These moral considerations raise issues of manager responsibility, in light of the traditional role of corporate and fund managers. The proposition that corporate directors and fund managers have a duty to their trustors, shareholders and investors, respectively, to maximize profits is so widely accepted it needs no citation. However, because moral considerations do enter the fray for these particular investors, certain legal issues arise which are not yet so widely accepted. These issues include disclosure of information necessary for morally responsible investors (MRI’s) to discriminate between investment opportunities based on personal moral preferences, the effect of socially responsible investing on the disconnect between management and ownership in publicly traded companies, and a new twist on shareholder derivative actions.

This article will run across two publication cycles. To address these issues, this article first describes MRI and then identifies the possibly contradictory assumptions underlying the tradition role of managers (corporate directors and trust managers).

III. Moving Forward

The second article in this series will first identify points of reconciliation between the seemingly contradictory ideas of maximizing profits and maximizing the social good. Finally, it will point out possible additional benefits and drawbacks of morally responsible investing (MRI) as compared to the traditional model.

I. Morally responsible investing may challenge assumptions underlying the traditional mode of investing.

A. Morally responsible investing requires managers to consider moral preferences and social benefits along with maximizing profits.

Moral preference and social benefit mean different things to different investors. MRI can be generally defined as investing that permits investors to grow financially while still adhering to their personal social or moral preferences. [1]

Despite the variation in personal preferences, MRI is one of the fastest growing sectors, with more than $2 trillion of assets being managed as of 2005. [2] As of mid-2006, this amount was up to 2.9 trillion, a growth of nearly 33% within an 18 month period. [3] This translates to 10% of all managed funds. [4] In the UK, as of last year roughly 470,000 investors had chosen to participate in socially responsible funds. [5] This translated into $12 billion in the UK, up from $1.7 million in 1995. [6]

Some MRI is faith based. For example, Ave Maria funds follow the precepts of Catholic canonical law to avoid investing in companies that facilitate abortions, pornography, contraception, or sweatshops, to name a few. [7] Another example is Amana Growth, a fund that follows Islamic principles to avoid investing in companies that derive more than minimal revenues from alcohol, tobacco, pornography, gambling, or weapons industries. [8]

Non-faith based moral initiatives are also prevalent. Environmental preferential investing is a large sector of MRI. Those companies that follow safer environmental procedures and policies find themselves benefiting from attracting the capital of environmentally conscience investors. In fact, NGO’s like the Blacksmith Institute highlight the returns from investing in companies that specialize in performing environmental cleanup projects in the world’s most polluted cities. [9] Other MRI funds include those that oppose corporate delusion of cultural diversity. Brit Zak Goldsmith opened a hedge fund to take down Coca-Cola for "undermining real human diversity" by betting on the drop of Coca-Cola’s share price. [10] Thus, moral preference can run the gambit.

B. Economics theory states that moral considerations are not necessarily a manager’s concern and maximizing profit is the basis for all decision making.

In both the corporate director-shareholder relationship and fund trustee-trustor relationship, a duty of loyalty exists which obligates the manager to maximize the benefit to the investor. Maximizing profits for shareholders is the widely agreed upon benefit a corporate director must convey to his shareholders. Similarly, the duty of loyalty, the prudent-investor rule and similar doctrines which govern investment funds generally forbid social investing by the fund manager. [11] Thus, in the traditional economic understanding of the duty of the fiduciary, he can only consider economic criteria to maximize returns and increase profits. [12] Although economic considerations do not necessarily contradict the conclusions reached by moral considerations, that they may should not have bearing on the decision to invest.

To be fair, arguably in capitalism profit maximization is MRI. If we accept this to be true, the considerations in traditional investing and MRI become one and the same. Thus this analysis becomes moot, and so this argument is not addressed here.

The next article in this series will look to compare MRI to the traditional mode and to hypothesize the benefits and drawbacks of MRI.

[1] Thomas M. Kostigen, Hedge Funds Banking on Social and Moral Issues, The Washington Post, Dec. 25, 2004, available at http://www.washingtonpost.com/ac2/wp-dyn/A25215-2004Dec24?language=printer.

[2] Id.

[3] Weapons and Dice and All Things Nice, Money Management, June 1, 2006, 2006 WLNR 8631864.

[4] Id.

[5] Id.

[6] Id.

[7] Kimberly Lankford, Funds Get Religion, Kiplinger’s Personal Finance Magazine, available at http://www.kiplinger.com/magazine/archives/2005/12/askkim.html, (Dec. 2005).

[8] Id.

[9] Brian Walsh, How the List Was Chosen, Time Magazine, available at http://www.time.com/time/specials/2007/article/0,28804,1661031_1661047_1661015,00.html, (2007).

[10] Hegde Funds Banking on Social and Moral Issues, supra note 1.

[11] John J. Langbein and Richard A. Posner, Social Investing and the Laws of Trust, 79 Mich. L. Rev. 72, 76 (1980) (citing Rst. 2d of Trusts §2; ERISA 404(a)(1) (1976)).

[12] Edward S. Adams and Karl D. Knutsen, A Charitable Corporate Giving Justification for the Socially Responsible Investment of Pension Funds: A Populist Argument for the Public Use of Private Health, 80 Iowa L. Rev. 211, 213 (1995).