Ethics in Value Investing

I attend­ed my first meet­ing of the Bris­bane chap­ter of the Aus­tralian Share­hold­ers Asso­ci­a­tion today and heard a fas­ci­nat­ing talk by Karen McLeod from Eth­i­cal Invest­ment Advis­ers. Her pre­sen­ta­tion was most­ly mak­ing the case that investors can and should look for stocks that have noth­ing to do with eth­i­cal­ly-ques­tion­able activ­i­ties, such as fos­sil fuels, mod­ern slav­ery, tobac­co, etc. How­ev­er, she did­n’t real­ly talk much about why invest­ing in these stocks is uneth­i­cal. Her pre­sen­ta­tion con­tained no deep phi­los­o­phy and just made the assump­tion that invest­ing in such things are bad.

I had a quick chat with her dur­ing the break and put to her the posi­tion that I’ve gained from Tony over the course of this show — i.e. unless you’re par­tic­i­pat­ing in a cap­i­tal rais­ing, e.g. an IPO or sub­se­quent share issuance, buy­ing stocks in a com­pa­ny isn’t actu­al­ly help­ing the com­pa­ny and it’s not a vote for the com­pa­ny’s activ­i­ties. The com­pa­ny does­n’t get our mon­ey. The trans­ac­tion is between a sell­er and a buy­er. So, for exam­ple, if we invest in a coal min­er, we aren’t actu­al­ly giv­ing them more cash to mine more coal. We are mak­ing a judg­ment that their busi­ness is going to do well over the com­ing year — we’re not giv­ing their line of busi­ness our vote.

In addi­tion, as in investor, we have a greater abil­i­ty to affect the busi­ness’s oper­a­tions. We can write let­ters to the Board and man­age­ment and ask ques­tions at the AGM. We have far more influ­ence as a share­hold­er than we would have if we were not.

Any­way, when I put that argu­ment to Karen she fun­da­men­tal­ly dis­agreed. In her view, buy­ing a share in a busi­ness is a vote for the busi­ness. You want it to con­tin­ue to do well. You are now a part-own­er of the busi­ness and there­fore part­ly respon­si­ble for their activ­i­ties. While I agree with that last part, I think we also need to keep our invest­ing in per­spec­tive.

Every day, I do a lot of things that have eth­i­cal impli­ca­tions. The food and tech­nol­o­gy I buy, as well as all of the oth­er mass-pro­duced prod­ucts I buy — what are the eth­i­cal impli­ca­tions of those? Do I dri­ve my car? Do I fly on a plane? How long do I use the air­con­di­tion­ing or the hot water? Do I sep­a­rate my recy­cling from oth­er waste? Do I use a worm bin for food scraps?

All of these actions have eth­i­cal impli­ca­tions and if I stack ranked those as well as my invest­ing and asked myself which had more of a direct impact on busi­ness eth­i­cal stan­dards, I think my invest­ing activ­i­ties would be very low on the list.

I don’t buy a coal stock, will have it any impact at all on their busi­ness? Not as far as I can see. At least if I don’t buy an iPhone, it shows up in Apple’s rev­enue, even if it’s a tiny, tiny, tiny dec­i­mal place. The coal com­pa­ny does­n’t even notice if I don’t buy their shares. Even if nobody bought their shares, would it mat­ter? It would­n’t affect their oper­a­tions one iota. It might affect the man­age­ment per­son­al­ly if the share price plum­met­ed because it impacts on their bonus­es and their per­son­al share­hold­ings. But in most cas­es, if the price went sub­stan­tial­ly down, the com­pa­ny would do a buy­back and keep the price up.

Par­tic­i­pat­ing in IPOs or oth­er cap­i­tal rais­ings is, of course, a sep­a­rate issue. In that case, they do actu­al­ly get my mon­ey.

So as a val­ue investor, I think we are try­ing to bal­ance the pri­or­i­ties of max­imis­ing our port­fo­lio while, at the same time, doing as lit­tle dam­age as pos­si­ble and being as eth­i­cal as we can. If the check­list tells me that the best invest­ment is in a coal min­ing com­pa­ny, and I can be con­fi­dent that buy­ing that stock isn’t in any way help­ing the com­pa­ny pros­per (it is, instead, my vote that it’s going to pros­per with or with­out me), then I think it’s eth­i­cal­ly sound. I would rather not have any coal min­ing com­pa­nies out there. When that day comes, I’ll applaud the human race. But right now coal is used for elec­tric­i­ty and that elec­tric­i­ty pow­ers homes and hos­pi­tals. It keeps peo­ple alive. It allows me to run my busi­ness which pro­vides an income to sup­port my fam­i­ly. It’s not like, for exam­ple, invest­ing in the gun indus­try (though even guns have some jus­ti­fi­able uses in farm­ing, etc).

I’ve invit­ed Karen on to the show to dis­cuss this impor­tant top­ic with Tony and me in more detail. I’m also very inter­est­ed in your thoughts. But I don’t think it’s as sim­ple as she wants to make it seem.

- Cameron