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August 29, 2002
SRI Mutual Funds Continue and Enhance Corporate Governance Screening
by William Baue
While the SRI industry has long screened for corporate governance criteria, the recent accounting
scandals have prompted the development of more comprehensive corporate governance screens.
SocialFunds.com --
According to a joint SocialFunds.com/Motley Fool investor survey, corporate responsibility,
accountability, and ethics issues concern more than 96 percent of the 679 respondents. Almost
three-quarters of respondents are evaluating how to protect their portfolios from accounting and
executive scandals. More than half are assessing companies' social, environmental, and corporate
governance records. This was the most popular of six suggested strategies (respondents could
choose more than one). Although this is an informal survey, it clearly reveals investor concern
and action on corporate governance issues.
 The socially responsible investing (SRI)
industry has long taken account of corporate governance issues in its corporate research. These
issues included board diversity and board independence. SRI fund companies such as Citizens Funds, Pax World Funds, and the Calvert Group screen for corporate governance issues.
Other firms, such as Ariel Capital
Management and Domini Social Investments,
do not have formal screens but rather incorporate corporate governance issues into their company
reviews.
"We've always looked at corporate governance as part of our investment process,"
said Citizens Funds Director of Social Research Diane Tod South. "It's important from both the
fundamental [financial] and social points of view."
Many SRI firms also have been
employing shareowner action to address corporate governance issues.
"The most direct way
that a mutual fund can impact corporate governance is through its proxy voting policies," said Adam
Kanzer, director of shareholder activism at Domini.
The scandals have also inspired some
in the SRI community to include more criteria in their corporate governance screening. Both
Calvert and Citizens have expanded their corporate governance screens, and Calvert has made
corporate governance a screen in and of itself.
"Now, we examine data on fifty-one
separate issues pertaining to corporate governance when conducting our company analysis," said
Calvert President and CEO Barbara J. Krumsiek. These issues include the quality and independence
of auditors as well as whether companies are under litigation and regulatory investigation.
KLD Research and Analytics also enhanced the screening process for its SOCRATES online social
research database. KLD has implemented a set of specific corporate governance screens on issues
such as accounting controversies and management and director. This September, KLD will add the
Corporate Library's corporate governance profiles to SOCRATES.
While such increased
attention to corporate governance issues gives better protection to investors, it remains unclear
how exactly this will affect corporate practice.
"I don't think we've gotten to the point
yet where we've really carefully looked at which governance policies make more sustainable
corporations, socially and environmentally," Mr. Kanzer told SocialFunds.com. "I don't think
there's a direct correlation between strong corporate governance and a great social profile. There
may be, but we're not seeing that."
Mr. Kanzer also pointed out that the new listing
regulations of the New York Stock Exchange (NYSE) may standardize many of the corporate governance
initiatives promoted by SRI fund managers.
"We wrote to the stock exchange to comment on
their listing standards and we supported everything in them, we just didn't think they went far
enough," said Mr. Kanzer. "They don't get to the social and environmental issues."
 Mr. Kanzer advocated requiring companies to establish
board-level committees addressing social and environmental issues. He also lauded the Johannesburg
Stock Exchange (JSE) for requiring all its listed companies to comply with the King Report on
Corporate Governance for South Africa Code of Corporate Practices and Conduct. "King 2," as
the report is known, stipulates compliance with the Global Reporting Initiative (GRI)
Sustainability Reporting Guidelines.
"This is amazing," exclaimed Mr. Kanzer. "The New
York Stock Exchange did not go nearly that far. We'd love to see that, when the corporation is
told that, as basic criteria for listing and operation, you need to take into account social and
environmental factors."
©
SRI World Group, Inc. All Rights Reserved.
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