The University of Chicago Campus Green

A Chat with a Socially Responsible Fund Manager

The University of Chicago Campus Green

Steve Dillenburg is the lead manager of the Summit Total Social Impact (SATSX) fund, an offering that is truly unique in the socially responsible fund world. The TSI fund invests in all of the stocks in the S&P 500, but it weights the companies differently according to their Total Social Impact rating. The rating reflects the company's scoring on a series of benchmarks corresponding to each of its stakeholders, created by the Caux Principles - a statement of business ethics developed by international corporate leaders.

The fund, launched in December 2000, is essentially an enhanced index fund that pays considerable attention to how companies treat their shareholders. Corporate governance is a popular issue these days, and many fund companies - most recently TIAA-CREF - have taken action against stock option plans and other practices they deem abusive to common shareholders in the wake of Enron.

IF: Why doesn't Wall Street pay more attention to non-financial indicators?[/:Author:]
SD: First, Wall Street created and benefits from the hysteria surrounding earnings per share. Analysts are like pro athletes basking in the glory of their recent recommendations. Scorecards are kept on very short-term outlooks and annual awards and bonuses are given. This is a very shortsighted industry that we are talking about. Non-financial indicators are anything but shortsighted. Stakeholder practices and results are in a slow cooker that might explode but they rarely merit an analyst's look.

Secondly, Wall Street firms don't spend any money on non-financial indicators. Analysts aren't taught what to look for in CFA training. When I went through that program, there was only one reading assignment that discussed non-financial issues. At Scudder, I supervised the socially responsive research department. I had two junior people covering 1,900 securities in the active universe for Scudder portfolio managers. They were typically right out of college, turned over quickly, and were certainly not viewed as traditional research analysts by the rest of the firm. Yet we used their research to manage $3 billion in client assets. That is a major reason that I left Scudder.

Third, the non-financial or "soft" analysis of the past was often related to companies' involvement in sin stocks. Were they involved in tobacco, alcohol, defense? They weren't real metrics that measured stakeholder practices and business practices. That is where the industry is going.

Finally, those firms that do measure stakeholder (shareholder) issues aren't very transparent with the results yet, but I stress "yet." This will change. Thanks to Enron and others, transparency will be on everyone's top ten list for many years to come.

IF: Do you think simply excluding "sin stocks'" is an overly simplistic way to run a socially responsible fund?

SD: Yes, I definitely feel that way. This is the old paradigm of avoiding what you object to and is a natural outgrowth of faith-based issues. We all subscribe to certain faiths and adhere to these in varying degrees. Investing according to one's faith is commendable but doesn't go far enough in my opinion. It also prevents many mainstream investors from embracing the concept of socially responsible investing because of either disagreement with screening criteria or an overall feeling that "sin" issues don't have a place in investing.

Changing the focus to a more comprehensive evaluation of corporate business practices is a step in the right direction. Our Total Social Impact (TSI) fund methodology rates corporations based on their treatment of stakeholders. This approach does require that investors embrace the notion that corporations have more than one stakeholder or shareholder. Corporations owe every stakeholder responsible treatment and are rewarded for doing just that, whether they are in the energy business or defense industry. This is a universal issue. The process of evaluating companies on business practices, communicating these ratings to stakeholders, and finally investing accordingly is a positive and reinforcing process. In other words, what gets measured gets managed.

IF: Tell me a little bit about the TSI fund. How is it different from other socially responsible investing (SRI) funds? [/:Author:]
SD: The TSI fund is unique in that it is a complete replication of the S&P 500. It is an enhanced index fund. The other so-called (SRI) index funds all screen for "sin stocks." Index providers Domini and Calvert start with larger benchmarks and screen out roughly 50% of the companies that don't meet their requirements, including product exclusions. TSI invests in all of the benchmark companies but reweights them according to the TSI rating.

The TSI rating captures how companies treat a comprehensive group of stakeholders. This is a new approach that appeals to mainstream investors who are interested in influencing corporate business practices, as opposed to eliminating disagreeable products. The focus group work that I conducted two years ago indicated that 90% of 401(k) participants would invest in a fund like this and would invest a significant share of their assets. They were quite suspicious of corporate business practices and would like to send a strong message. Remember this was two years before Enron. Imagine their feelings now.

IF: Currently, we have the Dow Jones sustainability indexes and FTSE4Good benchmarks. Also, KLD teamed up with Russell to launch SRI indices based on the Russell indexes. Is this market becoming saturated or is there potential to develop new wrinkles?

SD: I'm sure we will see more benchmarks, but I'm not sure that they are adding any value. As long as they are built on the screen-out concept, they don't allow good analysis on the impact of corporate social responsibility on shareholder prices, and that is really the holy grail. Even the Dow Jones Global Sustainability Indexes screen out weapons contractors. Every one of the existing indexes screens out for some product. Our fund is the only one that does not.

IF: You say, "What gets measured gets managed." What do you see in the short- and long-term as far as Wall Street accepting non-financial indicators, and how can that affect corporate behavior?[/:Author:]
The Enron mess has thrown a big question mark on the entire financial auditing, analysis, and reward system that exists in today's capital markets. Trust and confidence have been significantly eroded. This is truly a crisis for the moment. Arthur Andersen is likely to go out of business. Non-financial indicators are in a prime position to fill a void that has been created by the over-reliance and overemphasis on quarterly earnings, which appear in many instances to be fabrications. The measurable treatment of a broad group of corporate stakeholders gives a tangible measure of the "soul" of a corporation, if you will. We're the only investment management firm paying to use this type of research.

In the future, I envision TSI ratings will be used by many stakeholders to make decisions that will impact corporations. Employees will make decisions on who to work for. Investors will lower the cost of capital for highly-rated companies. Suppliers will judge who to partner with. Communities will decide who to grant licenses to operate to. Companies will decide on merger opportunities based on similarities of TSI ratings. Of course, this might seem quite futuristic and optimistic. But, let me remind you that Morningstar ratings didn't exist 15 years ago, and today they move the entire mutual fund industry.