Doing Well by Doing Good

Since 1999, Amy L. Domini, CFA®, has been named to the Smart Money 30, to Money Magazine's 30 Most Important People in Finance Today and to Barron's 30-person All Century Team. She clearly has made an impression, in part by demonstrating that investors can enjoy excellent returns without moral compromise -- a concept known as socially responsible investing. Ms. Domini is a founder of Kinder, Lydenberg, Domini, a corporate accountability research firm that created and maintains the Domini 400 Social Index. She is a managing principal of Domini Social Investments, in addition to serving as the Domini Social Equity Fund's president and as chair of its board. She is also a private trustee/portfolio manager at the firm Loring, Wolcott & Coolidge in Boston, Massachusetts, USA, managing US$1.1 billion worth of investments by applying social responsibility criteria. Ms. Domini earned her CFA charter, became an ALMR member, and joined the Boston Security Analysts Society in 1990.

Christina M. Grotheer, Associate Editor of AIMR Exchange, spoke with Ms. Domini in late January 1999, just three months prior to the Domini 400's 10-year anniversary.

AIMR Exchange: Smart Money, Money, and Barron's have recently named you to their "top 30" lists. To what do you attribute this media attention?

Ms. Domini: Ten years ago academic work indicated that limiting your investment universe would limit your investment return. Until there was an index for the socially responsible investor, that was a full stop for the field. My main contribution was the introduction of the Domini Social Index in 1990; it helped bring socially responsible investing mainstream and I think that is why I am being honored.

AIMR Exchange: In 1999, Domini Social Equity became the first company to post all of its proxy votes on the Internet. What did you hope to accomplish?

Ms. Domini: The three legs to socially responsible investing are: one, screening the portfolio; two, community economic development support; and three, direct education and outreach influence. Shareholder activism is a way of doing that third thing. Domini Social Equity Fund files more shareholder resolutions than any other mutual fund in America, and since 1992, we have published our policies in voting shareholder actions.

In 1999, I was asked to file a resolution on Home Depot regarding the use of products made out of wood harvested from old-growth forests. The proponents of the resolution were discouraged because the mutual fund families they contacted said their policy was to not disclose how they voted their proxies. This was shocking to me because it is not the fund family's money; it is the small investor's money. So we put our proxy voting online and challenged the mutual fund industry to greater transparency and to publishing their proxy votes, too.

AIMR Exchange: Is the Working Group on Socially Responsible Mutual Fund Disclosure related to this issue?

Ms. Domini: Our greatest challenge to growing the industry is that people have not heard of it. So our first goal was to come together in a kind of "Got milk?" campaign to help the public understand socially responsible investing. The disclosure we are working toward is, if you are defining yourself as a socially responsible mutual fund, then you should disclose to the public what your screens are, and what your commitments to community development and education and outreach are.

AIMR Exchange: What are the "screens" that you use to include or exclude companies from the Domini 400 Social Index?

Ms. Domini: We grew out of an older industry that was faith driven. If you were a Baptist, it was wrong to make money from alcohol. As an industry, we avoid alcohol, tobacco, gambling, nuclear power, and military weapons. In 1986, with the divestiture of American corporations doing business in South Africa at its height, socially responsible investing began to move from investing based on personal or institutional positions on certain products toward assessing the role of the corporation in society. The focus changed from a product orientation to a stakeholder orientation.

We now attempt, through a variety of systematically ascertainable and quantifiable data points, to identify companies in the better half of the universe. A common misunderstanding about the Domini 400 is that it represents the 400 best companies; it does not. In reality, it is comprised of 400 companies selected in parallel construction to the S&P in a way that reflects the market, but that also meets the criteria the classic socially responsible investor would apply.

AIMR Exchange: The Domini 400 has bested the S&P 500 since its inception in 1990. How are you beating the market when financials are a secondary issue?

Ms. Domini: Stakeholder analysis introduces a quantifiable way of assessing things that heretofore have been considered non-quantifiable: the corporate culture and the caliber of top management. We introduce a bias toward high-quality management and strong corporate cultures. We do not make any financial decisions on stocks in the index - we just look for viability.

AIMR Exchange: Do you foresee a global role for socially responsible investing in spite of concerns regarding development in emerging nations?

Ms. Domini: Absolutely. This is probably my number one priority over the next two years. I want Domini to be the global brand in socially responsible investing. Often, funds in other parts of the world will focus on environment, but will not emphasize human dignity. I would like the rest of the world, as they enter this field, to look at both justice and environmental sustainability, and I am excited about creating a demand for data on corporate behavior in an international context so that globally there is an infrastructure for following the corporate impact on society.

AIMR Exchange: Are companies today more willing to rethink their policies to conform to ethical, social, and environmental standards?

Ms. Domini: I think companies have undergone a shift, and I am astonished at how far things have come. General Motors now publishes comprehensive environmental reports. That is something I never would have conceived of as possible. The difference in environmental reporting between now and 20 years ago is absolutely amazing. This change is mostly due to shareholder actions that have introduced codes of conduct to companies, as well as blueprints for how environmental reports should be presented, but where it came from does not alter the fact that it exists. Now, no automobile company can say it cannot find information about how it runs its business because General Motors already has the information out there. It has changed the entire dialogue.

AIMR Exchange: Can you describe the four trends you have identified as key in making investment choices?

Ms. Domini: In my active management business, I like to emphasize companies that are beneficiaries of trends that I see lasting through the immediate, l0-year future. The first trend is that technology is getting faster and cheaper every year. A retail store like Staples benefits because it is selling desks to people who want something to put their new, cheap technology on. Staples also has a new distribution system it did not have before the Internet, so it is reaping a double benefit. The second trend is that, in the wealthier parts of the world, the aging population is demanding a higher standard of living than their parents and grandparents did. So I look to the health care field, at drug and medical device companies like Merck and Medtronics that focus on the aging population.

The third trend is that this is a global economy and, in my opinion, American brands like Gillette, Coca-Cola, and Colgate-Palmolive are ideally situated to benefit from and dominate our global economy. The fourth trend is that management will find experts so it can stick to core competencies. If you are a manufacturing company, you are not an expert on uniforms. Given the morale and safety issues around uniforms, it is an area of liability, and management is likely to hire an expert uniform-maker like Cintas.

AIMR Exchange: Which is more challenging: raising two teenage sons or trying to beat the S&P 500 for the ninth straight year?

Ms. Domini: Knock on wood, I find teenagers to be a lot of fun. I cannot imagine an age group that I would rather be a parent of. I have heard that teenage girls are mean to their mothers, but teenage boys are just a gas.

My biggest challenge for the next year is going to be how to take socially responsible investing into a global environment. It will involve a lot of change. I do not know what that change is going to be, but I think we can at least agree to justice and environmental sustainability as goals. Once you have your goals set, you can follow wherever that logic takes you. ¤