As mentioned above, one group of activists has social rather than primarily financial agendas for U.S. companies. In the view of these activists, U.S. companies should help achieve social goals such as saving animals, protecting wilderness or alleviating poverty. Let’s consider whether these social goals are appropriate for most mutual funds and then for the subset of funds specifically geared to socially responsible investing.

Social activists who attempt to change corporate policies or challenge corporate practices take many different tacks in pursuit of their goals, but all are motivated by one fundamental principle: corporations shouldn’t be solely profit-maximizing entities; rather, they have an obligation to take into account their impact on social issues. Activists seek to influence companies through a variety of means—including litigation, picketing and public relations offensives—in an effort to encourage a company to alter its social policies in some fashion.

Mutual funds, as stockholders with the ability to influence corporate management, are sometimes the focus of activists seeking support for social causes. For many years, activists have sought to include proposals recommending changes in corporate social policies in corporate proxy statements for consideration at the annual stockholders‘ meeting. For instance, shareholders have made proposals to include more women and African Americans on corporate boards and to prohibit a company from doing any business with countries accused of human rights violations. Companies generally have sought to exclude such social proposals as an improper interference in ordinary business matters or as not a proper subject for stockholder review, with varying levels of support from the SEC. When those proposals are included on the proxy ballot, the success rate for purely social proposals, as opposed to business or financial proposals, has been very low. On average, social issues receive less than 8% of stockholder support; if they fail to attract sufficient percentages of votes as specified by the SEC rules (i.e., between 3% and 10%, depending on the time period), they cannot be reintroduced at the next shareholders’ meeting.

FundsAlthough the issues raised by these activists may address important social policy questions, advisers to mutual funds in general tend not to support such proposals unless a direct financial benefit would be obtained, or financial harm avoided, by a company’s stockholders. Most advisers of mutual funds are not charged with the mission of pursuing any social policies; they are supposed to invest their customers‘ savings in accordance with the fund’s stated objectives and policies in order to earn as good a financial return as practical. In fact, advisers to mutual funds that voted or invested based on social, not financial, grounds could expose themselves to claims of breach of fiduciary duty if the social grounds were not properly disclosed to customers. An adviser to a mutual fund that substituted its view of a social agenda for the goal of maximizing the fund’s financial returns would undoubtedly come under considerable criticism.

However, mutual fund advisers do take into account the potential financial impact of social issues on a company’s business and prospects. For example, a fund adviser will consider the potential effects of a company’s environmental policies on its earnings and stock price. Conversely, an adviser to a mutual fund might conclude that a company’s stock price was much lower than its earnings power because its product line was socially disfavored. For example, a fund manager who bought tobacco stocks in early 2000 would have reaped a significant financial gain for fund shareholders during the rest of that year.

Although most mutual funds do not invest based on a certain social agenda, in recent years the phenomenon of socially responsible investing has blossomed in response to the demands of a distinct minority of investors seeking to invest their money in a manner consistent with their social values or political views. Socially responsible investing can be divided into three forms: screening, activism and community building. Community-building investments, such as loans to disadvantaged entrepreneurs or subsidies for low-income housing, generally cannot be conducted through mutual funds with their high liquidity requirements. But screening and activism have found mutual funds to be a convenient vehicle to attract sympathetic customers and implement their social vision.

Screening is practiced by “socially responsible investing” (SRI) funds. Such funds generally seek returns from a portfolio that does not include the securities of companies that receive a substantial amount of their revenue from activities related to tobacco, alcohol, gambling, weapons production, animal testing or other controversial practices. Screening involves either not investing in certain companies because of their products or practices (e.g., tobacco or gambling) or deliberately investing in certain types of companies (e.g., renewable energy) that match investors social goals. At the end of 2000, funds with SRI as a stated objective amounted to approximately $12# billion in assets, according to Morningstar, Inc. This represents a growing sector of the mutual fund industry, although a tiny fraction of the industry’s total assets of approximately $7 trillion.

Socially responsible activism by investors generally involves the efforts of stockholders of a company to change corporate behavior, such as urging adoption of environmental or labor practices or boycotting certain countries or activities. Some SRI funds that screen their investments also take the additional step of lobbying the companies in which they invest to adopt or avoid practices they favor or oppose. The oldest SRI funds, like the Domini Social Equity Fund and the Calvert Group of funds, tend to combine social investment screens with advocacy efforts. More recent entrants to SRI funds, like TIAA-CREF and Vanguard, simply offer screened funds to their customers.

Whether SRI funds can provide competitive investment returns has been the subject of considerable debate. The social screens, as well as changes in company policies, can result in divestment or avoidance of stock purchases that would otherwise be financially sound. On the other hand, the increasing trend of professional investment management firms offering SRI products, together with the bull market of the 1990s, has resulted in a few SRI funds that have outperformed the broader market.These funds have tended to concentrate on stocks of technology companies, which often avoid practices and business areas that generate social controversy. Although technology companies performed extraordinarily well during most of the late 1990s, they generally underperformed in 2000, and so, consequently, did these SRI funds.

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