In American society, there are a number of issues that are vitally important to people, yet are often difficult to discuss among even close friends. For many people, financial matters are one of these taboo topics; talking about how much money you make, how much debt you have, how much you paid for your home, or how much you have saved can all be extremely awkward. One reason for this awkwardness is that money holds a place in many people's general system of moral and social values. Different people hold differing views about the importance of work, material wealth, and the choice of what to do with that wealth. To discuss money, therefore, exposes the way we think about money, and by extension, our values in general.
One solution that many people use is to keep their financial matters separate from moral decision-making. In investing, they seek solely to maximize return. In business, one can justify unscrupulous behavior that achieves a legitimate business goal with a simple explanation: "It's not personal; it's just business." However, outside the realm of business and finance, these same people may well behave in a manner that most would agree is virtuous. They may be philanthropists, giving generously from their wealth. (Consider the Fool's own annual philanthropic endeavor, the Internet's first and longest-running -- Foolanthropy.) Or they may serve in positions of leadership for charitable or civic organizations, using their influence for a worthy cause.
On the other hand, you don't have to keep your morals separate from your money. There are many ways to bring a good return on your investments while also achieving some other meaningful goal.
Using your vote
Investors who buy shares of individual companies tend to focus on the monetary aspects of share ownership. However, being a company shareholder also gives you other rights. Each year, you have the right to vote on proposals requiring shareholder approval. In addition, SEC rules give investors who own at least $2,000 in shares of a company for at least one year the right to submit resolutions to be included in the company's annual proxy materials. Rule 14a-8 states that an eligible shareholder can submit one resolution per year, up to 500 words in length, at least 120 days before the annual meeting. In addition, you must either attend the shareholder meeting yourself or name a representative to present the proposal on your behalf. Note that your resolution must be of general interest to all shareholders rather than a personal matter relevant only to yourself. Also, the company may exclude your proposal if it relates to the company's ordinary business operations, a loose standard that gives companies the right to challenge a number of proposals.
Although individual shareholders have the power to submit proxy proposals, it's important to understand that the vast majority of such proposals receive little support. In order to increase the likelihood of achieving success, shareholder activists have used the power of mutual funds to focus the power of many investors.
Values-based mutual funds
In response to the wishes of some investors to use their money to more actively support their values, a variety of mutual funds now directly appeal to many different groups of people. Some of these funds, known as socially responsible funds, choose their investments based on various criteria that are important to their respective investors. These funds take action in a number of different ways. Funds like the Domini Social Equity Fund (FUND:DSEFX) and the Pax World Growth Fund (FUND:PXWGX) avoid investing in companies they consider undesirable, including tobacco stocks like Altria Group (NYSE:MO), defense stocks like Boeing (NYSE:BA), and gambling-related stocks like MGM Mirage (NYSE:MGM). Instead, they seek companies that serve social purposes they consider desirable - for example, by using fair labor practices, providing affordable housing, or promoting education. They also take strong positions on shareholder resolutions, using their substantial holdings in companies to push for policy changes. Although these funds still rarely achieve outright victories on shareholder votes, the pressure they impose on company management often leads to concessions that meet some of the wishes of fund shareholders.
Other mutual funds appeal to people who practice a particular religion. The Amana Trust Growth Fund (FUND:AMAGX), for instance, invests in a manner consistent with Islam by avoiding businesses related to liquor, gambling, and pork, as well as interest-generating financial institutions. Indeed, entire fund families, including Ave Maria for Catholics and MMA Praxis for Mennonites, follow investment guidelines based on the tenets of their respective religions.
Some organizations go beyond mutual funds, seeking to assist members with managing their overall finances. For instance, Thrivent Financial for Lutherans is a fraternal benefit society whose vision is to be the organization that Lutherans seek first when pursuing their financial goals. By assisting members with their finances, Thrivent helps Lutherans give back to their communities by sponsoring national outreach programs and activities that support congregrations, schools, charities, and individuals in need.
Mixed results
The jury is still out as to whether funds that restrict themselves to certain groups of investments based on moral values can perform as well as other funds. Because some of the industries these funds tend to exclude are also highly profitable, fund managers have to hope that they can find other attractive investment opportunities. In addition, some of these funds are quite small and as a result have high expenses that reduce investment returns.
From a financial-planning perspective, it's far easier to concentrate on finding strong companies and funds in which to invest than it is to evaluate the non-financial benefits of directly incorporating your values into your investment strategy. Reasonable people may have differing opinions about whether values-based investing is the best way to achieve their financial goals while meeting their personal moral obligations. However, no one should dispute the fact that you always have the ability to take control of your own investment decisions. Therefore, if you have any doubts about whether a fund manager that claims to follow values consistent with your own actually will do so, you can always keep the responsibility of managing your own money.
The best thing about values-based investing is that it gets people talking about two difficult subjects: values and investing. Since communication fosters knowledge and understanding, anything that improves the level of communication is good for everyone.
More Foolishly responsible articles:
- Stocks With Scruples
- Dueling Fools Debate on Socially Responsible Investing
- What the Good Guys Are Buying
You can find helpful advice on all sorts of mutual funds, including funds that use socially responsible investing practices, by checking out Motley Fool Champion Funds . Discover the SRI fund pick that Shannon Zimmerman recommends as part of the Champion Funds scorecard by signing up for a free30-day trial today.
The Foolanthropy 2006 campaign begins with a call for nominations on Oct. 16. Hilton Family Hotels (NYSE:HLT) is a proud partner in this year's campaign.
Fool contributor Dan Caplinger values doing the best you can with what you have. He owns shares of Altria Group. The Fool's disclosure policy is always socially responsible.
