22 Apr 2002  Research & Ideas

Profits and Prophets: The Role of Values in Investment

What are the tradeoffs of socially responsible investing? In a lively debate, social fund manager Amy Domini and a Harvard investment scholar, Samuel L. Hayes, explore the margins of moral versus amoral investing.


As chair of the investment committee for a college, Sam Hayes was faced with a challenging dilemma: Should the committee invest only in socially responsible funds even though the outcome might mean fewer scholarships and teaching positions, putting the school at a competitive disadvantage?

Amy Domini, who runs a fund specializing in socially responsible investments, was posed a similar, although theoretical, problem. Would she invest in a company doing great works for society, but whose board was all male?

Hayes and Domini took center stage, and often different sides, on a panel discussing "Profits and Prophets: The Role of Values in Investment," at the Harvard Business School Möbius Leadership Forum on April 12.

Hayes holds the Jacob H. Schiff Chair in Investment Banking at Harvard Business School, Emeritus. Domini is president of the Domini Social Equity Fund, a mutual fund for social investors.

These are people who put their money where their mouth isand they pay a very significant price.
— Sam Hayes

Hayes related an experience as a member of a Swarthmore College investment committee, which was responsible for some $500 million in investments. The endowment proceeds helped pay for scholarships and faculty salaries. But when protestors in the 1980s challenged the board to end investments in companies operating in South Africa during apartheid, Hayes said he was against such a move. Those who provided money for the endowment, Hayes reasoned, did so to fund education, not for use as a political weapon. The board conditionally agreed to end the disputed investments.

The result: With investments constricted over a number of years, the fund experienced a $3 million performance shortfall, which translated to fewer scholarships and a potential disadvantage with other schools competing for the best students.

Hayes drew a line between personal investing—he himself is a socially responsible investor, he said—and other types of investment vehicles. Several audience members questioned Hayes on that stand, suggesting that at no time should investment money be used to support immoral enterprises. Hayes argued that an investor is in a better position to change a company's policies than an outsider, noting that his college investment committee used proxy materials to raise an issue about sexual discrimination at one of the companies the school had invested in.

photo of Sam Hayes
Sam Hayes

That sparked a lively debate with Domini. While shareholder actions are important, they often don't get the job done, she said, listing a string of corporate abuses from slave labor to environmental decay practiced by publicly owned companies. An investment in Phillip Morris may have provided a good return for a pension fund holder at some point, but that investor and society pay more in the end through increased health care costs.

Hayes said that Domini's picture of a system run amok, with perhaps the need for a central government solution, has been tried and failed. The best solution is the capitalist model, "which in the long term creates the largest pie."

"What's the cost of losing a sunset?" asked Domini at one point.

"I can't use a sunset to pay a scholarship for a student at Swarthmore," Hayes answered.

He said also there are "very few" examples of shareholder actions resulting in an outcome such as the South African divestitures. "So, how do we operate in an imperfect society?" he asked. While clearly his committee wouldn't invest in a company owned by Saddam Hussein, in general the decision to invest is made on an economic, amoral basis.

Domini said that of the $7 trillion or so now invested in mutual funds, some $200 billion are in socially responsible funds. But she also said this segment is among the fastest growing in the mutual fund sector, and is especially popular in Europe. The Domini 400 Social Index Fund has outperformed the S&P 500 by a 1.2 percent annual average return, she said

photo of Amy Domini
Amy Domini

Her firm uses some 100 criteria in judging a potential investment. Immediate knockouts would be companies involved in power, alcohol, nuclear weapons, gambling, for-profit prisons and for-profit schools.

Top-caliber and forward-thinking management is also a must, she said. For example, are there women in leadership roles at this company? "We are really assessing the quality of management: Are they on the ball, ahead of risk?"

An audience member presented Domini with her own challenge, this one theoretical. What if she could invest in a company doing great things for society, but where the board was 100 percent male? "I invest in them, and file a shareholder resolution," she answered immediately.

In introductory comments, Hayes noted that Muslims observe tight restrictions over what they invest in, staying clear of alcohol and gambling companies, for example, and businesses that derive a significant portion of their income from interest. With such a constrained investment environment, "these are people who put their money where their mouth is, and they pay a very significant price."

Samuel L. Hayes holds the Jacob H. Schiff Chair in Investment Banking, at Harvard Business School, Emeritus.

Photos by Sean Silverthorne