like it does today. Of course, on any given day, certain individuals’ lives will change significantly for reasons that cannot be predicted. But rarely do such disruptions at the individual level have any lasting significance on the world at large.

On the other hand, it is virtually certain that over the next decade, unforeseeable “black swan” events will occur which will have a lasting impact on our world. In 2021, the world will almost certainly look similar to today’s world in many ways, and very different in other ways. How exactly will it be different? We don’t know. That will depend on how current trends play out and what new trends develop. Our view into the future is like weather forecasting: we can predict tomorrow reasonably well, but no matter how many supercomputers we throw at a meteorological task, we will never be able to forecast the weather very far into the future, because weather is far too complex and dynamic.

So, what to do…?

Where the financial markets are concerned, it is important to remember that experts are only guessing—no matter how smart they are, no matter how compelling their arguments.  What you believe about any experts’ ability to predict the future may affect your ability to make sound decisions. And each investor’s behavior is the single most important determinant of long-term investment results.

We encourage investors to talk with their advisors about the risks you and they perceive. But be mindful of your emotions and try to recognize the influence of biases and hopes. Remember that there are many possible futures, none of which are certain. And know that First Affirmative is prepared to help you implement appropriate strategies for your investment objectives.

As an example of waste water problems from textile manufacturing, the New York Times writes of blue dyes washing downriver near jean production mills in China. Additionally, the energy used by such mills contributes to China’s deplorable air quality and high rates of respiratory problems. Cotton is a very thirsty crop, and its production has been the primary contributor to the shrinkage of the Aral Sea in Central Asia and the loss of nearly all of the marshes and wetlands around it.

Increasing awareness of the problems, combined with greater consumer pressure for green products, has led clothing companies to join with environmentalists to create the Sustainable Apparel Coalition. A primary goal of this new coalition is “to lead the industry toward a shared vision of sustainability built upon a common approach for measuring and evaluating apparel and footwear product sustainability performance that will spotlight priorities for action and opportunities for technological innovation.”

For an industry that employs more than 60 million workers worldwide, measuring sustainability is no small task. The coalition outlines five categories, for which they intend to develop metrics and measure improvements: water use and quality, energy and greenhouse gas emissions, waste, chemicals/toxicity, and social/labor. Their Sustainable Apparel Index V1.0 will begin as a series of indicators with the intent that it evolve quickly to become a metrics-based tool.

According to the Times, the group plans to develop a sustainability score from these metrics to display on clothing. The coalition represents about 60% of global apparel sales and includes large retailers Nike, Target, Wal-Mart, JC Penney, and Levi Strauss, as well as companies with an established reputation for sustainability leadership, such as Patagonia and Timberland. Other collaborators include Duke University, the Environmental Defense Fund, Verité, and the EPA.

This kind of market share and stakeholder representation holds real promise for change. When the world’s largest retailers demand clothing production with fewer chemicals, the environment benefits, as do workers and consumers. And when suppliers are required to be more transparent in their operations, best practices can spread more quickly and become standard operating procedure throughout an industry.

Providing consumers with better information leads to more informed purchasing decisions. Greater disclosure will also help investors that consider environmental, social, and governance (ESG) criteria in their investment decision-making. Stakeholders will be watching to see if this initiative leads to real change in the long term price of fashion.