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SRI Chat - Socially Responsible Investing
Subject: Proposal to enhance the power of SRI
From: Matt Lykken
Date: 12/20/07
SRI fans should visit www.sharedeconomicgrowth.org to learn about a proposal that, among other benefits, would force corporations to pay out their cash continuously and have to ask investors to give it back. What better way could there be to give power to the investors? An extract from the Corporate Responsibility page of the site is copied below. The proposal is quite feasible, but it needs people to spread the word and help raise it onto the public agenda.

Making Corporations More Responsive

Responsiveness

We’ve all read the stories of corporate CEOs who were paid $50 million while their corporations tanked. In some cases, the executives’ poor performance had no consequences. In others, the CEOs were forced out – with additional huge severance packages to soothe the pain of parting,. What can shareholders do to react in such cases? They can refuse to vote for the director candidates that the corporation offers, but they can’t vote for any alternative. They can sell their shares and take a loss, but the corporation still keeps its cash. The shareholders, for the most part, are effectively powerless.

The same holds true if a company abuses its employees, creates an environmental disaster, cheats the U.S. government, or otherwise misbehaves. Except in the rare case where there a government agency imposes a truly serious fine, there is no effective mechanism for the American people to force corporations to be good citizens.

But under the Shared Economic Growth proposal, corporations would lose 35% of their earnings unless they pay them out as dividends. That would create heavy pressure for a company to give up its cash. If it wanted more cash to invest and grow, then it would need to go to the market and convince people that it deserved their investment dollars. It would come to you, an investor, and ask you to trust it with your money.

If a corporation wasted its investors’ money on underperforming executives, or if it had been caught doing something evil, would you invest? The public would finally have a real source of control. Companies that misbehaved would see their funding dry up.

Wouldn’t that be a good thing?

Transparency

Enron. WorldCom. Global Crossing. – One could fill a page with the names of corporate scandals in which companies fooled investors and left employees without jobs or pensions. The Sarbanes-Oxley accounting controls legislation was supposed to help with this problem, but try downloading the annual report for a corporation and see if you can tell whether it is really profitable or not. There’s one foolproof way to tell and that’s by asking the same question that led truly savvy investors to spot Enron’s troubles well before the company’s collapse: Is the company generating cash?

The Shared Economic Growth proposal would require any company seeking to get the benefit of the dividends paid deduction to pay its taxable earnings, in cash, to its shareholders. It would be impossible to hide behind complex accounting or confusing jargon – either a company would have the money, or it wouldn’t. And if a company wanted more cash to invest, then it would need to convince the public to buy new stock. If it hadn’t responded to previous investor demands to “show me the money,” a corporation would need to do some serious explaining to persuade anyone to invest their hard-earned cash in it.

Wouldn’t that increase your confidence in your investments?

 

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