Can big business clean up corrupt governments in the developing world?
Greased palms, payments under the table. One of the seemingly intractable problems of doing business in the developing world is corruption. But some unlikely nations and corporations are teaming up to tackle it, says Elizabeth McGeveran of F&C Asset Management in Boston. She joined Michael Gallipo, coportfolio manager of small- and mid-cap growth strategies at Citizens Funds in Portsmouth, N.H., for this month's roundtable on ethical investing. Here are excerpts of their comments:
Q: Governments set rules to keep business honest, but why would business try to do the same for government?
Ms. McGeveran: I think there's a myth out there that oil and gas and mining companies benefit from corrupt markets. In fact, corruption is very expensive for companies. When federal officials are lining their pockets with public dollars, you have developing nations that don't have hospitals, aren't building roads - the kind of services and infrastructure that companies need. You also find that in corrupt markets money sometimes gets siphoned off to buy weapons and to fuel internal or cross-border conflicts, which can create very dangerous and even deadly operating environments for companies.
Q: How does the plan work?
EM: Companies make legitimate payments to governments and then the governments publish both what they received and what's in the treasury. And the companies also publish what they've paid. So it allows civil society to compare what's gone into the government coffer and what's exactly there. It's an initiative called the Extractive Industries Transparency Initiative.... There are several pilot countries, about 12 different countries, that have agreed to work with the different oil and gas and mining companies to try out this transparency idea and see how it works.
Q: But the participants include Nigeria, Azerbaijan, Chevron, and ExxonMobil - nations and companies that many ethical investors avoid.
EM: Social investors bring different values and different sets of concerns. If you're concerned about the questions of good government, if you're concerned about how oil and gas and mining revenues may fuel human rights abuses, then revenue transparency is a really important issue for an individual investor. So I think it's always a question of balancing.
Mr. Gallipo: It's always a challenge. One that we wrestled with recently is Starbucks. They announced a licensing deal with Jim Beam to come up with a Starbucks-branded coffee liqueur. We evaluated that very carefully. We actually signed a letter to the company encouraging them to pursue other growth avenues rather than this one. But they pay well above market rates for coffee, which helps a lot of third-world coffee growers. There are lot of business practices they do, including health benefits for their staff, things like that that we really approve of. So, at the end of the day,... we think their overall business practices warrant keeping them in the portfolio.
Q: You invest in small- and mid-cap stocks, Michael, which have outperformed large-cap stocks in the past five years. Is that run over?
MG: You're certainly not going to see outperformance of that magnitude over the next couple of years. But I think you can see the small- and mid-cap sector keep pace and maybe even continue to outperform.
Q: Oil companies have done well in the past year, obviously. But you've been looking at luxury retailers that also do well when gas prices are high.
MG: It's not so much that they do well because [oil] prices are high, but they are more isolated from high prices. Retailers that are more sensitive to the lower end of the consumer spectrum are going to be much more negatively impacted by higher gasoline prices. So we have tended to emphasize the luxury end of the consumer market. An example is Nordstrom. That stock is up more than 15 percent in contrast to Wal-Mart, which is flat to down, or Family Dollar, which is down more than 20 percent.
Q: What other high-end retailers do you like?
MG: A company like MarineMax, which makes boats. Their average selling price is $90,000. [So for] people who are inclined to make that purchase, the extra $10 to $15 a week to fill up their car probably is not going to affect that decision. Whole Foods Market is another great example. Whereas supermarkets in general have been struggling, both because of gas prices as well as competition from Wal-Mart, Whole Foods continues to post just great numbers. Its stock has been a phenomenal performer this year.
Q: Elizabeth, what luxury retailers do you like from a social perspective?
EM: We like Whole Foods, too. We like their products, their focus on organic. They've been attentive to the issue of genetically modified organisms and other concerns that consumers may have. We think Burberry is interesting. They make high-end clothing and have been paying good attention to how they can manage some of the labor issues that you may find throughout the supply chain - things that are related to sweatshops and other unsafe working conditions. We think that Tiffany is interesting. Some of the work they've done on conflict diamonds - trying to avoid purchasing and using diamonds that have been used to fuel civil wars in Africa - has been a really interesting, important stance in that industry.
Q: April rained on Wall Street. May came up roses. What happened?
MG: April was an extremely frustrating month. At Citizens, one of our theses for the first quarter was that earnings were going to come in considerably stronger than what the street was looking for. The street was looking for about 8 percent year-on-year earnings growth. We thought it was going to be closer to 15 percent. As it turned out, the final numbers came in right around 14 percent, so we were pretty correct in our thesis. And yet the markets not only shrugged it off, they actually went down. There were tensions between oil prices and what the Fed was doing. Would the Fed overshoot? Would we go into a recession? Or do we have inflationary concerns? As we rolled into May, though, the market started to digest some of those stronger earnings reports. And you saw some of the companies that had put up good numbers really start to come back pretty strongly in May. We were ready for a bounce.
Q: What's your outlook?
MG: We've had a nice rally in the marketplace. We hope it can continue. And our belief is still that 2005 can be a pretty decent year for investors - probably a lot like '04, not the sort of 25 percent returns you saw in '03. But at the end of the day, [2005 is] probably a decent year.