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June, 2005


This advice sounds simple: buy the shares of companies whose managements are socially responsible, shareholder-friendly, and/or who strive to look out for the needs of their employees; then watch the profits roll in. The trouble is there are no easy formulae for that kind of responsible leadership. And one person's socially responsible company may not be another's.

Tobacco companies have paid billions of dollars a year in taxes for many decades, which seems pretty responsible, and, by and large, have also been good for their shareholders and not bad places to work. Yet in today's culture, few would argue that they have been managed with the best interests of society in mind.

Berkshire Hathaway has certainly been good to its shareholders. The intrinsic value of a share of the company has grown by leaps and bounds, overall considerably better than 20% a year, compounded. Usually the share price has followed that value skyward. Top management takes a pittance in wages (around $100,000 a year) compared with the extravagant CEO salaries of many other companies. And its head honcho, Warren Buffett, has often personified good ethics in business. Yet, currently a division of the company, General Re, is under investigation by NY's Attorney General, Eliot Spitzer, for possible misconduct in a specialized type of transaction, previously fairly common practice, that called into question the validity of AIG's earnings statements and risk acceptance.

Starbucks has a lot going for it, but the long-term health of its caffeine and/or chocolate addicted consumers may not be one of them. If we chastise big tobacco for smoker-related illnesses and junk food companies for making us fat, can coffee companies be far behind, in a widening circle of criticism and litigation?

Whole Foods has been a terrific growth company and has found favor with an increasingly wholesome eating public. They are now even starting a program to assure their meat comes from farms, ranches, or other suppliers that are friendly to animals (right up until they are butchered for our dinners), but vegetarians may not find this kind of sensitivity persuasive. Also, there have been hints of a bit of controversy in how the company treats some of its employees.

So, we could probably find something objectionable in just about any candidate company when looking for responsibly led businesses. The issues involved are values-based, and thus not subject to ready definition or consensus.

Despite such reservations, however, we can at least seek to acquire shares of companies that, on a wide spectrum from highly responsible to highly irresponsible, fall more at the former end than the latter. Historically, shares of such equities perform very well compared with the major market indexes. I do not know just why this is, but intuitively it seems reasonable that companies which are growing their earnings in a generally win-win fashion, positive for consumers, employees, the environment, and shareholders alike, will find favor with those who buy their products and services, loyalty among those who work for them, and increasing popularity among investors who prize their relative security and profitability.

Investors have a wide variety of social concerns when it comes to responsible investing. Some are not worried about coffee but wish to exclude tobacco, others dislike carbon based fuels, firearms, nuclear energy, corrupt CEOs, major polluters, companies that employ child labor overseas, etc. The potential list of issues is long.

As with any recommendations, it is best before investing that the reader carry out his or her own research or check with a preferred financial consultant before parting with hard-earned money, but here are a number of stocks that, more or less, seem to me to fill the bill for responsible company leadership. I encourage those interested to weed through the list, add names of their own, select at least five to purchase for a small portfolio, and test this essay's hypothesis for oneself by investing in the best and then holding the assets for the long-term.

Johnson & JohnsonJNJ$17$66+288%
Berkshire Hathaway (Class A)BRK/A$22,300$83,520+275%
United Parcel Service**UPS$68$70+3%
The Timberland CompanyTBL$3$39+1200%
Whole Foods MarketWFMI$8$121+1413%
Herman MillerMLHR$6$30+400%
Southwest AirlinesLUV$5$14+180%
Ecolab, Inc.ECL$6$33+450%
Hewlett PackardHPQ$15$24+60%
(*prices rounded to nearest split-adjusted dollar)
(**UPS began trading publicly on 11/10/99, so the initial figure reflects that date's closing price.)

Investors who had purchased shares in these relatively responsibly managed companies ten years ago (or 11/10/99 in the case of UPS) would have seen compound average annual gains of about 18.5% in that period vs. 8.4% for the S&P 500 Index (all stats are through 6/16/05 and exclude dividends, which generally would have added about 2% or less annually in this period).

If you prefer leaving the investment driving to mutual funds managers, there are good funds available with an emphasis on responsible company leadership. Among the best of these is: Ariel Fund (ARGFX) which has had a ten-year compound annual total return (through 5/31/05) of 15.68%.


Larry is not a professional. Don't take him seriously!

Actually, the investment article provided here is for general information only and should not be considered as professional advice, a solicitation to buy or sell any security, or the Word of God. Investors are encouraged to do their own research while considering their personal goals and circumstances, or consult their own professional financial advisors, before making investment decisions. Neither Larry nor LARVALBUG will be liable for any losses sustained by any visitor to this site.

(Disclosure statement: Larry and Val have holdings in some of the suggested assets but do not "make a market" in any of them and do not derive any direct benefit from recommending them, except perhaps for a bit of smug self-satisfaction.)

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