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Ethos in Praxis : The Missing Elements in Ethical Investing - I

1. Introduction
The feeling that not all is right with capitalism has prompted the thoughtful to question the morality of business. Making profits is not inherently bad, but pursing profit at any cost is morally questionable for most people. If a business enterprise must engage in, or support, the harming of human lives, destruction of the environment and careless depletion of non-renewable resources in order to produce ever expanding profits, then many morally conscious investors will feel queasy about putting their money into these companies. Portfolio managers claim they can help investors put their money into ethical companies.

Ethical investing is a two-part process. The first part is theoretical - developing ethical criteria to provide guidance on companies that qualify for investments. The second part is practical - selecting the companies that meet the ethical criteria. This paper concludes that it is possible to set up ethical criteria that rest on principles from moral theories. The extent and scope of the criteria depends on the position one holds on the moral status of corporations. If one is of the view that corporations do not have any moral status or responsibilities then evaluative criteria are moot. However, if one argues that corporations have moral status and responsibility, then it is possible to derive moral evaluative criteria.

Unfortunately, problems arise in the second part of ethical investing i.e. the application stage. Criteria are incorporated into negative screens (stocks to avoid) and positive screens (stocks to buy). These screens tend to ossify the criteria into thoughtless laundry lists and leave no room for interpretation of moral principles as applied under different circumstances. To take into account the various moral situations of corporations will result in an unwieldy, time consuming and impractical screen. There also are problems when it comes to getting accurate information on firms' ethical behavior. The information is more flawed and incomplete than we wish to believe. Finally, an absence of rigorous ethical reasoning is highly likely because investors do not demand it and ethical funds must serve investors' desire for ethical subjectivism. In sum, ethical investing in practice is a perfunctory, conscience assuaging exercise.

2. Ethical Investing
What does it mean to invest ethically? It is to purchase, with a view to obtaining higher returns, the financial instruments issued by corporations that act ethically. These corporations are selected by means of a set of ethical criteria. Conversely, it is not investing in corporations that act unethically. The former definition describes the positive choice approach to ethical investing - one invests in companies that are acting ethically. Not investing in unethical corporations describes the avoidance approach where an investor refuses to invest in companies that are acting unethically. A fund must decide which strategy it wishes to pursue when investing ethically. It is not unusual for funds to pursue both strategies at the same time, although avoidance tends to be the dominant one in ethical investing.

3. Evaluating Corporate Morality
Is a corporation a moral agent and therefore, held responsible for its moral actions? If a corporation is morally responsible, how are we to assess corporate morality? Clearly, how we evaluate corporate morality depends on the theoretical framework that we choose to use. The framework, in turn, determines how much we expect from corporations in moral terms. Our expectations can range from zero (corporations cannot be evaluated morally) to very high (corporations are expected to abide by a full range of moral principles.)

3.1 The Separation Thesis
If one holds the position that business and ethics are entirely separate domains, then there will be zero expectations from corporations to act morally. Freeman explains the separation thesis as, "The discourse of business and the discourse of ethics can be separated so that sentences like, "x is a business decision" have no moral content, and "x is a moral decision" have no business content.". Businesses make economic and profit maximizing decisions irrespective of the ethical implications. If they had to consider ethical aspects, then they would be unable to maximize profits. Since profit maximization is the primary responsibility that they have to shareholders, this goal must take precedence over others. The view that ethics and business are incompatible has led to the view of business as amoral. De George calls this view the "myth of amoral businesss." It is a myth because it is clear from the outrage resulting from recent scandals at Enron, WorldCom, and Health South that the public does expect corporations to act ethically. Werhane and Freeman declare the separation thesis to be a "bankrupt discourse" because it forces false dilemmas on business practices. It is an illusion that businesses must choose to be either morally good or profitable. In reality, every business decision affects people and every economic decision is "embedded in a belief system that presupposes some basic values or their abrogation."

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3.2 The Minimalist Conception
Thus, business and morality are not separate. However, the level of ethics expected from corporations may still be minimal. The low expectations of corporate morality are represented by Milton Friedman. He writes, "There is one and only one social responsibility of business - to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud." According to Friedman, corporations do not have any moral obligation except to make profits. However, he does not to give the corporation carte blanche to achieve this end by any necessary means. The corporation must stay "within the rules of the game" and "engage in open and free competition." It must increase profits "without deception and fraud." According to Friedman, in achieving the goal of profit maximization, corporations are constrained by law, ethical custom, and social mores. Freeman and Werhane call Friedman's view a minimalist conception of corporate responsibility. However, as we have seen earlier, Friedman does not subscribe to the idea that corporations are moral entities. They do not have moral responsibilities and should not be morally evaluated. The only way corporations are constrained from being completely immoral is by legal means. In addition, if the market is ill disposed to the actions of a corporation, demand for its goods or services will likely fall. This event should cause the corporation to cease its behavior. Hence, the law and the markets are the only arbiters of the behavior of corporations. Under this theoretical framework, there is no need for ethical investing and therefore, no need for moral evaluation of corporations.

3.3 The Corporation as Moral Actor
De George attributes a greater degree of moral responsibility to corporations than does Friedman. He distinguishes the corporation as a moral actor because it is responsible for its moral actions. However, the corporation is not a moral person because it is not human and is not an end in itself. When judged in this way, the moral obligation of a corporation is limited to not doing harm to people. We expect corporations, "to not do what is morally prohibited" but we do not expect them to have the full degree of moral obligations that we expect from humans. As such, the criteria for judging if a corporation is ethical will stem from this negative injunction. A list in section 4 provides further elaboration of the criteria. The list (and unfortunately, ethical criteria seem to end up as laundry lists - more on that problem later) calls more for an exclusionary or avoidance approach to investing. The equity or bonds of a corporation that commits an act that is ethically prohibited will not be included in an ethical portfolio. Acts are always measured against the main criterion (does not harm people) to evaluate a corporation's morality.

3.4 The Corporation as Moral Person
Peter French argues that corporations are analogous to moral persons because of their normative dimensions. French's theory rests on four key claims. First, corporate identity corporate identity is distinguished from other collectivities by having a corporate internal decision structure (CIDS). Secondly, decisions are corporate intentional acts if and only if they arise in accord with the CIDS. Third, there are only two necessary and sufficient conditions for ascription of moral responsibility:

1. an agent must have caused an event to occur
   
2. the agent must have intended the event to occur.

Fourth, a moral person is the subject of a right. Any entity, which is an intentional actor, is also a moral person. French's views are not without problems. In particular, others have criticized his leap from ascribing responsibility to the corporation to the idea that a corporation is a moral person.

If corporations are moral actors instead of moral persons, they do not have the full range of moral obligations as humans. On the flip side, if corporations are not moral persons they cannot expect to receive the full moral consideration accorded to moral persons. Thus, a corporation need not treat another corporation as a moral person and may therefore, treat it as a means to an end and not an end in itself. This may result in some shabby behavior by corporations, not only towards other corporations but also towards institutions in the public and non-governmental sector. I prefer not to give corporations this excuse for moral laxity. Moreover, avoidance is a limited way of ethical investing. Knowing where not to invest does not help with the decision of where to invest. The positive approach complements the avoidance approach. Thus, a fund will actively seek out corporations that are doing good, and not just avoiding evil (to put it in natural law terms.) If we believe that corporations have a moral obligation to act to maximize the good because they have the status of moral persons, as French argues they do, then the moral evaluation net will be spread wider.

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