Rogue Missives

Rogue
July 30, 1998

The Color of Money
A Rogue Opinion by Yi-Hsin Chang (TMF Puck)

By now we all know Peter Lynch's mantra, "Buy what you know." Founding Fools David and Tom Gardner modified that and said, "Buy what everyone knows." Here's one more to consider: "Pick stocks the way you pick your friends."

How do you pick your friends? If you're like me, you look for someone with similar interests and values, someone you can talk to, someone you can count on. In other words, you don't judge your friends by their hair color, their height, or other superficialities. You care about the person inside, the fundamentals, if you will. Similarly, in investing you should focus on a company's products, its financial performance, its plans for future growth, and the quality of its management -- the fundamentals.

But certain Wise publications would have you believe that there's more to the formula. They insist that it's important to evaluate a company's "corporate diversity." By this, they don't mean a diversity of ideas, which probably would boost productivity. Instead, they're talking about something as superficial as the "complexion" of a company's management and employees.

Case in point: the latest issue of Fortune (Aug. 3) features the magazine's first-ever list of the 50 Best Companies for Asians, Blacks, and Hispanics. Apparently Fortune wanted to know what companies are doing about diversity and which "do it best." To find out, the magazine designed a survey to rank companies in various categories: minority representation at different levels, from the total workforce to the board of directors; the percentage of minority new hires; the number of diversity programs; the percentage of purchasing that goes to minority firms; and the amount of charitable contributions to programs that benefit minorities. Unlike the well-respected and well-established Fortune 500 list that ranks companies based on tangible and logical factors such as revenues and income, this particular survey focuses on tallying how many "people of color" work at a company.

To give you an idea of how shaky the methodology is to begin with, Fortune sent the survey to the companies in its Fortune 1,000 database plus the 200 largest private companies. Out of these 1,200 companies, the magazine got back 128 responses -- a 10.7% response rate. This may be dandy if the survey were trying to roughly guesstimate what companies are doing about diversity. But here Fortune is trying to pinpoint the top 50 companies that "do good" the best. We're talking an 18-page spread complete with pictures, lists, graphs, and pie charts detailing minority numbers and diversity programs.

No doubt the 128 companies that responded saw this as free publicity touting them as members of the politically correct elite. And who doesn't want (or need) to be perceived as being PC these days when discrimination lawsuits abound? The troubling thing is what the articles suggest about companies that are not on this exclusive list. If these 50 are "good" companies, are the rest -- including the 78 others that bothered to respond -- "bad" companies? Never mind that great companies such as Microsoft, Dell, Coca-Cola, and Wal-Mart didn't make the cut or didn't respond. Fortune declined to disclose the names of the 78 other companies that did respond. We can at least take heart that 90% of the companies that received the surveys presumably didn't think it was important enough to fill out.

Fortune tries to argue that "companies that do good also do well by shareholders" by claiming that these 50 best as a group outperformed the S&P 500 in three-year and five-year returns. This is hardly surprising considering that the list comprises the likes of Chase Manhattan, Merck, Lucent Technologies, American Express, and Cisco Systems -- all very successful and media savvy companies. But Fortune seems to imply that there's a direct correlation between companies that go out of their way to hire minorities and their financial performance. If that were the case, shouldn't we see many more so-called "minority businesses" in the Fortune 500 and featured on magazine covers as outstanding companies?

The point is, of course, companies shouldn't hire or make purchasing decisions based on what's on the outside (skin color) but what's on the inside (brains and talent). Your race or ethnicity is something you're born with. It's not something you've developed through hard work, practice, reading, or studying. It makes as much sense hiring based on race as hiring based on height -- "We should hire more workers who are 5 foot 7." See how ridiculous that sounds?

In its attempt to attain PC nirvana, at times Fortune actually sounds racist. The whole reference to "doing good" suggests that this is some sort of charitable gesture -- "Isn't Company X good for hiring minorities?" In the piece highlighting Liz Claiborne, the writer expressly talks in terms of charity: "And because Claiborne contributes generously to needy women near its headquarters in New York and New Jersey, it has served women of color well too -- at least at lower levels." To Fortune, needy is equated with minority.

Then the piece on No. 4 Fannie Mae opens: "It would be hard to find a less likely champion of diversity than a tall guy of Norwegian descent from Benson, Minn." What exactly is the writer saying about Norwegians, about Benson, Minn., about tall people? We're also told that Fannie Mae, based in Washington, D.C., has "altruistic" goals in targeting blacks and Hispanics because fewer than half of them own their homes. While it's great PR for Fannie Mae, let's face it, if tapping into this market weren't lucrative for the company -- and this is a publicly traded company responsible to its shareholders -- it simply would not and should not do it.

Companies shouldn't embrace diversity for diversity sake. It just makes good business sense to draw from as large a hiring pool as possible, to hire the best candidates regardless of race, to have a workforce that reflects the makeup of the community. The top company in Fortune's survey, Pacific Enterprises, knows this well. The natural-gas company is based in Southern California -- where minorities are hardly in the minority. The company treasurer (who we're told is Hispanic) says that the company has a smorgasbord of customers. "The best salespeople are the ones most like the customers they serve," he says. Not surprisingly, four out of the top 10 companies on Fortune's list are based in California. Another Pacific Enterprises employee (who is identified as being black) said he had no interest in being someone's "diversity poster boy," but that's exactly how Fortune used him and others in these articles.

Interestingly, Fortune's parent company, Time Warner, failed to make the list of 50 best companies. I dare say even if the publication was a stand-alone company, it too would not have made the list. Perhaps Fortune is trying to make up for its own lack of diversity with this absurd exercise that unfortunately looks likely to plague us at least once a year.

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