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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 transformation.

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.

Two beliefs 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 exclusionary screen--abortion.

"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

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.

The CEO 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. Zimmer.

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."


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