this article youll need to dust off your meter to measure
the strengths of your beliefs and opinions. As a starter,
consider the questions posed by Donald Bartlett and James
Steele in the introduction to their series "Corporate
Welfare" in Time (November, 1998). "How would you
like to pay only a quarter of the real estate taxes you owe
on your home?" they asked. "And buy everything for
the next 10 years without spending a single penny in sales
tax? Then have [your city] install free water and sewer lines
to your house, offer you a perpetual discount on utility billsand
top it all off by landscaping your front yard at no charge?"
Imagine the scale
on your beliefs meter ranges from wonderful,
I fully agree to indifference, it makes no difference
to me to outrage, this behavior should be stopped.
Where did these first questions register on your meter?
Okay, now lets
change them around a bit. What is your response to these same
questions if these benefits were available to your neighbor
but not to you? Did you give the same response or a different
go a step further. What if their availability was so widespread
that you were taxed the equivalent of two weeks pay
every year to fund them? How did you go this time?
Those who read
the articles by Bartlett and Steele know that taxpayers around
America are getting deals like this. These taxpayers are called
corporations and Bartlett and Steele label the deals corporate
welfare. In the articles we read that in 1993 a foreign car
manufacturer received a subsidy of $253 million from Alabama
to build an automobile-assembly plant to employ 1,500 workers.
The result: a subsidy of $169,000 for each job.
In 1994, Guymon,
Oklahoma, put together an economic package worth $21 million
to attract an agribusiness to set up a hog-slaughtering operation.
Later, tax breaks for this business from Oklahoma totaled
$100 million. At the same time, Bartlett and Steele explain
that because of the hog farms and the open-air sewage ponds,
life in Guymon has deteriorated to the extent that many residents
seldom go outside without a face mask.
are respecting their own beliefs and values when making investment
decisions. No longer are quarterly earnings enough. For example,
so many people are investing in socially responsible mutual
funds that the total investment is now over one trillion dollars.
Many others are following their own paths to clarify their
investment values and act on them. The process of bringing
as much honesty as possible into investment decisions we call
the chairman of Berkshire Hathaway, remarked to the shareholders
in 1997 that he was offered the chance to buy a company that
manufactures chewing tobacco. He and Charlie Munger, his vice
chairman, knew that it was going to do very well and subsequently
it has. They did not, however, go through with the purchase.
As Buffett explained, "We sat in a hotel in Memphis in
the lobby and talked about it and decided that we didn't want
to do it."
On the other hand,
Buffett does own the Buffalo News which takes cigarette advertisements.
Remarking on this, he said, "I just know that the one
bothers me and the other doesnt bother me. Im
sure other people would draw the line in a different way."
Munger added, "I think each company, each individual
has to draw its own moral lines," a comment which sets
the theme for this article.
What are the benefits
of investing in a company? From the side of the company, a
common belief is that when you buy its shares through a public
stock exchange, you are providing capital for that business.
This is not the case. They got the capital from your new shares
at the time of the IPO. You are, however, helping to make
life easier for the company and its management.
Each purchase in
the stock market creates upward pressure on the price of the
stock. In turn, higher prices for its stock benefit a company
and its management in three main ways.
It makes it easier
for the company to raise further capital by issuing more shares.
If the stock doubles in price, the same amount of capital
can be raised by issuing half the number of shares, so less
dilution of earnings and equity.
founders of the company generally hold large numbers of stock
and stock options; these people benefit from higher stock
is threatened by the possibility of a takeover. Higher stock
prices make a takeover more expensive and hence less likely.
From the other
side, the side of the investor, if you purchase stock you
benefit from the profits that the company makes, whether these
profits come through the sale of cigarettes or the provision
of services to recycle waste products. These benefits come
to you through dividends or capital gains.
We often read that
the primary duty of a public company is to create profits
for its shareholders. For example, in his editorial for the
series of articles on corporate welfare, Norman Pearlstine,
the editor-in-chief of Time, wrote that he does not view the
companies mentioned in the series on corporate welfare "as
villains." "Business enterprises like General Motors
and General Electric are designed to make money," he
writes. "They would be derelict if they didnt seek
to avoid taxes and gain special subsidies. No, the villains
are the federal, state and local governments that reward some
companies while denying similar largesse to other corporations
and individual taxpayers."
How do Pearlstines
comments register on your beliefs meter? How much bigger
do you think governments would have to be to regulate fairly
corporate welfare and close down loopholes?
arises when individual welfare is considered. What if we consider
welfare for the unemployed or single mothers. In your opinion,
would such people be "derelict if they didnt seek
to avoid taxes and gain special subsidies."
Other people think
that the responsibilities of a company go beyond maximizing
profits for shareholders on a quarter by quarter basis. Stated
goals include the creation of share-owner value over the long
term hand-in-hand with the promotion of a stable, healthy
society, social well-being and environmental protection. Some
CEOs argue that the companies with the greatest long term
value will turn out to be those with the strongest commitment
to the use of sustainable energy and conservation of resources.
Long term value
may also require not putting offside the suppliers and customers
of a company. Warren Buffett even brings into the picture
the people he associates with. "We would rather achieve
a return of X while associating with people whom we strongly
like and admire than realize 110% of X by exchanging these
relationships for uninteresting or unpleasant ones,"
he wrote in the 1987 annual report. But this sort of action
may actually bring an even higher return because it attracts
the top management and provides them with the security to
perform at their best.
When thinking about
the social behavior of a company, the first question is what
does it produce. Tobacco, alcohol, gambling equipment and
services, genetically-engineered food, armaments and nuclear
energy are products that raise a red flag for many people.
The second question is how does the company go about this
production. Is it a major cause of pollution or does it try
to use renewable resources? Does it market products in a misleading
or deceitful way or is its marketing open and honest? Does
it exploit its employees or does it treat them in a dignified
and cooperative manner? Does it entice people into financial
over-commitment or does it encourage financial responsibility?
The next step is
to use your beliefs meter and ask yourself how you feel about
this companys products or activities. The final step
is to decide whether you are going to modify your investment
activities. For some this means not investing in a particular
company. For other investors it means the opposite. They invest
in a company precisely so that they can go to its meetings
and put forward their opinions.
Peter Kinder of
Kinder, Lydenberg and Domini recommends another alternative.
If you decide to divest yourself of a stock because of its
products or activities, then write to the company and tell
them why. "Even better," he says, "do that
and let your friends know and write a letter to your local
newspaper about your action." On the other side, if you
like what they are doing, tell them so.
It may not seem
like it, but things do change. Consider the fact that smoking
is banned on most airlines around the world and tobacco companies
have been ordered to make major financial settlements.
Whatever you do,
in the end its your decision about how conscious you are about
all aspects of your investments. But, as Shakespeare wrote,
own self be true,
And it must follow, as the night the day,
Thou canst not then be false to any man
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