Corporations, government, Hobby Lobby, and socially responsible investing, part 3

This is Part 3 in a series. Part 1 looked at corporate structure and Part 2 looked at problems with sports teams.

Part 3 is about how all this affects investors, especially those who are trying to be socially responsible.

Now, social investing is a really broad topic. It is investing in a way that reflects the investor’s values. However, it has to be done conscientiously or performance will suffer. Social investing has a bad reputation because many social investors simply avoid what they don’t want to invest in without thinking of what investments they should invest in. After all, the name of the game is to make money.

There’s also a limit to what social investing can accomplish. Corporations are in the business of maximizing economic value for shareholders, which is defined as maximizing return for a given level of risk. Now, shareholders often debate what that really means, especially when it comes to maximizing value in the short-term versus the long term. The markets price daily, and not many investors are patient waiting for long-term value when their performance is assessed in the short-run.

Corporations are not in the business of making a perfect world, although they can address some imperfections and add value to both shareholders and society. Think of a company like General Mills, which has a large line of organic products. That serves a market niche, and it reduces pesticide contamination of soil. A win-win! Or, they can take advantage of those imperfections and add value for shareholders at the expense of society. A great example would be a sports team, demanding a publicly financed stadium as well as all the concession profits. The team and its investors makes money at the expense of the local community. That’s a win-lose.

If sports teams can’t make money without taxpayer subsidies, then there’s a serious issue with the underlying business model.

Corporations are amoral. MillerCoors is not a bad company for making alcoh0lic beverages, nor is it a good company for making the same. (As Homer Simpson says, alcohol is the cause of, and solution to, all of life’s problems.) It’s just a company that makes beer. It is the consumer who either drinks a moderate amount for good cheer and good health or drinks to excess.

An investor may want to avoid investing in MillerCoors because of a personal or religious restriction on alcohol. That’s fine, but then the investor needs to find an investment with a similar risk and return trade-off in order to maintain competitive performance. That’s the extra step that many social investors forget about.

Now, shareholders can agitate for MillerCoors to get out of the alcohol business, but that’s not going to happen anytime soon. But MillerCoors can do things that are good for the business that it is in as well as for society at large. For example, the company has been investing in projects that save energy, save water, and farm barley in a more sustainable way. A socially responsible project like that can help the company add long-term value for shareholders as well as to the community, and it may make the stock more attractive to certain investors than others with the same risk and return profile. (This is known in the trade as the clientele effect.) If you define social investing as avoiding sin stocks, MillerCoors is not for you. If you are interested in environmental issues, then it may be.

From a pure investment perspective, though, you need to get a certain amount of risk and return in your portfolio somehow.

If we assume that Hobby Lobby is an amoral corporation – the standard assumption in corporate law to date – then restricting operating hours or employee benefits would be acceptable as long as it created shareholder value. Consider the company’s practice of closing on Sundays. The reason other retailers open on Sunday isn’t out of disrespect for moral precepts, but rather a recognition that there are people with money who find it easier to shop on Sunday than on other days of the week – for example, Jewish people who do not shop on Saturday!  If there were enough customers who preferred to deal with a retailer that did not hold Sunday hours, or if the cost savings to closing on Sunday offset the lost revenue, then closing on Sunday would add value to shareholders. Any moral benefits would be incidental.

It’s the same with employee benefits. Companies offer them, or not, for economic reasons. Will the cost of the benefits be an effective form of compensation? Will they be too expensive to offer? Will the penalties for not offering them be too great?

A corporation’s board and management should make “moral” decisions only if they are economically neutral or add economic value. This is not as limiting as it may seem; it allows for a huge range of good things in terms of the environment; treatment of customers and employees; and contributions to local communities. But I’m not sure the choices of Hobby Lobby’s owners are adding to long-term economic value. A publicly traded company could not make the same moral arguments, and my opinion is that you give up on any moral decisions that would cost shareholders when you give up your liability. The courts will have to decide that.

On the other hand, if Hobby Lobby’s executives find that restricting health benefits is a way to attract better employees or build customer loyalty, then they’ve done the right thing. Otherwise, they have violated their fiduciary responsibility.

Commerce is messy. The corporate structure exists in part to set a company apart from a family, a religion, and the government. We’re all better off if those boundaries are respected.