Responsible Investing - Case Studies
Case 1: International Labor Standards
For companies to remain competitive, they often hire workers or contract manufacturers in foreign countries to develop their products. The global trend of using foreign workers has some positive benefits by creating jobs in impoverished countries, but the companies outsourcing to foreign countries should take responsibility for their actions. The relationship between the foreign companies manufacturing the products and the company selling them is technically an arms-length relationship, so historically US companies did not feel an obligation to take ownership over another company's manufacturing process.
At Parnassus, owning a stock is owning a company, and outsourcing your manufacturing is owning your manufacturing. Parnassus initiated dialogue with a major retailer who purchased substantially from foreign factories about taking a more proactive approach to monitoring how their products were being produced. As investors offering support to the firm's management to do the right thing, the company had the public and financial support it needed to change their approach to outsourcing. Today, the company has set the standard of responsibility of working with foreign manufacturers, including publicly disclosing their policies and the results of their work.
Case 2: Corporate Diversity
Part of fostering a good workplace is encouraging a diverse workplace. It's not just the right thing to do, but it's also not good business to assume that the best talent is in a certain demographic. When we consider investing in a company, we look at the firm's diversity record, including diversity in upper management.
During the early 1990s, Parnassus invested in a maker of advanced computer systems. For the most part, this company fit our standards as a socially responsible firm. Despite having a good workplace, the company had a stark lack of diversity on their executive board, with a board of almost 20 people and not a single woman or minority. New board members are infrequent at best, but after constant suggestion by the Parnassus investment team, the board finally appointed its first woman to board. On the day of the announcement the company's CEO called Parnassus President Jerome Dodson to tell him of the news.
Case 3: International Operations
In the mid 1990s, Parnassus held shares in a major apparel retailer that outsourced some of its production to contractors in Burma. Burma is governed by a military dictatorship maintaining its control by imprisoning the main opposition candidate. There were suspicions that a contractor for this company was being secretly controlled by the government. Parnassus, in conjunction with other companies, used their influence to convince this retailer to pull out of Burma.
The company examined the situation and concluded the right course of action would be to cease its relationship with this contractor. They have since closed all of its Burmese operations.
This retailer maintains its commitment to better oversee their production processes by dictating that their suppliers must adhere to its written standards of engagement. Among other things, these strict standards prohibit child labor, restrict working hours and require payment of the minimum wage or prevailing industry wage, whichever is higher.
Current Work
We are currently addressing accusations of predatory lending to low-income borrowers from financial institutions. Lower-income borrowers are inherently riskier than higher-income borrowers, so financial institutions charge a higher interest rate to compensate for that extra risk, which is reasonable and necessary business practice. The potential for unethical behavior comes about in the structure and terms of loans to a more captive and financially unsophisticated lending base. Many financial institutions have announced major changes to their direct lending practices, helped along by encouragement from socially responsible investors and consumer-protection groups. Despite this change, some financial institutions have shifted the origination of the loans to other, less-scrutinized financial institutions and then buying the loans from them. Just as retailers should take responsibility for the outsourcing their manufacturing, financial institutions should take greater responsibility for the origination of loans. We continue to work with financial-services companies to address the sub-prime lending problem.