For blacklisted firms, a chance at redemption

For socially minded investors looking for a food company with honorable values, Citizens Advisers has a recommendation to raise eyebrows as well as profits: McDonald's Corp.

Critics blame the burger giant for contributing to rising obesity rates and rainforest destruction, among other social ills. But what's more important than the company's shortcomings, proven or alleged, is its track record of recent improvements, especially on environmental issues, says Sophia Collier, president of Citizens Funds, based in Portsmouth, N.H.

"We want to see big companies make continual, incremental progress," she says.

The fund approved McDonald's for socially responsible investment after the company took steps to use more recycled paper products and to phase out the use of growth hormones among its beef suppliers.

"When the big guys move in the right direction, even a small amount, that's very significant because they can move markets," she adds.

As America continues to feel the fallout from corporate scandals, mutual funds specializing in socially responsible investments are doing more than tout their screening techniques for steering clear of troublesome firms.

Some are also taking high-profile measures to reward those who have changed for the better. For some previously blacklisted companies, this era of mounting accountability has included a welcome pathway toward redeeming their reputations.

For example: The Home Depot. In the late '90s, the home improvement retailer was fighting multiple class-action lawsuits from female workers who claimed to be victims of discrimination. The Women's Equity Mutual Fund found the company failed to meet "minimum standards" for progressiveness on women's issues and rejected it as an investment.

But shortly thereafter, The Home Depot settled its suits and proceeded to promote women to leadership roles. Rather than spurn the company for prior sins, Women's Equity bought shares to applaud the changes and to leverage influence on future policy.

"This is not investing in perfect companies," says Heidi Soumerai, coportfolio manager of Women's Equity. "What we look for over time is improvement."

Although values-based funds manage as much as $40 billion of investors' money, they concede they can seldom take credit for changing a corporate culture. In fact, changing what's important to a company is next to impossible, investment managers say.

"It's so hard to change a company's values; it's so hard to establish them in the first place," says Jane Siebels, chairwoman and chief investment officer at Green Cay Asset Management, a values-based investment firm based in the Bahamas.

And when companies "have such a history of bad values [and] employees reach crossroads in their decisionmaking, they keep making bad decisions," she says.

Nevertheless, Green Cay has offered a fresh start to blemished companies by investing in those that seem to have refocused on good practices.

Consider the Stanley Works, a worldwide supplier of tools, hardware, and security products. The company got the investment firm's blessing back after a hiatus when management signed a long-disputed contract with union employees and turned attention from cost-cutting to brand-promoting.

Likewise Vestel, a Turkish television manufacturer, redeemed itself after censure from Green Cay by controlling industrial pollution and bringing emissions into compliance with international standards. Investment dollars from Green Cay began to flow again in 2001.

Companies in today's scandal-scarred environment are receiving rewards not only for improved social policies but also for transparency - that is, for disclosing generously how a company is run.

The Parnassus Fund stopped investing in Baxter International, a hospital-supply firm, after the company violated an embargo on Israeli goods in a manner that "had a bad, underhanded feel to it," according to the fund's president, Jerome Dodson.

But Baxter returned to favor with Parnassus when fund managers later felt certain the firm had disavowed all such hidden policies.

Meanwhile at the Aquinas Funds, a family of funds dedicated to Roman Catholic values, managers would rather exert influence as investors than divest themselves of suspect stocks.

For instance, rather than blacklist Whirlpool Corp. for donations to Planned Parenthood, a family-planning organization whose methods violate church teachings on birth control, the Aquinas Funds warned Whirlpool managers that major Catholic protests could reduce sales by 2 or 3 percent. Whirlpool soon thereafter stopped donating to Planned Parenthood, and the Aquinas Fund continues to own Whirlpool shares.

"Blacklisting makes you feel good," says Frank Rauschler, president of Aquinas Funds, "but it's not nearly as effective as being an active shareholder."