Principles Newsletter Q3 2010
In April 2010, CBIS, members of the Interfaith Center on Corporate Responsibility (ICCR), and 300 other investors and faith-based organizations sent a letter to major hotel companies with a presence in South Africa inquiring about actions being taken to combat human trafficking in advance of The World Cup international soccer tournament, which was held in June and July of this year.
The hotel companies that received the letter were Accor (whose brands include Formule1, Mercure, Motel6 and Sofitel); Best Western; Carlson (whose brands include Radisson, Country Inn & Suites and who is majority shareholder of The Rezidor Hotel Group, which operates in South Africa); Hilton; InterContinental (whose brands include Holiday Inn and Crowne Plaza); NH Hoteles; Starwood (whose brands include Westin and Sheraton) and Hyatt (where the letter was sent by the Presbyterian Church USA).
According to the United Nations, 12 million people worldwide are victims of human trafficking. Some of the most vulnerable are children, primarily through forced prostitution and child sex tourism. Events like The World Cup, which attracted more than 3 million attendees, have the potential to be accompanied by an increase in human trafficking. The lodging industry is well positioned to help in the struggle against human trafficking by taking actions that can stop the use of hotels by traffickers.
Findings and Recommendations
Child Sexual Exploitation
Many hotel chains in the U.S., such as Best Western, Hyatt and Hilton, lack programs to deal with child sexual exploitation. By creating policies and programs that help address this critical issue, hotels can enhance their public profile with current and future guests, reduce reputational risk and create a competitive advantage within the sector.
Adopting “The Code”
Developed by ECPAT (End Child Prostitution, Child Pornography and Trafficking of Children for Sexual Purposes) in Sweden in collaboration with the travel industry, it asks tourism providers to adhere to a six-point pledge to help protect children from sexual exploitation, including training staff to identify victims and report incidents to management, publicizing information that alerts travelers to trafficking laws, creating partnerships with local social service and government agencies to assist victims, and reporting publicly on progress developing programs and achieving policy goals.
While Accor’s program is exemplary and the company has publicly announced the goal that all its brands eventually adopt The Code, we encourage its U.S. chain Motel6 to sign The Code given the current lack of support for The Code in the U.S. We also encourage NH Hoteles to sign The Code worldwide, as it recently has for its operations in Mexico.
Specifying Child Protections
While Hilton reported that the American Hotel and Lodging Association’s (AHLA) statement that condemns all forms of human trafficking represents the company’s global view, Hilton did not provide detail as to how it has integrated the statement into its own policies and programs.
InterContinental has already taken the important step of creating a human rights policy. We encourage the company to revise its policy to include protections of the rights of children. Moreover, while InterContinental, NH, and Carlson have shown leadership by signing The United Nations Global Compact — a strategic policy initiative for businesses that seek to align their operations and strategies with universally accepted principles in the areas of human rights, labor, environment and anti-corruption — we encourage these hotel chains to publicly report how they are implementing Principle 5, which references child trafficking and prostitution. Starwood, NH and Carlson, which have human rights policies, also should demonstrate and report progress on policy implementation.
Our priority as shareholders is to see greater evidence that human rights policies are being implemented and the results of that implementation. Demonstrating that policies are implemented can enhance hotels’ credibility and increase consumer confidence in a company’s policies. Given the existence of training materials from such organizations as ECPAT and the relative ease of integrating training on human trafficking into existing training programs, it is apparent that these hotels can create and implement policies relatively quickly.
Disclosure is an important aspect of corporate social responsibility and a critical tool for building trust with investors and the public. It also provides a basis for analysis that allows stakeholders to evaluate a company’s progress over time and compare a company’s performance to that of its peers. Leadership in transparency and disclosure may enhance a company’s public profile with current and future customers and promote a reputational advantage over its competition.
Membership in ITP
As shareholders of these companies and frequent guests at several of their hotels, we view their commitment to protect children as an important element of corporate social responsibility that will also help reduce reputational risk and improve business operations.
CBIS will continue our outreach to these and other hotels, monitoring policy development, implementation and public reporting in order to reduce the likelihood of incidents of child sexual exploitation and other forms of human trafficking.
For issue overviews and the latest updates on all CBIS active ownership initiatives, please see the Shareholder Advocacy Directory.
Global tech giant Cisco Systems announced on July 28, 2010 that its board of directors will offer a shareholders an advisory vote on executive compensation during its upcoming annual meeting, scheduled for November 18. At the meeting, shareholders will be given the opportunity to provide input on the compensation of named executive officers by casting a non-binding vote.
A CBIS-sponsored resolution asking Cisco to provide shareholders with a “say on executive pay” was approved by 51.4% of voting shareholders at the company’s annual meeting on November 12, 2009.
Restraining Executive Pay
CBIS believes that publicly traded companies should set executive pay at reasonable and justifiable levels and share financial success broadly and fairly with employees at all levels of the organization.
“Say on Pay” Advisory Vote
Such an advisory vote, referred to as a “say on pay”, can enhance board accountability and provide the board and management with useful information about whether shareholders view the company’s senior executive compensation to be in shareholders’ best interest.
Cisco said it collaborated with shareholders, governance advocates and peer companies to develop its approach to the advisory “say-on-pay” vote. CBIS commends Cisco for joining a number of other companies, including several of its peers in the technology industry, in implementing this measure.
CBIS congratulates Partners for the Common Good (PCG) for being named a finalist in the 2010 Wachovia Wells Fargo NEXT Awards for Opportunity Finance, the nation’s largest and most prestigious awards program for community development financial institutions (CDFIs).The Opportunity Finance Network (OFN) — the award’s sponsor and the nation’s largest and most widely recognized awards program for community development financial institutions (CDFIs) — announced on August 10th that Partners for the Common Good (PCG) is a finalist for an award of $2.75 million. Winners will be announced prior to an awards celebration on Wednesday, November 3, at OFN’s 26th Annual Conference in San Francisco, CA.
“The finalists for this year’s Wachovia Wells Fargo NEXT Awards for Opportunity Finance each demonstrate excellence and proven expertise serving important opportunity markets. These inspiring organizations have delivered real results for low-wealth and low-income communities and exemplify how CDFIs can drive economic recovery and growth in those markets,” said Mark Pinsky, President and CEO of the Philadelphia-based Opportunity Finance Network, the leading national network of high-performance CDFIs.
PCG: Advancing Economic Justice
From 2002-2009, PCG originated nearly 100 loans in 25 states and 14 countries totaling more than $22 million. Since 2004, PCG has originated nearly $15 million in participation loans, which have leveraged over $56 million from local CDFI Lending Partners and over $102 million from banks and other sources.
“We are extremely honored to be selected as a finalist for this prestigious award,” said Jeannine Jacokes, CEO of Partners for the Common Good. “The Wachovia Wells Fargo NEXT Award is critically important because it highlights performance and features innovations within the CDFI sector.”
About the Award
CDFIs are market-based, private sector financial intermediaries that create opportunities for low-wealth and low-income individuals and institutions and spark growth in hard-to-serve markets across the nation.
“This year’s finalists are taking CDFIs to the next level,” said Lesley Eckstein, executive vice president and group head, Community Lending and Investment, for Wells Fargo. “Wachovia, a Wells Fargo Company, is proud to support these community-based funding organizations by partnering in an $8.25 million investment in the Wachovia Wells Fargo NEXT Awards for Opportunity Finance, which will help families and individuals in underserved communities work toward financial independence and gain more access to credit.”
CBIS’ New York and Chicago offices will be moving to new locations this fall. Effective September 27, our new address in New York will be:
New York Office:
Our Oak Brook office will be moving to downtown Chicago. Effective November 15, our new Chicago address will be:
Please note that individual extensions may change in our Chicago office.
For account information and general account correspondence, please continue to use our Denver address:
P.O. Box 3238
A Green Move
Technology and Systems
As part of CBIS’ broad-based 2010 campaign against human trafficking we have sent a letter to California Governor Arnold Schwarzenegger encouraging him to sign a bill that requires retailers and manufacturers doing business in the state to disclose their efforts to eradicate slavery and human trafficking from their direct supply chains.
The letter includes 32 signators representing research firms, institutional investors and faith-based investors, including members of the Interfaith Center on Corporate Responsibility (ICCR). The group oversees a total of $40 billion in assets under management.
The California Transparency in Supply Chains Act of 2010 (SB 657) recently passed the California senate and assembly. Governor Schwarzenegger has until the end of September to sign or veto the bill. If signed, the bill will impact more than 3,200 global companies whose revenues exceed $100 million. It will require these companies to disclose on their website the extent to which they:
In addition to the CBIS-led group of investors, supporters of the legislation include the California Catholic Conference, the California Consumer Federation, and human rights groups including The Alliance to Stop Slavery and End Trafficking (ASSET). ASSET was founded by Emmy-award winning actress and former UN Goodwill Ambassador Julia Ormond.
While opponents of the bill have expressed concern about the level and difficulty of disclosure, the letter points out that progressive companies have been disclosing this type of information for many years. We also note that assistance in collecting and reporting the information requested in SB 657 is available from several multi-stakeholder initiatives, including The Global Reporting Initiative, The Forest Footprint Disclosure Project, the Electronics Industry Citizenship Coalition and the Responsible Sourcing Network.
CBIS participants have named pornography as a top social concern that they would like to see opposed through SRI initiatives. There are only a small number of publicly traded companies whose main business is pornography production. These companies are restricted from CBIS portfolios because we apply a Principled Purchasing screen to companies that derive significant revenue from producing pornography. However, most pornography producers are small, privately owned businesses, which precludes any form of CBIS-led shareholder action.
Other publicly traded companies involved in pornography are content distributors such as cable and satellite TV providers and hotel chains that provide “adult” channels and on-demand programs. These companies tend to be fairly large, and the revenue they earn from distributing pornography is a small percentage of their overall revenue. We believe there is an opportunity here to use our influence as a shareholder to encourage these companies to stop distributing pornography.
CBIS is asking participants to join a campaign against pornography by signing a letter that we will send to five major media companies: Comcast, Time Warner Cable, DIRECTV, Dish Network and Cablevision. The letter asks the companies to:
Visit the SRI Action Center at www.cbisonline.com to read the letter. Broad support by CBIS participants will help us send these companies the important message that shareholders object to profiting from this type of business. Keep up-to-date on this campaign at the SRI Action Center.
The internet hasn’t eliminated the paper trail that follows us around the office. It has just restructured it a bit. Here are some common sense, low-tech security tips for managing your paper trail that are easy to overlook in a high-tech online world.
Investors continue to debate whether the U.S. faces future inflation from the Fed’s unprecedented quantitative easing or deflation from economic stagnation, excessive debt levels and falling wages. Both outcomes would create a range of investment risks, but very low inflation or deflation, while a good environment for bonds, would not necessarily mean bad news for stocks.
Over nearly a century of data beginning in 1925 there have been only two periods characterized by very low inflation or deflation. In both, stocks tended to perform well.
The first, from January 1926 through December 1939, was a turbulent era that included the end of the roaring 1920s, the crash of 1929 and the Great Depression. Consumer price index (CPI) deflation averaged 1.7% per year. However, stocks returned 9.8% per year on average over the 14-year period.
The second occurred from January 1952 through December 1955, when growing American industrial might helped power stocks sharply higher, up 25.4% per year, even though CPI inflation was a very low 0.3%.
Because low interest rates affect the discount rate for future earnings, they should support average or above average price/earnings (P/E) ratios. It’s rising inflationary expectations and rising inflation that cause P/Es to contract. Given stable P/Es, stock returns should be determined by earnings growth. Therefore, strong market gains are certainly achievable by growing companies with solid balance sheets. Over-leveraged companies, by contrast, would suffer in deflation. However, positive sentiment is critical for strong returns under inflation or deflation. Anti-business sentiment — widespread during the early 1930s, 1938 and in 2010 — can temporarily overwhelm otherwise favorable conditions for stocks.
Given today’s unusually uncertain economic outlook, CBIS urges participants to consider absolute return strategies for enhanced portfolio diversification. Participants may want to speak with their Investment Advisor to learn more about CBIS Capital, a new entity offering access to socially responsible alternative investment programs that target absolute returns regardless of the inflation backdrop.
Note: Please refer to the PDF version of this newsletter for the graph that accompanies this article.
Q: With bond prices fully recovered from the global financial crisis of 2008-2009 and Treasury yields sharply lower since mid-year, there is talk in the financial media now about the possibility of a bubble in bonds. Does CBIS believe there is a bond bubble and should participants be concerned about potential losses in bonds if interest rates rise?
A: We do not believe that bonds in general are valued at levels that suggest a bubble. However, given the losses in the equity market during 2008-2009, which have not yet been recovered, we understand why participants would be concerned about a similar fate in the bond market.
The mathematics of bond returns can be complex, yet they are very different from those of equities. A quick review can help assuage fears for long-term bond investors. As interest rates rise prices of existing bonds fall, but market yields rise, boosting the portfolio’s yield. The portfolio’s duration suggests the percentage rise or fall in principal value for every percentage change in interest rates. At June 30, for example, the RCT Intermediate Diversified Bond Fund’s duration was 4.0 years, slightly less than the Barclay’s Capital Aggregate Index benchmark’s 4.3 years. Were market yields to rise sharply, say 400 basis points (4.0%) in a single year, that would imply about a 16% decline (4% X 4.0) in the Fund’s principal value. This would certainly be a painful development. However, such a large, sudden upward surge in rates has never occurred in U.S. history. Our bond sub-advisers expect that when the Federal Reserve finally raises short-term rates, it is likely to do so in modest increments of 25 basis points (0.25%). Moreover, the Fund’s sub-advisers can make tactical moves to offset some of the decline in principal, and reinvestment of interest income would occur at rising yields. So even in such a decidedly negative scenario, it’s highly likely that losses would be recovered within two to three years. Investors in high-quality diversified bond portfolios simply do not face the same magnitude of risk faced by equity investors.
It is impossible to know where interest rates will be next year or after. Bond yields might be lower than they are today. We encourage participants not to make portfolio bets on the direction of interest rate changes. Instead, use annual rebalancing to maintain targeted asset class exposures and take advantage of bonds for what they offer — current yield, a hedge on equity volatility and generally positive annual returns (since 1975, the Barclays Aggregate Bond Index has produced a negative annual return only twice; -2.9% in 1994 and -0.8% in 1999).
Due to the complexities inherent in bond portfolio management, and given the many macroeconomic risks shaping today’s investment landscape, there is considerably more that can be said about this topic. We encourage participants who are concerned about a bubble in bonds to speak with their Investment Advisor.
CBIS Office Closings
SRI Action Center