Stephen Viederman writes and acts on a variety of interconnected issues in alternative economics, sustainability, the environment and public policy, including the linking of asset management and grantmaking. The Noyes Foundation is a leader in mission-related investing including shareholder activism, for example calling Intel to account over their accountability to communities in New Mexico and elsewhere. [This interview transcript is substantially longer than the edited version which appeared in IFS itself. A more detailed biography is available in connection with the Harvard speech referred to elsewhere]

"crossing the boundary from your home, family and community to your desk at another institution does not absolve you of your responsibilities as a human being"

Q: Could you briefly describe the Noyes Foundation and its objectives?

Well, the Foundation is 50 years old today, in fact. It is a middle-size American philanthropic foundation with about $65 million under management. The goal is to protect natural systems and create a sustainable society -- broad goals for a relatively small amount of money. We carry out our objectives always having to make choices, since you can't do everything with about three and a half million dollars a year, which is our grantmaking budget. So we are funding in the areas of toxics, sustainable agriculture, and reproductive rights, particularly as these intersect with issues of justice, and particularly in the Southern part of the United States. The family have seven seats on the board, compared with eight non-family.

Q: Moving straight on to issues of corporate governance - the most common method of disciplining management is by selling out - voting with your feet. Why have you come to favour a strategy of shareholder activism?

The problem with divestment is that, unless it is part of a large well-organised effort, it falls on deaf ears. If we hold two thousand dollars' worth of shares in a particular company and we were to sell out, even if we were to send them a letter telling them why we were doing so, it would have no meaning whatsoever. Let's face it, there are no perfect companies - our board jokes about the Russell 2000, the S&P 500 and what they have dubbed the Viederman 3 - allegedly those companies that would meet all of my standards for social responsibility, and we're still looking for the Viederman 3!

The system does not permit companies to meet all of one's criteria. We do screen out the most egregious offenders although, at the same time, we have set aside some money to purchase stocks in companies that we are particularly concerned about, as a result of concerns expressed by our grantees, so as to undertake shareholder activity in cooperation with their organising grants. So we would hold shares in companies that we would deem egregious - our activism is not just what we, the Foundation, feels is important - our motivation is in large measure to add value to our grants by adding shareholder activism to the various instruments that organisations we fund have available to them to get the attention of corporations.

Where shareholder activity or divestment has been successful in effecting changes in corporate behaviour responsive to community stakeholders, for example with South Africa, it has been as a result of larger organized effort including political action and boycotts. It did not just involve shareholder or institutional investor activity, but also the public at large.

It is also a question of citizenship - I believe that owning shares in a corporation is not so different from being a member of any other community or polity, and in effect you take on certain ethical and moral obligations, within limits obviously, when you become a shareholder, to ensure that that institution is not doing things that are detrimental to the health and safety of you, your family, your community and the world at large.

Q: For an institutional investor, is getting involved in shareholder activism not quite a risky strategy, given the potential costs of a lengthy battle?

I would prefer to ask: what are the costs of not doing it? I hate to sound like an economist and I don't particularly like most ways that cost-benefit analysis are undertaken, but there are costs and benefits. If we all sit back and do nothing, we are giving those people who are accountable to no-one (increasingly) license to do as they please - now, in some respects, multinationals are more important and more politically powerful than governments.

It is not so much risky as time-consuming, and somewhat costly in that respect. We were low on the learning curve the first time around with Intel. We had never done this before. I think as we and others get more involved and more skilled, the time constraints and costs go down.

Q. But are individual institutional investors without a philanthropic mission not in a 'prisoner's dilemma' situation, of bearing large costs while others reap much of the benefit?

You say 'without a philanthropic mission', but who are some of the major institutional investors? The mission of pension funds, for example, is to help to ensure the future health and safety of their pensioners - to provide them with resources when they are retired. Well, what is the advantage of providing them with an income if air they breath, the water they drink and the food they eat is making them sick and shortening their lifespan or contributing to increased health costs? Do they not have a mission that is more than just providing money?

Similarly, the college and university is trying to educate people to leave the world at least as good a place, if not a better place at some point, and if they let their investments destroy that, isn't there a fundamental conflict between what their purpose is and what their investments are doing? Christian religious institutions that do not care for stewardship, but simply say "we're going to make money", are not then being responsive to their stewardship concerns spoken of biblically.

Perhaps the only institutional investors that don't fall into this are the straight financial ones - the banks etc. - but that gets into a broader set of issues. We are all basically human and crossing the boundary from your home, family and community to your desk at another institution presumably does not absolve you of your responsibilities as a human being and as a citizen.

Q: When it comes to exercising responsibilities, why do you think so many institutional investors either do not vote at all, or have policies of always voting with existing management?

Because most institutional investors come out of the world that the companies come from, so in a sense there are huge psychological barriers. Do you vote against your peers, or, in a sense, do you vote against yourself? Many of the boards and other people in these institutions also serve in other corporate roles and, at one time or another, they may be on the receiving end, so it is just easier to let it go.

It is also difficult to get consensus - there are real issues about how you determine what is an appropriate vote. In the absence of clear non-financial performance indicators, it is hard for people to say "this would be good" or "this would be bad." Alas, these issues are complex and there is a lot of uncertainty involved. I don't want to characterise this as an 'open and shut case' that anybody can easily do. A great deal of thought and commitment is needed to co-ordinate action. And if you are not too different from the people you're voting against, you are not likely to do it. Basically, managers support managers, and most of the decision makers in these settings are managers.

Q: Would you agree with Sarah Teslik of CII that this is tantamount to owning something and then not looking after it?

Yes, and this comes back to citizenship again. Owners cannot absolve themselves from responsibility for that in which they are involved. Part of the systemic problem, especially in financial markets, is that people have divorced all of these things from their own personal existence, and somehow implied that what corporations do does not affect them, which I find hard to understand.

Q: What do you think of the argument that institutional investors have a duty to exercise their voting rights diligently as part of their fiduciary responsibility?

Without question, yes. Fiduciary responsibility is a citizenship concern, and is a responsibility to others. Part of the problem in all of these things is in the very nature of the way we think about economics. The narrow view of fiduciary responsibly is the neoclassical economist's view that the economy is a closed system, in which environmental and social costs are seen as 'externalities' - as outside the system. In fact, there is no closed economic system - the economy is an open system within a broader system - a closed and finite ecosystem - and interacts with the political system, the cultural system, the social system. However, in economics you are told that the environment in an 'externality' which allows you to pollute without paying.

The concept of fiduciary responsibility must be broadened to include 'external costs'.

If I were allowed to expurgate the English language, one of the concepts I would get rid of sooner rather than later is the concept of a 'by-product' or a 'side-effect'. Within a system there are no 'by-products' or a 'side-effects', only products and effects. Think of the situation where I go to the doctor and she prescribes an antibiotic for an infection in my elbow, say, and tells me that the side-effect will be nausea. Well, the response to the doctor is that this is not a 'side-effect' - it is an effect because I am a system - nausea affects me. I think if one could stop thinking of things as by-products and side-effects one would be more likely to see things in a holistic way, as difficult as that may be.

Q: Returning to what you said about fiduciary responsibility - given that the linguistic definition of prudence implies a long-term view, is it possible for an institutional investor such as a mutual fund manager to focus on short-term financial gain and still act as a responsible fiduciary agent?

This raises two issues. Firstly, what is the importance of the short term? A short term focus is defined into the economic system because we discount anything over the long term. What is the magic of the short term, and how does that impact on things we might care about? Any short term view, by definition, tends not to look at consequences, and particularly unanticipated consequences - "live for today and the hell with tomorrow" - thereby neglecting ultimate fiduciary responsibility.

Secondly, one can be concerned about rates of return in the short and long term, but the question implies that if you screen - if you do take account of consequences and get involved with activism of various sorts - your returns will be lower. We question that as a conclusion. One year a trend doth not make but, last year, we had one manager who did 29%, one who did slightly under the S&P and one who was considerably under. Quite frankly, the issues were not that the screens affected them but it was that they varied in their stock-picking ability. Overall, we matched the S&P 500, which is a reasonable benchmark given that 75% of US managers don't make that!

So the assumption is that you can't make money if you are a conscientious investor, but we believe that there is increasing evidence that this is not so.

Q: But, again, are institutional investors, be they mutual fund managers or pension funds, not legally bound to simply seek the highest return for investors or members?

Again there are two questions here. The legal situation depends upon the investor: in the US, according to the 'prudent man' rule, foundations can invest in things that relate to their mission, but public sector pension funds operate under a different set of legal restraints and may not knowingly take a lower rate of return. However, again, the increasing evidence that screening does not lower returns challenges the premise of the question. Recent studies show that screened portfolios may be marginally more volatile, but that screening has virtually no impact, positive or negative, on return. The difference is in stock-picking and manager selection and, intuitively, that makes sense. Most portfolios have, say, 150 - 200 stocks at most. In this country alone there are thousands and thousands of stocks, so it is reasonably clear that one can find something that is less egregious if one looks for it.

And then the question is, "what is a return?" If a 'profitable' company passes on its costs to the society at large by polluting and thereby increasing health or cleanup costs, who pays? Taxpayers and consumers of the pollution. Is the company really generating a greater rate of return?

That's the externality question again. A Jewish theologian by the name of Rabbi Abraham Heschall once said that "words create worlds": by allowing ourselves to define 'return' purely in financial terms and only to the investor and corporation, and not to the society at large, we allow ourselves to be brought into a discussion that does not take account of the fact that you and I pay, with our health and so on and so on.

Q: So is there, in your view, a fundamental conflict of interest between institutions' dual roles as both owner and fiduciary and, if so, is it built into our definitions and legal structures?

Again there are economic systemic issues here. Corporations, as of the present time, do not have to pay attention to things that are regarded as 'externalities', except where the government regulates. Let me give you an example. Increasingly, a corporation will commit itself to environmental restoration. For example, if it destroys a wetland it will attempt (if that is actually physically possible) to recreate a wetland. But if you ask the same corporation "will you try to restore a community that you have destroyed" because you closed or downsized a plant significantly, there is a look of amazement because they never thought of that! In a sense there are no incentives for them to do this, but who carries the burden? As well as the individuals directly affected, if unemployment goes up, the taxpayer pays for it, small businesses falter, the community's economic base falters, there is less of a tax base ... and the corporation can pick up and walk away with no obligation - no responsibility.

How does any individual or institution deal with that? These economic issues have important political and social implications - issues of what is the nature of the society in which people want to live - questions of values, ethics and morals, terms which are not often part of the discussion.

Fundamentally, it is the sense that 'it's not my responsibility' that is a major problem. I remember 'Tomorrow' magazine reported on a survey of money managers in London and their sense of responsibility for environmental concern. The response, according to 'Tomorrow', was that those were moral and ethical issues and therefore not part of their purview. Well, yes, that's the way they have been trained to think, but it allows them to say "this is not part of investment." With a broader sense of responsibility, the conflicts disappear. Otherwise it is as if, on entering their offices, managers say "we are no longer human, we are no longer parents - we don't breath the air, we don't drink the water, we don't eat the food from polluted land; we don't care about our children and grandchildren" ...

Q: OK, so from your perspective, then, what are the principles at the heart of 'the corporate governance debate?'

Who are the stakeholders? Do they have legitimate rights? We accept that shareholders at least have some rights, but what about employees and communities and customers? And what about the corporation which, in an ideal situation, might define itself as a stakeholder in the community, which it can sustain or destroy by its actions with no responsibility to those who may be harmed by their actions? To the corporation, as things are at present, communities are disposable.

Q: So in practical terms, what key aspects of good corporate governance do you believe both add value and bring about broader social and political benefits?

There is an increasing body of literature showing that environmental concerns and changes in corporate governance do affect bottom-line shareholder value. Much of it seems self-evident, but there is a lot more work to be done. For example, pollution control is principally about reducing waste, which tends to improve the bottom line. Similarly, there is evidence that genuine concern for employee welfare improves productivity. That seems pretty reasonable. If you have happy people working for you, they are going to be more productive and think harder about how they might improve the quality of the product and process.

Q. And how would you view the suggestion that this is better done by giving employees an ownership stake - turning them into shareholders as well?

I think the whole question of employees as shareholders is an important one. It may be an improvement, apart from the fact that most corporations don't treat their shareholders very well! It may be a pyrrhic victory! The issue doesn't have to go that far if you think in terms of reasonable working policies and the like, which respect people as individuals, whether they are employees or owners or both.

Q: What else do you think that stakeholder theory has to say about wider issues of corporate governance and accountability? (For example, should employees or local elected officials have a say in how a company is run?)

We already covered much of this, but I would add 'not only elected officials'. I think corporations need to listen to and speak with the communities in which they are located. The reason I separate local elected officials from communities is that I am never quite sure how independent they may be. I can't speak for the UK but certainly, in this country, campaign contributions do have a way of affecting that and, in fact, our whole activity as regards Intel in New Mexico was related to the fact that there was no conflict between the local elected officials and the company. The conflict was between the community, the company and, in many respects, also the local elected officials, because the community felt that they were not being responsive, open and transparent about what was going on.

Q: But how can an institution transparently demonstrate successful performance to its members, investors and perhaps its own shareholders if some of its objectives are non-financial?

This is at the heart of the issue. The fact is that people are still looking at the single bottom line. It strikes me that a lot of the problem arises from, for example, arguments that data on environmental activities as they relate to performance are not very good - your 'metrics' are not good. Well, that's a fairly common argument when somebody wants to dismiss you. But the fact is that most accounting principles are not that good - it is just that they have been accepted over time. A friend reminds me that a German accountant and an American accountant would give very different answers as to the profitability of Mercedes Benz.

So the fact is that all of the data that we are using - financial or other - are at best approximations and reflect the acceptance of agreed practice. It is just that the environmental and workplace stuff has not been accepted yet.

Q. So it's a legitimacy problem?

Yes, it is a question about acceptance and mind set - about analysts and money managers feeling that they have enough to worry about without another set of indicators - the financial stuff is complicated enough! And the 'theology' of this is that those things don't make any difference anyway. Once again, it comes down to whether or not you choose to ignore the 'externalities'.

[Editor's Note: Non-financial performance indicators are under discussion by a number of industry figures including Sarah Teslik of the Council of Institutional Investors.]

Q: What do think of the view of some writers that if corporations, including institutional investors, do not take a broader view of their responsibility to society, democratic institutions will ultimately legislate away the unprecedented freedom they currently enjoy?

This is an interesting question. In the US, since corporations control much of the legislation, I find it hard to imagine that Congress would or could pass legislation reducing corporate freedom at this point.

Let me give you an example: I was just in China, and I was talking with students there about the question of technology transfer, and saying that a country like China should demand that. In order to exercise its own freedoms, it should have reasonable access to technology. The rule there is that companies do have to share, but it is the United States government that puts a limit on technology transfer. I would be so cynical perhaps to suggest that this rule has been established by the corporations themselves so that, in conversation with the Chinese, they can blame the US Government: "sorry folks, but we've got to do this".

The fact is that corporations do have enormous degrees of freedom, and in many aspects are more powerful than government, partly due to government weakness and partly due to campaign finance, through which they make a lot of the rules. This requires an ever-vigilant set of democratic institutions, particularly in the non-profit, non-governmental sector but, even there, many of these institutions are now relying on corporate contributions, so it becomes a cyclical process - even the NGOs are effectively co-opted.

Q. Yes - we've seen this in the UK with NGOs receiving substantial funding from local authorities, making it difficult for them to then criticise those local councils on, for example, the effectiveness of their Agenda 21 initiatives, environmental policies etc.

Exactly - one does not bite the hand that feeds one.

Q: Thinking particularly about the focus of our readers - institutional investors, executives in mutual fund companies, senior pension fund sponsors and the like - is there any other major aspect we have missed, or you would like to pick up on?

Not so much missed, but more a question of emphasis. It is the question of 'cognitive dissonance', and the process of 'dissonance reduction' that we are going through and I have written about. I have heard a money manager say: 'Look, as a parent, as a grandparent and a citizen I am concerned about these issues, but as a money manager I am constrained.' This is denial. I recognise systemic constraints, but I also believe that constraints remain in place too long because people are not willing to really confront them and deal with them!

As the Grateful Dead once said, "Denial ain't just a river in Egypt". For money managers, the question is about extent that we continue to separate out their vocation and their avocation - In one of my papers I quoted a money manager in the States talking about a tax law from which he benefited both personally and on behalf of his clients. He said that "when I get home after 6:00pm, I worry about that as a citizen". Well, I worry about the fact that he is capable of separating his citizenship life from his work life. I worry about the fact that many people make this separation between their real values and their work. This is the fundamental issue - are we humans, or do we somehow leave our humanity behind.

Q: What would you say to institutional investors who feel too small or too risk-averse to take on the management of a company with whose policies they disagree, either on financial or ethical grounds?

Well let me point out that, as institutional investors go, the Noyes Foundation small. We have $65 million under management. Presumably we could make a bigger difference if we ran the trillion dollars of the Council of Institutional Investors, but the fact is that we don't, and you have to start somewhere. There are all the trite sayings about 'the journey begins with the first step', but somebody has to start, show that it can be done, and show that it is worth it. We only owned one hundred Intel shares when we filed our resolution. (That was not by design - it just happened that we had about 3,000 shares and our manager thought they were topping out and had put them on call!)

Yes, it requires organisation and time, but everything starts small. South Africa divestment started small, the corporate governance issues started small. As Markhol Bloh once observed, if you think you are too small to make a difference, you have never been in bed with a mosquito.

ENDNOTES & LINKS:

Here are a few words from the conversation which took place around the interview, and which were interesting and enlightening:

[ During a pause in the interview, I mentioned the piece written for Green Futures magazine by myself and my partner Frances Laing earlier this year. I mentioned that "it was an opinion piece rather than a structured academic piece"... ]

Every piece is an opinion piece - the structured academic stuff is just hiding behind some non-existent aspect of 'objectivity'.

[Talking about recent publications ... ]

Have you read the new book by Bill Greider - " One World Ready or Not: the Manic Logic of Global Capitalism" - talking about globalisation? It is extraordinarily well-written, though its a very sad book, in the sense that he is a superb journalist with a serious social conscience. One of the very right-wing journals said, in their review, that it was unfortunately too well-written a book because it would get more attention than it should. Especially where it questioned some aspects of the free-market system, but I think it is a terribly important book. [Editor's Note: See also articles, biog etc. on Amazon's site.]

But a sad book? One of the things I liked about David Korten's book ("When Corporations Rule the World") was the last chapter, in which he listed a large number of positive changes that could take place in the next few years and said, well, if all this sounds 'pie in the sky', who would have imagined the Berlin Wall coming down when it did?

I don't know what Grieder says in his last chapter yet, I'm not there yet.

My partner is always telling me how important it is not to write something depressing without telling people what they can do about it.

Yes, my son keeps telling me that, and I keep saying I wish I knew the answers.

Well, I find a lot of your writing very positive, because you are doing something about it, and telling people what you are doing about it - I find that positive and empowering!

Thank you, though I sometimes wonder!

Are any of your papers available on the Web as yet?

I believe that a speech I gave at Harvard is, through the Harvard seminars. We may be setting up a Website ourselves. [Editor's Note: a link will appear here as soon as it is available!]

In what direction is your work moving at the moment?

We are going to continue exploring ways to get institutional investors, especially foundations, more involved in mission - related investing.