Gold Standards in Ethical Investing


To invest in a socially responsible manner, one of the major criteria is the manner of a corporation's governance. So says Joyce Haboucha, portfolio manager of the Enterprise Global Socially Responsive Fund, which has done better than the overall market in the two years since it was launched.

Haboucha looks for companies with "engaged" directors, as much disclosure as possible, and also product and marketing quality, as well as good policies on the environment and the workplace. She observes that "ethics, which is part of our governance screen, has proven to be an important predictor of financial performance."

The fund she manages avoids companies that manufacture tobacco products, and red flags also go up on nuclear power, weapons, and gambling. Among the stocks she likes are Pfizer, AFLAC, Bank of Hawaii, and cable company Cox. These were some of the points Haboucha made in an investing chat presented Oct. 24 by BusinessWeek Online on America Online, in response to questions from the audience and from BW Online's Karyn McCormack. Following are edited excerpts from this chat. A full transcript is available from BusinessWeek Online on AOL at keyword: BW Talk.

Q: Joyce, the market has been back and forth the last few days amid a flood of earnings reports. What do you make of the recent action? Do you think there will be brighter days ahead?

A: I think that we're going to [face] some headwind because some of the corporations will continue to have challenges in terms of revenues and profits. Capital spending is really taking longer to come back than many of us had expected. And we're seeing that the consumer is slowing down.... So I think we're going to continue to see this volatility in the market for a while.

However, I think this is actually healthy. I think the underpinnings of the economy are healthy. We're continuing to get good productivity numbers, inflation is O.K., and, in the U.S., the banking sector is healthy, despite bad loans. I think that's really important. Also, valuations are not as stretched as some are saying, especially in view of the current interest-rate and inflation environment.

Bottom-line, it's going to be difficult to predict when we're going to see a recovery, especially in light of the uncertainties of the Iraq war and the continued crisis of confidence among investors. However, I think eventually we're going to see a better market -- I just don't know when the timing is. Patience is probably the order of the day.

Q: Joyce, this seems like a great time to focus on corporate-governance issues, as more companies reveal accounting irregularities and the like. What do you look for when you invest for your fund?

A: I agree this is a great time to be looking at corporate governance and corporate accountability. What we think is really important is not just an independent board, but an engaged board. A board that has support to be able to get their work done is also important.

We also look for as much disclosure and transparency [as possible] because that creates accountability. We also are looking for more alignment of executive compensation with shareholders' interests. And that's going to be a challenge, because some of the bad habits of the past are going to have to change. We also look for companies that have governance principles, and the processes by which they operate. We think that director training is going to be important.

Q: Joyce, are you a socially responsive investor? Do you buy stocks for yourself based on the fund's criteria?

A: Yes, I am personally invested in the enterprise, as are my husband, mother, and sister. This is a family affair. I do look at all of my investments in the same way, with the same criteria as the Enterprise fund. The first criterion is governance. The other criteria that we use are product quality and marketing issues. We pay particular attention to workplace issues, which include diversity, women/family benefits, advancement of minorities, and treating employees well overall. Training and benefits are important, too. We also think that in companies where women and minorities do well, men do well also.

Another important issue is the environment. And we think that both for the environment and workplace issues there are real financial benefits to the companies. Even in times likes these, retention of good employees is very important. Turnover is costly. And what's interesting about the environmental issues is that companies which are efficient on the environment tend to be efficient in manufacturing.... The most interesting thing we find is that when companies produce environmental reports, their employees are the ones who read [them] the most.

The other criterion we look at is community, which includes charitable donations, support for education, support for housing, support for health care. And we're also looking at human-rights issues. That includes..."sweat-shop" issues -- the use of labor in developing countries.... We have a few avoidances. We don't buy companies that manufacture tobacco or have 2% of their revenues from nuclear power, gambling, or weapons. And we also look at animal-rights issues.

On the whole, we're much more interested in companies that are making progress and taking their corporate citizenship seriously than in trying to avoid companies. So we are always interested in companies that are making a first step on that road. And this is good financially. Ethics, which is part of our governance screen, has proven to be an important predictor of financial performance.

Q: How has the Enterprise Global Socially Responsive Fund been faring lately compared with the overall market?

A: The fund year-to-date is down 18%. And the MSCI World index, which is a benchmark for the fund, is down 21.6%. So it's doing better than the market.... The fund has only been in existence two years. So we started at a very poor time in October, 2000. But we beat the benchmark for every period. We've done well on a relative basis. Unfortunately, that only means we have lost less money than the broader market.

Q: What are some of your largest, or favorite, holdings? Have you been buying anything new?

A: Among our recent purchases was Pfizer (PFE), and that's among one of our largest positions. We like it because we like the merger with Pharmacia. We think the cost savings are going to be quite good there. We also like the lack of patent expirations until 2009. We think that the stock is very reasonably priced at about 16 times earnings [and that] it's being unduly punished for the possible regulatory problems that all the drug stocks are facing.

We also like it because it has excellent governance practices. It's one of the companies that have been named 100 best companies to work for by Fortune magazine. It has very good employee benefits, child-care centers, and a very innovative program to provide low-cost drugs to the elderly through a discount card at CVS. And they're advancing the issue of the high-cost drugs for those who can't afford it. And we think that long-term, this will help them.

We also like AFLAC (AFL), a life- and health-insurance company. They're known for their duck commercial on TV. The most important thing about them is they operate in Japan, and they're gaining market share there because the Japanese are worried about the ability of their government to provide them with health insurance. So they are purchasing additional health insurance. And because the Japanese insurance companies are not in good financial health, the Japanese prefer to buy from AFLAC, which has a very good balance sheet. The stock has done well. It's about 20 times earnings this year. But we think that earnings are going to continue to grow in the double digits.

Q: What three stocks would you recommend in today's market? You already mentioned two.

A:[We like] small European financial companies. We like banks with a niche and very good balance sheets. One of them is called Danske, out of Denmark. It's trading at about 10 times earnings, and it has high profitability. The other one we like is Dexia, out of Belgium. And it's at about seven times earnings. A similar bank in the U.S. is Bank of Hawaii (BOH). The stock is about $29 a share. They have a new CEO who has refocused the company on their core franchise, and they also have a very good balance sheet, so that they are buying back stock. They bought back 18% of their market cap in the last year.

Q: How about cable stocks? Do you have any comments on DirecTV or cable vs. satellite? Do you see satellite replacing cable, or will it remain more expensive than cable?

A: Actually, I can't comment on DirecTV or satellite vs. cable. But I can say that we like the cable stocks themselves. That's because they're in a sweet spot in the capital-spending cycle. As their spending comes to an end, they will experience rapidly growing cash flows. They also benefit from the nesting that we're all doing these days. Most people are keeping their cable service, and some of the new technologies like movies-on-demand will increase their revenues also. Meanwhile, the stocks have been beaten down because of the Adelphia (ADELQ) issue. And we think they're very reasonably priced. Cox (COX) is our favorite. It has come back a bit, but it's still down 31% on the year.

Q: What's the latest on any legislation regarding corporate governance? Do you watch that closely? There was talk of making managers more accountable for earnings reports, etc.

A: The two most exciting pieces of regulation and legislation just came through. One was the Sarbanes-Oxley bill that just passed Congress. And the other is the new standards for listing that the NYSE put into effect recently. What to watch for is the implementation of the legislation and the standards. There has already been controversy about the appointment of the chair of the new accounting board that's being created by the bill. And there's a need to make sure they really are good, responsible people appointed to these positions.

We will watch out for the interests of the small investors. The NYSE standards are quite good. We made a huge leap forward in terms of director independence and disclosure. It will take work for them to be implemented. And we need to see how that happens.

Q: Do you stay away from companies that do not list their stock options as an expense?

A: This has not been a screen that we have been able to implement in the past because there wasn't enough information available. However, it's a screen that we will consider looking at in the future.

Q: What advice would you give investors now, as we sift through all the earnings updates and outlooks?

A: Stay patient, for one. And don't be pushed by short-term moves, and focus on companies with good earnings, long-term earnings prospects, and very good balance sheets. We think that balance sheets are very important at this point. And if not balance sheets, then growing cash flow like the cable companies.


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