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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.

According to a joint 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 "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."

Governance and Public Policy ArticlesMr. 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."


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