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Benefits and Pensions Monitor

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What Would Uncle Miltie Say?

By: Jim Helik

When todayʼs proponents speak of Socially Responsible Investing (SRI), they note that the philosophy has moved away from negative screens that avoid investing in certain areas (see Michael Jantziʼs article in the May 2006 issue of this magazine) towards more mainstream and inclusive issues such as including sustainability issues. They often use more positive words referring to the “duty” of pension fundsʼ to “do more” than just make money.

So, we are presented with a modern, positive thinking option that calls on us to collectively be more (socially) responsible. Well, who can argue with that?

Business Application

At least one man can, and did. Milton Friedman died in November of last year, yet continued to rally against the business application of social responsibility (but not against, it should be noted, any personal application of broader social responsibility). His widely-quoted New York Times magazine article of 1970 states the problem nicely in its title: The Social Responsibility of Business is to Increase its Profits.

Letʼs pull out some main arguments, and note the application for plan sponsors:

• Just as plan fiduciaries are the agents of the retirees who own the pension funds, so too is the company executive who acts as the agent of the individuals who own the corporation. The primary responsibility of all of these agents is to the owners. That is the important responsibility, of people not of organizations. According to Friedman, business as a whole doesnʼt have responsibility, it is the people within an organization who have this responsibility.
• A focus on the owners, and on their profits, is no trivial matter. This doesnʼt mean that judging the agentsʼ performance is easy, but “at least the criterion of performance is straightforward” says Friedman. To the SRI cry that we “must do more,” Friedman would respond “we have enough to do already, thank you very much.”
• The executive (or plan sponsor) is also a person in his own right. As a person, he or she may have many other responsibilities that are assumed – to family, conscience, charity, or country. But in all of these respects, he or she is acting as a principal, not an agent. He is spending his own money or time, not the money or time that others have entrusted to him.
• If the statement “social responsibility” is not pure rhetoric, it must mean that the agent is to act in some way that is not in the interest of the owners, and this gives the agent a huge degree of power over what to spend, who benefits, and who pays the tab. They become “simultaneously legislator, executive, and jurist.” The agent wasnʼt elected or chosen for this, and may be wholly unsuitable for this job.
• If the statement “social responsibility” is purely rhetorical, then it should be judged as such. Friedman, in a Business Week commentary a year before he died, noted that “a company that is playing a large part in a community may want, for its own purposes and profit, to maintain good relations with the community and to engage in community activity. In doing so, it would be pursing its own profit. But, of course, it may believe that it will be better public relations if it labels its action an act of social responsibility. I believe most of the claims of social responsibility are pure public relations.” So if investing in “sustainable companies” makes money, then go for it, just donʼt masquerade this as anything more than it is.

Positive Role

Reading this article decades after it was first published, Iʼm struck by how this ultimately stresses a positive role for the agent. Rather than it being ʻanti-SRI,ʼ it should be thought of as focusing, and even celebrating, the job of the fiduciary. They should, and must, focus on what they were retained to do and be proud of it. Microsoft, to use an example, need not distract itself from its products and profits by publicizing the number of jobs it creates, the taxes it pays, or the architectural splendour of its offices (unless such publicity is good for it). Instead, the company should focus on the benefits of its products – the software it creates, and the way it makes work processes better.

The plan fiduciary should emphasize their job of providing the money necessary to meet the needs of their retirees. This is a valid and important role. You donʼt (and shouldnʼt) have to do anything more.

Donʼt just do it for me, listen to Uncle Miltie.

Jim Helik is co-author of ʻEnergy Markets Risk Management,ʼ a textbook published by the Canadian Securities Institute. He also teaches at the School of Business, Ryerson University in Toronto.

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