How do we control crime in our society? When we think of crime, we usually imagine a hooded teenager vandalizing homes or assaulting someone in a dark alley. Yet there’s another type of wrong-doing that, while not as obvious as street crime, does affect our pocketbooks, our quality of life, and the lives of our children.
Three of the most dramatic examples of this kind of crime include the conveyance of our savings and tax dollars into failed banking institutions, US corporate involvement in South Africa during apartheid, and catastrophic environmental degradation, such as the oil spill from the Exxon Valdez.
What can we do to control or prevent serious corporate wrongdoing – legal or illegal? Let’s see what we can learn from these three examples.
WHO’S HOLDING UP WHOM?
Taxpayers have paid $393 billion since August 1989 to rescue depositors from the insolvency of 680 mismanaged banks and savings & loans. Over $22.9 million was returned to depositors, although most received only their invested principle, not the interest.
Despite brilliant management by the government’s Resolution Trust Corporation, which has recovered $353 billion of assets, the net cost to taxpayers so far has been $40 billion, and another $18.3 billion will be spent by the time the books are closed in 1996.
In many states, convicted felons are now subject to the "three strikes you’re out" rule. Collectively, their crimes over the past five years have not approached the cost to society of the savings and loan disaster. How then have we dealt with this more serious crime?
The debacle occurred because of highly speculative real estate lending, poorly structured and counterproductive government regulation, improper management of interest rate risk, and several instances of unbridled greed.
Prosecution has been minimal for the bank managers who participated in acts of self-interest that caused insolvencies. Political exemptions, plea bargaining, prison sentences reduced to community service and country club jail conditions have marked the punishment of banking executives.
To deter future abuses, the government has stepped up reserve requirements at lending institutions and increased auditing standards.
Unfortunately, the root problems that created the S&L debacle remain. While banks and savings & loans currently reap record profits, a steep rise in interest rates could spark another, more severe, round of insolvencies. Investor monies are very fluid now and could flood out of banks as they did in the early 1980s when interest rates escalated.
Government regulation remains inadequate, and another round of bank failures is a very real possibility. Proposals to require lenders to match maturities of loans and deposits, and to require bank managers to own stock in the institutions they manage have not been acted upon.
We can and should demand through the legislative process improvements in the banking system which strike at the root of problems in the industry. As a depositor, you can protect yourself by banking at an insured institution and checking to make sure that your bank is managed in a manner you consider satisfactory. We will either pay for more bailouts or act to prevent our victimization by corporate crime and mismanagement.
SAYING "NO" TO APARTHEID
The role of multinational companies doing business in South Africa has changed dramatically over the past 30 years. Initially, these corporations served to support apartheid, South Africa’s system of legal racial discrimination.
Let us look at how companies eventually helped to bring about the downfall of apartheid. On March 21, 1960, international attention was drawn to the practices of apartheid when unarmed black demonstrators were shot near a police station at Sharpville, near Johannesburg. Foreign investors partially withdrew that year, and the South African stock market declined almost 50 percent. South African business executives reacted by asking their government to improve conditions for blacks. This set a precedent in South Africa for change in race policy through economic pressure.
Most Americans consider racial discrimination to be a crime. In the past 30 years we have eliminated legalized segregation, brought about universal voting rights, and instituted laws and practices intended to equalize economic opportunity. Our experience as a nation made us sensitive to the practices of apartheid in South Africa.
Reverend Leon Sullivan, a southern baptist minister and contemporary of Martin Luther King, while on the board of General Motors in 1976, called for a code of conduct for companies doing business in South Africa. Corporate adherence to these "Sullivan Principles" was an historic recognition on the part of US companies that their actions were an extension of the American ethic against discrimination.
The religious community, municipal pensions and other corporate shareholders found that their convictions could be adopted and acted upon by the companies that they invested in. They were led by proxy-voting initiatives sponsored by the Interfaith Center for Corporate Responsibility in New York, which represents over 250 religious denominations.
Internal tensions in South Africa continued to mount as the then-illegal African National Congress and other organizations kept up the pressure for an end to apartheid. When Bishop Desmond Tutu called for an international boycott of South Africa in 1981, a disgusted international community was eager to answer the call for action. Numerous multinational corporations withdrew. Banks curbed lending, and, in 1985, withdrew extension of further credit to South Africa. These acts culminated in the US mandating economic sanctions against South Africa in 1986.
Slowly the South African government started to react. The onerous "pass" laws were rescinded in 1986, allowing greater freedom for blacks to work and travel. Nelson Mandela was released from prison in 1990, the year the ANC regained legal status. During this period more private investors, religious groups, municipal funds, and pensions "screened" their investments to eliminate companies doing business in South Africa. By September of 1993, over $800 billion – fully 10 percent of stock investment in the US – was screened in this way. This was unprecedented in the history of the US stock market.
In 1992 and 1993, the South African government agreed to most of the ANC’s demands. By August of 1993, a new constitution had been drafted in South Africa, and on August 24, 1993, at a meeting of the UN General Assembly, Nelson Mandela called for the lifting of all economic sanctions. The country’s first all-race elections were held April 26-29, 1994. Nelson Mandela, who was released from jail just four years ago, was inaugurated president of South Africa on May 10.
The lion’s share of the credit for this transformation belongs to the people of South Africa. Nevertheless, they were significantly assisted by religious, student, and social investor groups who convinced banks, multinational corporations, pension funds, and local governments to withdraw their investment from South Africa. In so doing, they proved that the socially responsible direction of capital is a powerful tool for affecting corporate behavior, which in turn has enormous influence throughout the world.
A COMMITMENT TO THE ENVIRONMENT
When the Exxon Valdez split open and began dumping 11 million barrels of crude oil into Prince William Sound, most of us felt personally violated. The reaction in the US included intense media coverage, enormous volunteer clean-up efforts, and an immediate consumer backlash as more than 40,000 Exxon gas card-holders cut up their cards and returned them. Many more Americans refused to buy gas at an Exxon pump.
In the wake of the disaster, a group of religious leaders, investors, and environmentalists created a code of environmental conduct for companies. The code, initially named the "Valdez Principles," was patterned after the Sullivan Principles used in South Africa. Now called the CERES Principles (named for the Coalition for Environmentally Responsible Economies), they include commitments to protect the biosphere, to use resources sustainably, to reduce waste and conserve energy, and to keep the public informed about environmental performance.
Social investors have put intense pressure on companies to adopt the CERES Principles and have met with extraordinary success. Over 80 US companies have signed on, ranging from former fighters of environmental standards, such as Sun Oil Co., to companies with excellent environmental records, like Ben and Jerry’s Ice Cream and H.B. Fuller. The largest industrial company in the world, General Motors, signed the principles in January 1994.
To meet the standards of the CERES Principles and the test of public scrutiny, many companies will have to fundamentally restructure their operations. This change in approach has already begun. Instead of fighting regulators and environmental groups and using end-of-the-pipeline solutions, such as pollution cleanup and litigation, many companies are hiring environmental engineers to design pollution elimination processes. The cost savings that result from this preventative approach has surprised many corporate executives who have also noticed its public relations value.
While signing the CERES Principles does not guarantee that a company will place the interests of society and the environment first, it does indicate a willingness to recognize these overriding concerns. The escalating rate of adoption of the principles shows that corporations can be affected by the values of the culture in which they are based.
MAKING A DIFFERENCE
In the past 30 years, a dramatic shift in ownership has taken place in corporations. Pension plans now own the largest percentage of shares of corporate stock. Collectively, we who are small investors own corporate America through pensions, mutual funds, and other investments. We are entitled to vote proxy motions in stock we own.
We can also influence corporations by supporting appropriate regulation and boycotting companies that act irresponsibly. We exert our influence whenever we extend or withhold our patronage, particularly when we inform a company of our reasons for taking action.
It could be useful, then, to consider that corporate crime is our crime. Our crime is committed not by intent but by omission when we ignore the behavior of the companies with which we do business and which we capitalize.
Despite the legal language that treats them as people, corporations are not alive. They have only the rights we have chosen to grant them. We have created a large and effective economic engine, comparable to a D-6 bulldozer, which can either carve careful clearings in a park or run over anything in its path. Clearly this bulldozer should not run at full throttle with no one at the controls. Perhaps together we can guide this engine of industry carefully. We can start by voting our convictions, and investing and making our purchases intentionally.
John S. Adams, CFP, is an investment advisor specializing in socially responsible investments. John lives and works on Bainbridge Island, Washington.