There are compelling reasons to favour Karma Banque’s approach to SRI to more traditional SRI strategies.
Not a single one of the SRI funds tracked on http://www.socialfunds.com actually plugs consumers directly into the process of weeding out ‘bad’ companies. This is because SRI, by its very nature, is only available to people with funds to invest. Immediately, the vast majority of those impacted most harshly by socially irresponsible companies are excluded; no funds means no votes.
Custodians of SRI funds will say its their job to represent the cashless and their concerns, but this view fails to incorporate changes in the financial and economic landscape that have taken place over the past decade. These have fundamentally changed the very nature of banking, finance, and activism.
For example, free file-swapping of music on the web broke the record label cartel and their price-fixing rings. This lowered the cost of music and helped usher in a replacement model for distributing music: Apple’s iTunes.
Free code-swapping on the net is breaking Microsoft’s monopolisation of software as consumers adopt free, open-source programmes such as Linux. In both of these cases, vast hordes of consumers changed ‘bad’ corporations by banding together and creating a new economic reality by recognizing something the corporations assumed had no value as having value: dissent.
Creating business models in the more traditional ways to challenge the labels and dominant companies, such as Microsoft, without harnessing the power of dissent, would not have made a dent in changing these companies. A look at recent history reveals why. Any time a threat materialises, companies simply gobble up the competition or get their friends in government to pass laws outlawing the upstart business models. A good example of this was seen recently in the copyright business, when Disney lobbied Congress to extend copyright law every time Mickey Mouse was due to enter the public domain.
Only by harnessing the ‘spontaneous combustion’ and outrage of masses on the web can corporate power be curbed. I don’t think the SRI industry, in its current form, will ever get to that point.
Secondly, SRI’s methodology and philosophy stands on the shoulders of the neo-liberal economics model that has been the foundation for Western economics for more than 200 years. That is, SRI can take on corporate malfeasance and bad governance, but it does nothing to address the root of the problem; the fundamental fallacy embedded in our post Adam Smith, David Ricardo neo-classic, neo-liberal economic era.
These economists of the Enlightenment constructed their manifestos without including the true cost of the environment (i.e. natural resources) into their calculations. For this reason, over $100 billion in environmental costs will have to be paid out this past year by insurance companies and that number, according to the insurance industry, is set to rise exponentially as the knock-on effect of environmental degradation cross-infects forests, oceans, and the atmosphere.
By contrast, Karma Banque tackles both these SRI problems. Firstly, we manage our portfolios based in large part on the direct participation of the activists themselves (per our boycott popularity metric) in an attempt to harness the potential of ‘spontaneous combustion’ offered on the web. Furthermore, to help activists choose in which boycotts to participate, we show them how each dollar of their dissent impacts different companies.
Since companies trade at different multiples of their trailing 12-month sales figures, the loss of a dollar of sales via a boycott will have differing impacts on the balance sheet. Boycotting ExxonMobil for example takes away just over $1 of market capitalisation, whereas boycotting Coke instead takes away close to $5. Simply by switching from a low yielding boycott like Exxon to a high yielding boycott like Coke leverages the activists ‘dissent buck’ by close to five. If enough activists start thinking strategically in this way, the pressure on Coke’s sales can’t help but attract the attention of hedge funds who will motivated to start selling the stock short.
A lower stock price will telegraph to activists that they’re winning, thus increasing the size of the boycott, which in turn can increase the size of speculative bets made by hedge funds against Coke. A virtuous circle is born, one in which activists effectively get free use of the trillion dollar hedge fund business to pressure companies along the only lines they care about, their stock price.
The other major advantage of Karma Banque’s ‘Smart Boycotts’ is that they attempt to unwind the damage done by Smith and Ricardo. Only by draining the swamp of the neo-liberal model of its capital can we begin to think about ways to replace this antiquated ‘American Business Model’ with something that is more equitable and sustainable.
For those who point to job loss as a reason not to embrace Karma Banque’s methodology, the question is: what do you value more? Jobs or lives? Humans are adaptable, and this extends to jobs, but without a habitat, our species won’t have even a chance to figure out how to support itself.
Briefing does not necessarily endorse the views expressed in this column
Corporate Citizenship Briefing, issue no: 80 – March, 2005
Max Keiser is the creator of the first patented virtual stock market, the Hollywood Stock Exchange; the financial columnist for the Ecologist Magazine, the co-sponsor of the world’s first activist hedge fund and founder of Karma Banque.