Lloyd Kurtz Tricky indicator choices in the technology sector December 9, 2011 http://bit.ly/zkTBkN

1. Tricky indicator choices in the
technology sector
Lloyd Kurtz
International Bernheim Workshop
December 9, 2011

2. Topics
• Assessing the objective function
• Technology companies as assessed by…
• Values-based investors
• Sustainability-oriented investors
• Stakeholder-oriented investors
• Toward better metrics

3. Assessing the Objective Function

4. Motivations for social investment
Values-Based
 Values are important, so they should be incorporated into investment
decisions.
 Example: General Board of Pension and Health Benefits of the United
Methodist Church
Financial Performance
 Companies that understand and respond to the changes that are taking
place in the world should offer superior long-term investment opportunities.
 Example: Generation Investment Management
Fiduciary
 Company management teams should be held accountable to investors (e.g.,
Hawley’s Rise of Fiduciary Capitalism).
 Example: CalPERS
Change
 Use market forces to create change in the world
 Example: Skoll Foundation

5. Some studies suggest ESG factors
can help performance
Nelson Capital Management | 5
• Derwall and Guenster (2005)
• Innovest sustainability ratings
• Edmans (2007)
• Fortune magazine’s “100 Best Companies to Work for in America”
• Barber (2010)
• CalPERS corporate governance program

6. Others find that boycott effects
could hurt performance
Nelson Capital Management | 6
• Hong (2006)
• Tobacco stocks have had large unexplained alpha for decades.
• Statman (2008)
• Finds offsetting effects:
• Underweighting sin stocks has hurt performance, consistent with
Hong
• But “social alpha” has been an offsetting effect
Risk of crowding?

7. Motivations for social investment
Values-Based
 Values are important, so they should be incorporated into investment
decisions.
 Example: General Board of Pension and Health Benefits of the United
Methodist Church
Financial Performance
 Companies that understand and respond to the changes that are taking
place in the world should offer superior long-term investment opportunities.
 Example: Generation Investment Management
Fiduciary
 Company management teams should be held accountable to investors (e.g.,
Hawley’s Rise of Fiduciary Capitalism).
 Example: CalPERS
Change
 Use market forces to create change in the world
 Example: Skoll Foundation

8. Common U.S. Social Screens
Mutual Fund Assets by Screen Type
#1 #2
1997 Tobacco Alcohol
1999 Tobacco Alcohol
2001 Tobacco -
2003 Tobacco Alcohol
2005 Tobacco Alcohol
2007 Tobacco Alcohol
2010 Sudan Tobacco
Source: Social Investment Forum, SRI Trends Reports, 1997-2010

9. Tech companies and values-based
investors

10. Tech companies screen well
• Rarely involved in “sin” industries:
• Alcohol, Gambling, Tobacco
• Firearms, Pornography
• Moderate environmental footprint
• Software/services may impose positive externalities
• No nuclear involvement
• Leading companies rarely involved in military projects

11. The 10 Largest U.S. Tech Companies
By market capitalization
• Apple - $362 bn
• IBM - $224 bn
• Microsoft - $212 bn
• Google - $201 bn Total market value:
• Oracle - $158 bn $1.35 trillion
• Intel - $126 bn Value of next 119
• Cisco - $100 bn technology stocks:
$1.16 trillion
• Qualcomm - $91 bn
• Hewlett-Packard - $55 bn
• EMC - $47 bn
Research source: Empirical Research Partners. As of 5 December 2011

12. Choices: Calvert Social Index
• Apple
• IBM The Calvert Social Index is a good
example of a modern approach to a
• Microsoft U.S. large-capitalization stock
• Google universe. Stocks are evaluated
both on exclusionary criteria and
• Oracle stakeholder performance, although
• Intel the exclusionary screens have a
stronger impact on the final
• Cisco composition of the index.
• Qualcomm
• Hewlett-Packard
• EMC
Research source: Calvert Group
internal social research team

13. Notes on Oracle
• Primary issue: Corporate Governance
• Company receives “F” grade from Governance Metrics
The Oracle Corp. (Oracle) corporate governance story revolves
around the large ownership interest of founder, CEO, and former
chairman Lawrence Ellison. His disproportionate share of voting
power has the potential to dilute the authority and effectiveness of
the board of directors.
• Key factors
• Heavy board influence by Ellison
• Ethics controversies
• U.S. criminal investigation of bribery in Africa
• Department of Justice complaint of overcharging the U.S. gov’t
• Excessive executive compensation
Source: Governance Metrics

14. Choices: MSCI KLD 400 Index
• Apple
• IBM The MSCI KLD 400 (formerly the
Domini Social Index) is older than
• Microsoft the Calvert Social Index, but is
• Google constructed in a similar way.
Exclusionary screens are the
• Oracle primary determinant in the
• Intel composition of the index.
• Cisco
• Qualcomm
• Hewlett-Packard
• EMC
Research source: MSCI/KLD

15. Notes on Apple
• Newsweek Green Rankings (2011)
• Apple rated #50, behind IBM (#1), Hewlett-Packard (#2), etc…
• KLD GlobalSocrates rating (2010)
• Poor B rating, down from BB in 2010, lower than HP (AA), Dell
(AA), Intel (A), etc…
• Greenpeace
• “[I]n a recent Greenpeace scorecard, Apple ranked lower than
HP, Dell, Nokia, and Sony. For an industry innovator, Apple is
falling off the cart while the leaders of the industry are
speeding ahead.”
• In August 2011, Greenpeace criticized Apple’s planned data
centers, which will rely heavily on fossil-based energy.

16. Cool Makes it OK
Invincible Apple: 10 Lessons From
the Coolest Company Anywhere
By: Farhad Manjoo July 1, 2010
“Everyone wants to be like Steve Jobs and his
powerhouse company. It's not as easy as it
looks.”
http://www.fastcompany.com/magazine/147/apple-nation.html

17. Choices: KLD Select Social Index
• IBM +
• Intel ++
This index is formed by
• Microsoft =
maximizing exposure to
• Oracle + overall corporate
• Google = responsibility (score derived
from KLD GlobalSocrates
• Cisco =
database). The +/- signs
• Accenture ++ indicate whether has a
• Hewlett-Packard - higher or lower-than-
expected weighting in the
• Apple -
index, given its market
• Texas Instruments ++ capitalization.
• Qualcomm -
• EMC
Research source: MSCI/KLD

18. Tech companies and sustainability-
based investors

19. Reframing the objective function
“Sustainability isn’t an issue, it is THE
issue.”
- London-based social investor

20. A good independent source

21. The 10 Largest U.S. Tech Companies
By market capitalization
• Apple - $362 bn
• IBM - $224 bn
• Microsoft - $212 bn
• Google - $201 bn Total market value:
• Oracle - $158 bn $1.35 trillion
• Intel - $126 bn Value of next 119
• Cisco - $100 bn technology stocks:
$1.16 trillion
• Qualcomm - $91 bn
• Hewlett-Packard - $55 bn
• EMC - $47 bn
Research source: Empirical Research Partners. As of 5 December 2011

22. Choices: Newsweek Green rankings
• IBM (#1 out of 500) .
• Hewlett-Packard (#2) .
• Dell (#5) .
• Accenture (#7)
• CA Technologies (#9) Oracle (#48)
• Nvidia (#10) Apple (#50)
• EMC (#13) Google (#59)
• Adobe (#14) Qualcomm (#75)
• Intel (#15)
• Cognizant (#16)
• Motorola Solutions (#18)
• Marvell Technology Group (#27)
• Advanced Micro Devices (#28)
• Cisco (#29)
• Intuit (#30)
• Microsoft (#31)
Research source: Sustainalytics and Trucost

23. Tech companies and stakeholder-
oriented investors

24. Reframing the objective function
(again)
The UN Principles for Responsible Investment
1. We will incorporate ESG issues into investment analysis and decision-making
processes.
2. We will be active owners and incorporate ESG issues into our ownership
policies and practices.
3. We will seek appropriate disclosure on ESG issues by the entities in which we
invest.
4. We will promote acceptance and implementation of the Principles within the
investment industry.
5. We will work together to enhance our effectiveness in implementing the
Principles.
6. We will each report on our activities and progress towards implementing the
Principles.
Source: unpri.org

25. Many Social Investors Believe This
“At Pax World...we believe that well-managed companies
that maintain good relations with employees, consumers,
communities, and the natural environment, and that strive
to improve in those areas, will in the long run better serve
investors as well.”
Source: Pax World Investments

26. Stakeholders:
commercial relationships
SUPPLIERS
This constellation of economic
relationships is similar to the
Input-Output Model, but I
argue these relationships are
CONTROL
dynamic, continuously CUSTOMERS GROUP EMPLOYEES
negotiated, and heavily (MGMT)
influenced by loyalty/voice
dynamics.
SHAREHOLDERS

27. Stakeholders: commercial +
contextual relationships
SUPPLIERS
ENVIRONMENT EMPLOYEES
CONTROL
GROUP
(MGMT)
LOCAL
SHAREHOLDERS
COMMUNITY
GOVERNMENT CUSTOMERS

28. Investing too much? Not enough?
High
Financial Performance
Underinvestment
Overinvestment
Low
Low High
Investment in Corporate
Social Responsibility Chart ‘borrowed’ from Kim
and Statman (2011)

29. Strong evidence of correlation
Fortune25 Most-Admired U.S. Companies
MSCI KLD 400 Calvert Social Index
Apple 
Google  
Johnson & Johnson  
Amazon.com   In 2010 only three ‘Most-
Procter & Gamble   Admired’ companies –
Costco   Wal-Mart, Coca-Cola, and
Goldman Sachs Group  GE – fail to appear on one
Wal-Mart Stores
Coca-Cola
of the social indexes.
Microsoft  
Southwest Airlines  
FedEx  
McDonald's 
IBM  
General Electric
3M  
J.P. Morgan Chase 
Walt Disney 
Cisco Systems  
Target  
Nike  
Pepsico  
Starbucks  
ExxonMobil 
American Express  
# in Social Index 19/25 19/25
Sources: GlobalSOCRATES database and Calvert.com, 8/2010

30. Fundamental governance issue
After commercial and contextual stakeholders are
satisfied, who claims the remaining available wealth –
shareholders or the control group?

31. Evolution of technology firms
Negotiating leverage of the control group
decreases as the firm advances through its life
cycle…
• Developmental
• High-Growth
• Growth
• Maturing/Mature

32. 10 Largest U.S. Tech Companies
Classified by degree of shareholder influence
Normal relationship
• IBM
• Hewlett-Packard - Subpar board performance, however
• Intel
• EMC
Some shareholder influence
• Microsoft – Ballmer maintains control, but diminishing
• Cisco – Chambers has a high degree of influence, but poor performance has diminished this
Low or no shareholder influence
• Apple – Culture of secrecy. Likelihood of change unknown following death of Steve Jobs
• Oracle – Board capture Ellison effectively controls the company
• Qualcomm – CEO is founder’s son
• Google – Shareholders are formally excluded (non-voting)
Source: L. Kurtz judgmental classification

33. Choices: Newsweek Green rankings
• IBM (#1 out of 500) .
• Hewlett-Packard (#2) .
• Dell (#5) .
• Accenture (#7)
• CA Technologies (#9) Oracle (#48)
• Nvidia (#10) Apple (#50)
• EMC (#13) Google (#59)
• Adobe (#14) Qualcomm (#75)
• Intel (#15)
• Cognizant (#16)
• Motorola Solutions (#18)
• Marvell Technology Group (#27)
• Advanced Micro Devices (#28)
• Cisco (#29) Same four companies
• Intuit (#30)
• Microsoft (#31)
Research source: Sustainalytics and Trucost

34. Toward better metrics

35. Two approaches
News/Event-Based Research
• KLD Research & Analytics
• Governance Metrics
• Calvert & Domini research operations
 But these two do not publish
Descriptive/Policy-Based Research
• Sustainalytics
• Innovest
• Asset4

36. Desirable features
• Suitability – Appropriate metrics for particular purposes
• Comparability – Ability to compare companies, not just assess them in
isolation
• Intelligent metrics – Checklists are not enough