August 11, 2004
The Value of Transformation: The Catholic Equity Fund
by William Baue
After transforming itself from three actively managed funds into one index fund, the Catholic
Equity Fund works to transform corporate practice through shareowner advocacy.
Catholic doctrine holds that faith in God can unleash the power of transformation: from water into
wine, from sinners into saints. The Catholic Funds, a Milwaukee-based socially responsible
investment (SRI) firm that advocates Catholic values, similarly places stock in the value of
In May 1999, the firm launched three actively managed equity funds
that practiced exclusionary screening only. Three years later it merged the three into one index
fund, the Catholic Equity Fund (ticker: CTHQX), which predominantly practices shareowner advocacy.
In choosing engagement over exclusion, the Catholic Equity Fund seeks to improve corporate practice
through patient dialogue, conscientious proxy voting, and resolution filing.
fueled the transformation from three funds to one: first, that an index fund that tracks the S&P 500 would outperform actively managed funds in the long
run; and second, that advocacy is more effective than exclusion.
"We realized that not
owning the stock of a company does nothing to improve a company's behavior," said Ted Zimmer,
president of Catholic Funds.
The firm initiated a Responsible Catholic Stewardship
program based on two core Catholic values: that human life deserves protection from the moment of
conception, and that every person is entitled to be treated with dignity and justice. While the
firm enacts this program primarily through shareowner action, it also chose to retain one
"We chose to implement the first value by exclusion
rather than advocacy in order to accommodate those Catholic investors who believe it would be
morally wrong to own shares in a mutual fund that owned stock in a company directly involved in
abortion, even if the mutual fund would try to persuade such a company to get out of the abortion
business," Mr. Zimmer told SocialFunds.com.
The firm promotes the second value by
focusing mainly on three issues: fair treatment of workers of a company and its vendors; good
corporate governance; and fair compensation of executives.
"We believe that a
company's board of directors should serve as the company's conscience and can effectively fill that
role if it is strong and works in a context of good governance procedures and policies," said Mr.
Zimmer. "Similarly, we believe that a chief executive who demands excessive compensation is likely
to have a value structure that devalues the contributions of workers and a mindset that undervalues
the importance of treating workers with dignity and justice."
Catholic Funds focused most
of their advocacy on the relationship between CEO and worker pay. It was the primary filer of
eight resolutions this proxy season: five called for shareowner approval for paying the CEO more
than 100 times the company's average non-managerial worker; three asked for a report on
CEO/average-worker pay ratio over time.
Recent research bolsters the case for such
resolutions from a shareowner perspective. According to a July 2004 Corporate Library (TCL) report, CEO total compensation
in the S&P 500 rose by a median of 22.18 percent in 2003, twice the rise seen for 2002. A 2001
United for a Fair Economy (UFE) report finds an inverse
correlation between very-high CEO compensation and long-term share performance.
pay limit resolution did not go unnoticed, as two companies petitioned the US Securities and
Exchange Commission (SEC) to allow them to omit
the resolution from their proxies.
"We twice successfully defended our CEO pay limit
resolution in the SEC from attacks by Cendant [CD] and International Paper [IP]," said Mr.
The resolution received enough votes at the two companies (6 percent and 3.66
percent respectively) to surpass the three percent threshold for first-year resolutions to be
re-filed in subsequent years. However, the resolution failed to do so at MetLife (MET--2 percent).
Catholic Funds and its co-filers withdrew the resolution at Compuware (CPWR) and Delta Airlines (DAL), believing that
the companies are moving toward improving compensation policies and practices.
Interestingly, as a co-filer, Catholic Funds also helped negotiate successfully with several
companies that have resisted shareowner and worker advocacy.
Catholic Funds withdrew a
resolution at Occidental (OXY) because the company is working
toward establishing a human rights policy. Occidental is currently the subject of an Alien Tort
Claims Act (ATCA) case charging human rights abuses in Colombia. Catholic Funds also withdrew a
resolution at ExxonMobil (XOM) because the company is working
on a report on the AIDS pandemic. ExxonMobil has refused repeated shareowner requests to implement
sexual orientation nondiscrimination policies.
Other Catholic Funds successes include
YUM! Brands (YUM) and Cintas (CTAS). YUM! Brands, which agreed to
elect all directors annually, is the subject of a three-year boycott organized by Florida tomato
farmers. Cintas, which recommended a vote in favor of a vendor code of conduct resolution, is
currently suing SRI firm Walden Asset
Management for calling a Cintas supplier a "sweatshop."