Cultivating Social Investments on the Efficient Frontier
By G. Benjamin Bingham
The following article was written from the perspective of an American investment advisor attempting to write out of an inclusive worldview that would also bridge the gap between financial experts and those readers who heretofore have experienced difficulties or have had little interest for all things financial.
TS Eliot's words, "... things fall apart, the center does not hold..." have never felt truer than they do today. The social/political context is dominated by polarities and decisions are being made that no one in their right mind - or at least right brain - would ever make. Culturally, floods of information are covering the globe, bringing apparent openness, but we are often blind to the different interests that control this flood. There seems to be no trustworthy way to discern what information is actually true or valuable. In the economic realm, like a tail wagging the dog, the stock market seems to have unhinged itself from its role as economic barometer and has instead become the source of economic fortunes or misfortunes. President Clinton's famous slogan, "it's the economy stupid!" has stupefied us and now more than ever society is dominated by financial consideration. Yet, there is wisdom to be found in the apparent wizardry of financial management. Combining good management with what is called socially responsible investing, or SRI, can become a powerful force for change. A 'balanced portfolio' that has positive social and environmental impact can be the foundation for the healing and security of our world.
Security is the antithesis of danger and danger is usually measured in variables of risk. Up goes the familiar mother's cry: 'If you go there you're going to get in trouble! Stay with us and you'll be safe!' Parents often err on the side of security, but know full well that at some point, in order to grow, expand and become their own person, their child in growing up will have to disobey rules that they question and take forbidden risks that they think they can handle. The parents' hope is that their child will achieve the most success with the least possible risk. In the financial world, various combinations of investments that yield the most success with the least risk are plotted in a graph and form a curve called the 'efficient frontier.' The following chart represents such an 'efficient frontier', showing a full range of optimal outcomes that one might expect on average, over time, given a range of predetermined degrees of acceptable risk.
Owen Barfield in his novel, An Unancestral Voice, plays with the roots of 'matrix' (mater or mother) and the double meaning of 'conception,' as both "giving birth" and as "the coordinates for plotting an idea." Barfield suggests that the cross of the matrix that helps one "conceive" of an idea can also become like a crucifix that kills ideas by pinning them down. René Descartes, the 17th century French philosopher/mathematician gave us these intersecting horizontal and vertical axes, or x/y coordinates, as a foundation for the age of reason. Barfield hints that without these Cartesian coordinates and the intellectual thinking that underpins them, humanity would have remained in a state that was more open to and enlivened by the spirit. The graphing of ideas, like the engraving of the printing press, enlightened us intellectually while cutting off our spiritual connection to some degree, freeing us to find a renewed spiritual connection with a more developed consciousness. Dying we become...
So we can now return to the financial chart with imagination and notice its applicability to life: A rainbow form appears in the positive quadrant measuring risk and returns. It represents the optimal portfolio for each investor. Each point along the curve represents a combination of investments, a portfolio of cash (for liquidity), bonds and/or notes (for income), and stocks of various kinds (for growth). This is shown in the portfolio as small circles with green representing cash, blue as fixed income and red as stocks. Below the efficient frontier appear these various asset classes, isolated, getting less return with more risk. In all these investment portfolios, whether socially responsible or not, the less risk one accepts the lower the potential return (the lower left end of the curve); the higher the risk, the higher the return over a long period of time (the upper right end of the curve). Risk, in financial analysis, is measured by the breadth of possible outcomes one might encounter. The less risk the narrower the range of possible outcomes: one can reasonably well predict mediocre, but regular, outcomes. The more risk the broader the bandwidth of potential outcomes - from disaster to brilliant success. The grey area in the background shows the range of potential outcomes like a great phantom of unknowns instilling greed above the efficient frontier and fear below it. The trouble is there are many types of risk, and certainly the 'stay at home variety', though safe investments, have returns so low that you might not have enough resources to maintain yourself safely in the future. In finance this is called 'loss of purchasing power', which happens when inflation causes your seemingly adequate supply of resources to diminish more rapidly than expected in terms of what is enough money to sustain you in the long term. If this seems to be the case you may need to grow your resources and take more risk. You can't stay at the bottom end of the curve. You need to venture out more and find real security by investing in a whole portfolio. If you want to do this in a way that helps the world become more whole, your portfolio can be directed towards solving social and environmental problems without changing its risk or return. This is a free choice that takes imagination to see the whole picture and the impact one might have; it takes courage to buck the chorus of skeptics; and to do it in freedom, it takes full consciousness of the many levels of potential risk and reward.
Financial advisors know that security is best maintained by managing all types of risk in a broadly Iversified portfolio. This approach to investments applies equally well in life. A good farmer often grows a variety of crops, not only to have a balanced diet at home, but also because when the season may not be ideal or may even be disastrous for one crop, it is likely to be adequate or even ideal for another. Too much rain or drought, too hot or too cold, all can ruin a variety of crops while sustaining others. The same goes for investments. Macro economic conditions - including, for example, variances in agricultural production, war and peace, interest rates and currency fluctuations- vary cyclically and yet it is not always possible to predict and work with the cycles. It is best to diversify across all asset classes (e.g. stocks, bonds, notes and currencies), countries and industries (e.g. healthcare, manufacturing, financials, technology, communications, etc.). That is to say, invest holistically in a portfolio on the efficient frontier so that your risk tolerance and need for return are balanced.
The notion that one can only afford to invest a percentage of the portfolio in a responsible way often fragments the portfolio and leads to disappointment, as the 'socially responsible investment' (SRI) portion of the portfolio is not adequately diversified. Naturally, good management and good asset allocation will lead to superior returns, whether SRI or not. Any manager, SRI or not, who realized that technology stocks were overvalued at the end of the 1990's took profits and avoided the downturn in 2001 and 2002. There are social, environmental and financial benefits to owning good companies, who operate ethically, and with social awareness, adding for the investor a new beneficial layer of wholesome engagement with the world. Many of these companies are well managed and energy efficient and create timely and innovative solutions to the world's problems, so they often outperform the market as well. By thinking holistically about the long-term health of the planet as a whole and the community of life on the planet, the SRI investor raises their "efficient frontier" " curve to include a broader definition of return. This new definition reveals that socially responsible investments can yield a higher overall return than traditional investments. Security deepens in a world where culture and social interaction are enhanced while good companies thrive because they are meeting real needs.
Security, brought about through a sense of wholeness and balance, begins in the womb, continues in the healthy family and may spread to a neighborhood, a community of friends and beyond, like an 'efficient frontier' of optimal experiences. The size and impact of this whole community varies with one's risk taking. Each gesture of reaching out risks a number of positive or negative responses; each negative response may increase one's aversion to risk. You can imagine that the different capacities for aspiration and requirements for security in each individual will describe a different "efficient frontier", arching, as it were, over each of us. To those who limit themselves, successful risk takers may seem more sure of themselves and in that sense more secure, but they may also simply be inexperienced and unaware of the dangers they escaped. Gamblers and lottery ticket purchasers are far more likely to lose than win, but the winners appear to be somehow special because of their success. To get involved with such risks is not an 'efficient' way to live and usually ends in addiction and loss. Other risk takers may have a real sense of their relation to the whole and their place within the scheme of things. They take their risks knowing that they have optimized their chance of success and are covered by reserves and a well managed foundation of "investments" in the world.
For many in inner cities, venturing outside on the streets literally risks being caught by a stray bullet. Children in these circumstances may find security at home with their families. Yet for some there is no security even in family; even so, they may still find, at times, a sense of peace and safety within. Some people who have experienced extreme confinement have emerged with an unusual sense of wholeness and a broad perspective because they have taken the risk of inner adventure, expanding their limits through enlightened thinking. Nelson Mandela, freed after 27 years in prison in South Africa and Solzhenitsyn in the Gulag in Communist Russia, are two such people. In fact, Solzhenitsyn in his famous Harvard address (8th June, 1978) decried the mediocrity of a safe society: "Even biology knows that habitual extreme safety and well-being are not advantageous for a living organism. Today, well-being in the life of Western society has begun to reveal its pernicious mask."
It's possible to imagine an efficient' social frontier' for the whole earth, arching upward - from the lonely people safe at home to the charismatic leaders whose words may influence the lives of millions. That arch, could be striped with vertical bands of color for each theme within a set of possible human strivings. Green, for example, would be an obvious color for environmentalists. Low on the curve, light green might describe a person who saves plastic bags, while high on the curve dark green might describe someone like Julia Butterfly Hill, the woman who lived in a redwood tree to save it from destruction by developers.
The extraordinary attribute of human beings (and therefore the corporations run by them) is their capacity for change. Similarly to the deepening of green, pink could be imagined as social conscience blushing to a brilliant red in the striving to alleviate hunger and poverty. The more people make changes based on inspiration and idealism, venturing out on their 'efficient frontier' of life, the greater chance for a world community with wholeness and security.
In order to 'succeed', dominant human beings have limited their expertise by becoming more and more specialized. This tendency towards isolation has led to extraordinary technological insights often coupled with increasing meaninglessness because of the loss of contact between people. Darwin has been conveniently misinterpreted by those who 'win' in a competitive model. Those that adapt well (i.e. creatively fitting in flexibly rather than being 'fittest') survive, while dominators rise and fall again, like empires. Similarly, the early moral insights of the 18th century's great Scottish economist, Adam Smith, have been mostly forgotten in favor of his later description of an 'invisible hand' that supposedly waves aside ethical considerations while balancing the supply and demands of the market. Though he maintained that market valuations should work simply by balancing supply with demand, he never intended this to be used as an excuse to neglect ethical considerations.
There is a gathering storm of protest against corporate businesses built upon these false premises of 'survival of the fittest' and the 'invisible hand.'. An invitational gathering of thinkers called Corporation 2020 took place on 12-13th November 2007 in Boston's historic Faneuil Hall where fiery speeches set off the Boston Tea party more than two centuries ago. Instead of crates of tea being thrown into the harbor in protest of the colonial taxation by the British government without representation, this new tea party was intent on debating and forming new strategies to save the world from an early demise. A broad spectrum of leaders from the likes of Harvard, MIT, Disney, Royal Dutch Shell, the AFLCIO (the largest federation of American labor unions) private business leaders, socially responsible investors, non-profit organizations focused on sustainability issues and philanthropists gathered to re-envision the future of corporations. The agenda seemed fairly clear: change the attitude of 'business as usual' or we'll all go down like the Titanic - how to do it was definitely the leading question. Answers were varied and often conflicting. Some liked the old corporate forms that were based on the idea of creating a vehicle for pooled capital to finance projects for the common good (imagine a community of citizens founding a bank to lend money for various projects, then dissolving once they were finished). These corporate representatives stressed the importance of shareholder activism: the investors need to take more responsibility in guiding the corporations. Others stressed the need for bold leadership by executives who actually can make decisions favoring the public good over shareholder interests. Contrary to common beliefs, only in the case of liquidity events, ie selling the corporation, must bondholders and shareholders get their due before the broader community of stakeholders, including the environment. Overpaid executives tend to lack the courage required to do the good, for fear of becoming victims of the market's short-termism. Ray Anderson, the CEO and Chairman of a company called Interface is an exception: when he learned that his carpet company produced more waste in landfills than any other company in the USA he courageously stopped production, had it redesigned to incorporate recycling and natural materials and his company survived the extreme loss of share price before rebounding to success. It is ironic and instructive to note that most companies seem to ignore market sentiments when approving gigantic severance packages for the very same executives who had argued that do goodism is expensive. Clearly, the executives, unlike Anderson, use the excuse of the market as it suits them.
For just such reasons, others at the Corporation 2020 conference have no confidence in the idea that corporate changes may come from within and instead base their hopes on an enlightened government enforcing established and new regulations. They want business out of government while the corporate leaders want to keep government out of business. Everyone is insecure and looking for a stable three-legged stool upon which to establish a holistic and secure future. Only the legs of this stool go by different assumed names - from People, Planet and Profit to Ecology, Economy and Equity; or the three sectors: Private, Public and Civil Society. Some were touting a Fourth Sector, which is a developing hybrid that blends non-profit philanthropy with for-profit efficiencies. While calling this a new sector seems like a blurring of distinctions, it does seem to be an active way to bring corporations back to their roots of benefiting the common good. Some leaders of this movement have formed 'b lab', a nonprofit t organization designed to help companies rate themselves on-line, using the internet, to see if they can qualify as 'B-Corporations' (see www.bcorporation.net). B stands for such adjectives as 'beneficial,' 'better,' 'beautiful,' or 'best' and after answering a slew of questions regarding best practices, the company, if rated a 'B Corp,' stands a chance of being audited within two years before taking the next revised and up-dated version of the questionnaire. They are either 'walking their talk' (acting on their spoken intentions) or 'green-washing' (paying some degree of lip-service and offering the minimum action to appease the green movement') to give themselves a good name. Failing an audit could be a serious embarrassment. The consensus on this approach was that it is the most attractive in the long term, but then came the reservations and pretty soon we were back to the idea of enforced regulations. Why the ingrained lack of confidence? Why do we settle for the bottom end of the curve?
To answer these questions we should first realize that we live in an extended time of war that began at the start of the last century. World War I has never entirely ended. This is perhaps the dark side of the emerging world economy that has its roots in the development of industrial technologies, electricity and the black oil that powered them. Everyone has resources to protect and it seems the more technically competent we have become the less we are able to persuade without force. The virtual pen is no longer mightier than the sword. Secondly, our future financial security is held for ransom by financial markets driven by fear and greed. Abstract mathematical models are failing to subdue the ups and downs of share prices. Not even cash offers easy security anymore. Cash was 'king' but was dethroned recently after the dollar fell more than 20% in recent years and whispers of oil trading in other currencies than the dollar now fi ll the financial hallways with tremors of fear. The Nixon of Vietnam and Watergate fame, decoupled gold's value from the dollar while coupling the dollar to 'black gold' with OPEC's promise to only sell oil for dollars. This gives oil states a good deal of leverage, particularly in the US. These states can play with oil prices, and vary the supply, and when OPEC threatens to decouple from the dollar and sell for Euros we Americans have pounced. Iraq threatened President Bush Senior and now Iran is threatening the same, raising President Bush Junior's rhetoric against Iran. If not pegged to oil, the question becomes: then what is behind the dollar? A country in deep debt with plenty of military investments is a risky partner in lean times.
If the American economy continues to unwind one might expect more aggressive behavior. The third and most potent reason for insecurity is the international tendency for nations to be ruled by religious law and especially when, worryingly, the US is a military power led by 'muscular Christians'. Religion, rather than being a source of solace and wholesome reflection in the world, has become fodder for fear mongering and acts of violence. Deep culture and wisdom have lost ground in this polarized world; or, at best, the ability of leaders to express themselves wisely seems to be lacking.
'Muscular Christianity' came into vogue along with prohibition at the time of the last great crash and the depression that followed. The idea was that 'Darwin's fittest' - who thought they deserved to rule the world - should stay in shape by combining the disciplines of physical fitness, a scientific approach to self-improvement and regular attendance at church. The discipline of 'sticking to your guns" paid off in the stock market and made rich American families richer by far (the birth of the 'buy and hold' investment philosophy). This was not out of wisdom as much as it was because the rich could afford to stay invested as they watched their percentage of ownership in stocks rise from the ashes of the Great Depression after 1929. The crash happened when all at once most investors fled the market, sold their shares and waited for a recovery. The rich, who were secure enough to wait it out and not sell, saw their shares' value rebound dramatically in the 30's, which most have forgotten was a rising bull market. With this easily acquired wealth philanthropists of the 20th century began the tradition of funding the arts for pure entertainment and relief from the rat-race. Deep culture, that still speaks to the human soul in jazz, blues, poetry and fiction, was enhanced more by the victims of the Depression than by the well off. A materialistic culture grew with the growth and establishment of industrial and military power.
A combination of rigid ethics and pushiness characterized the Fords, Carnegies, Kelloggs and Bushes of the day, who dominated everything from steel and the auto industry to breakfast cereals and the arms industry. Behind the scenes, secret societies and secret codes for success were sought after like the Holy Grail. Kellogg's privately bound epistle, I Dare You passed from brother to brother and likely still passes to star salespeople secretly tapped to move to the next level. Andrew Carnegie dared Napoleon Hill to interview successful men (yes, only men) for thirty years in order to write The Success System that Never Fails with W. Clement Stone, which became one of the most read books of all time. Horatio Alger's (1834-1899) Rags to Riches stories inspired generations of the less fortunate to follow such guidelines with visions of grandeur. Dale Carnegie cashed in on his own scientific c system with his book How to Win Friends and Influence People.
The westernization of inner transformative work is both the greatest enemy of our time and the greatest hope. Benjamin Franklin, the wisest of the American founding fathers, stands out in the way he took on his own scientific self-development outside the context of religion. He tracked his own behavior against one of thirteen virtues each week for more than fifty years. Though wildly successful he recognized that wealth sought after for its own sake would lead to nothing but pain. The American forefathers were well versed in the writings of Aristotle when Jefferson, with Franklin's coaching, penned the inalienable rights of Life, Liberty and the Pursuit of Happiness. As Charles Handy, a well-known British author, remarked at Corporation 2020, "they weren't thinking about lying on the beach with some blonde, whether male or female." Rather they were referring to the Aristotelian meaning of happiness: "doing your best at what you are best at for the good of others." This is an inclusive model, the heart of a balanced society and yet it has been largely forgotten. We think we in the West live in a time of freedom and yet much of our culture has been lost in the corporate drive for growth measured in currencies alone. In Aristotle's time Greek slaves were able to experience theater in the open air, along with public sculptures and the visible temples of the gods. Deep culture surrounded them despite their enslavement. In medieval times the depth of culture was available to all in the open cathedrals with their stained glass, sculptures and profound proportions based on the temple of Solomon. Roving bards told the stories of Parzival and King Arthur. Gradually, along with the sophistication of Cartesian thinking, the printed word made it possible for culture to be hoarded by the educated and well to do. With technology, the masses became increasingly enslaved by the hourly wage and, ironically, the "deep" culture that springs from the roots of suffering has become unaffordable. This can now change in some degree due to the extraordinary ubiquity of the media and the "information highway."
Discernment and will have now become the problem.. The world is at our fingertips. With the push of buttons our world could be destroyed. Will we ruin it through pursuing self-centred aims? Or, will we reach out, connect with each other and form a whole community?
At the end of the Corporation 2020 conference, Mr. Handy referred again to the ethical Adam Smith, who often commented on "the relentless pursuit of unnecessary things at the expense of cultivation." Cultivation may refer in part to the cultivation of the soil for real and necessary things, but it also refers to the cultivation of culture and, ultimately, the cultivation of the self. The popularity of nihilism in the 1960's saw self-centered hippiedom crash because self-cultivation lost its connection to the whole of societal culture in the pursuit of pleasure. The same group emerged as the 'me generation' in the 1990's and as business leaders who managed to cultivate a corporate culture that again ignored the values of a diverse world. Now the 'Baby Boomers' (born between 1946-1964) need to rise to the challenges of our time and become the wise elders that are needed to bring about the balance and security of an inclusive, holistic world community.
As long as each of us continues to value our own opinions above all others we will remain at the low end of the efficient frontier. By cultivating the capacity to listen with sincere interest to the whole 'portfolio' of society, our investments will prove to be stable and more than sufficient. This is hard work. Steiner, the founder of Waldorf Education, biodynamics and the inspirer of a new understanding of economics and social finance was referring to this when he once said, "genius is the result of industry." With courage this hard work of investing our interest in the broadest possible spectrum of humanity will reconnect us to the genius of our time. By "doing the best possible at what you are best at for the good of others" even investors in the financial markets can change and begin to reflect and implement the cultivated values of a balanced society. Investors on the efficient socially responsible frontier may lead this change by investing in a way that reflects values in every asset class from microfinance and private community based investments to the largest mega corporations that return to their mission of serving the needs of the earth and humanity.
G. Benjamin Bingham is the Managing Director of Benchmark Asset Managers (www.benchmarkam.com) in Philadelphia, Pennsylvania, U.S.A.
Endnote
*For other financial institutions inspired by Steiner see: RSF Social Finance at www.rsfsocialfinance.org; Triodos Bank at www.triodos.co.uk; and the Triskeles Foundation at www.triskeles.org
