Three Standards for Investment Ethics.

by Dual Income No Kids on November 30, 2007 · 0 comments

Ethics in investing. Boy, this is a tough one. Sometimes its often difficult to determine what’s ethical corporate behavior and what’s not ethically acceptable corporate behavior. Opinions differ. For example, my wife Miel places a greater value on the environmental policies engaged in by companies we have ownership in, but I’m more concerned about attitudes of management towards shareholders.

After some reflection, there are several criteria you could use for judging the ethics of investing.

1) It Doesn’t Matter, the Market Will Take Care of It: The late Nobel prize winning economist Milton Friedman famously wrote in 1970 that “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” (1).

By this Friedman articulate the lassie faire argument that the only responsibility held by corporations is to their owners – and that responsibility is to increase profits. In so doing, proponents of this philosophy argue that that the good of all will be ensured via Adam Smiths “invisible hand“. So basically under a free market/Friedman approach, it really doesn’t matter what you invest in because the market will take care of things in the aggregate. Of course a lot of people object to this, so we should consider alternatives.

2) Its Going to Happen Anyways, Just Don’t Make it Worse. This is the notion that unethical behavior will likely occur regardless of whether or not you participate in it. – For example, you might have shares in a company like Wal-Mart or Exxon Mobile, and regardless of your best efforts, the company might still engage in unethical behavior. In which case it really doesn’t matter if you own a small amount of shares – the unethical behavior is essentially out of your hands. On the flip side, those who make this argument do say you should not take controlling or large interest in a corporation you know to be engaging in improper behavior. If you do you’ll be tainted by association. This is articulated by Rabbi Jay Kelman.

3) I Know Its Unethical, so I Won’t be a Part of It. This third standard basically says that if you, on an individual basis, reach a decision of conscience regarding unethical standards of corporate behavior you are obligated to divest yourself of your holdings in that corporation.

This seems the standard most people hold, myself included. For example, I’ve decided NOT to purchase shares in the Wal-Mart corporation. I’ve made this decision because I believe that Wal-Mart unfairly spies on its shareholders and has illegally violated the rights of workers -both on numerous occasions. However, others do not agree with me – Warren Buffet included.

In this case, the standard is somewhat flexible, and it seems it has as much to do with closely held values as it does with universal principles about the role of profit.

Lastly, ethics are often an ongoing conversation, but these are three ways to think about how to balance making money while doing what’s right.



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