Should One Invest in Unethical Companies?

I had a telephone conversation last week with a new client and one of the questions he had for me was, "Do you invest in unethical companies?"

He was speaking about Wal-Mart (WMT) specifically, it turns out, but there are a lot of investors who avoid buying shares in companies where they disapprove of their products, their way of doing business, or both. Common examples include stocks with ties to alcohol, tobacco, firearms, casinos, Mideast oil, etc. It was a good question, and one that I don't think I've addressed on this blog before, so I figured I would give my perspective.

Before I get into an explanation, the answer to this question is yes, I will buy shares in the likes of Anheuser Busch (BUD), Altria (MO), Halliburton (HAL), Wal-Mart, and MGM Grand (MGM) if I think the stocks are good investments. This assumes, of course, that the client is okay with this. If a client does not want to own certain stocks, I have no problem following their request.

The issue here, in most cases, is whether or not you want to support companies like this if you disagree (insert a stronger word here if you prefer) with what they stand for. Many people equate buying stock to supporting a company. The reality though, is that Wal-Mart does not benefit in any way if I were to buy 100 shares of their stock. That action simply results in one of their current investors transferring their shares to me, in return for cash. Wal-Mart does not benefit monetarily from that transaction. After an initial sale of common shares, the money changing hands is between individuals, so the company is out of the picture.

I have no problem ceasing support for companies I don't like. However, if I wanted to stop supporting Wal-Mart, for example, I would simply choose to never again set foot in one of their stores. No longer shopping there is adversely affecting their business. Not investing in their stock is not having the same effect. Since my job is to make money for clients, I will generally invest in the stocks that I feel can accomplish that goal, regardless of whether I like the underlying firms or not.

This reasoning, of course, assumes that you are not buying shares in an IPO or a new offering of stock through which the firm is directly receiving the proceeds from the sale. In those cases, not buying the stock does have an impact on them, even though there will always be someone else willing to invest even if you're not. Still, it's the principle that is important.

Disclosure: No positions in the companies mentioned at the time of writing, but not for the reasons discussed above :)

Comments

[huangjin:]

I think in some ways you are supporting the company. If social investing caught on, I'm sure money could be made by buying the companies ignored by investors. But the whole concept is ludcrous. Wal-Mart is unethical? I must have missed the reports of them stealing and murdering. Even Altria. If people don't like smoking, fine, but the idea that something unhealthy is unethical is just stupid. People don't even know what ethics are anymore. The whole subject reminds me of the line about fools and their money.

2007 Jul 12 12:43 PM

[burque:]

Yes, voting with your wallet is the best way to avoid a company. However, the issue is not only whether WMT or any other company will benefit from your purchase of shares, but if you are comfortable trying to make a profit off their business practices. Everyone's threshold will be different, but everyone should at least consider whether they have any no-go areas. It's a very personal decision, but there are certainly stocks I'd prefer to avoid, and seek equal rates of return elsewhere. For example, someone who has had family pass away from lung cancer might avoid tobacco stocks, not because he wants to hurt tobacco companies, but because he will feel better about his portfolio.

2007 Jul 12 12:44 PM

[SA Editor J...:]

agreed - it's not so much whether they profit off of you - it's that through dividends and the like, you as a shareholder are profiting off of their business.

2007 Jul 12 05:44 PM

[Josh Stern:]

Individual investors should avoid companies they find unethical because (among other things) that belief will tend to make them weak holders that sell at the wrong time. Similarly, someone investing a clients money should avoid the pressure of holding something you believe they will look askance at.

On the question of whether going long helps a company, I believe the correct answer is yes, by some tiny, immeasurable amount. The economic benefit of public offerings is access to capital and the equity market is a social organization that sets the valuation terms for a given company and others like it. Just like someone who invests in a holding company that buys mortgage backed securities is in some microscopic way helping somebody somewhere afford a house with an acceptable finance arrangement. On the other hand, the effect is so small that if you knew you were going to make $X more with that investment then the overall benefit of avoiding it would certainly be less than doing it and giving, say $X/10 to a worthwhile charity.

On the topic of Walmart, I don't think their business practices are unethical - they work within the system and the laws that exist, and nobody forces their workers to take those jobs or their customers to shop there. But people who support a combination of laws, economic, and educational policies that will clearly result in the long term destruction of economic security for current and future workers with median or lower levels of skills in demand and geographic access to commercial centers lack compassion. And people who deliberately confuse and mislead voters for the benefit of their own economic interests are unethical.

2007 Jul 12 02:47 PM

[Frank Li:]

Perhaps the term you're looking for is "not socially responsible", a definition used (in inverse) by the socially responsible ETFs.

Buying a stock does help the company by lowering its cost of capital in the event it does an equity offering.

2007 Jul 12 06:57 PM

[User 1:]

In light of the comment above, we've tagged this post with the tickers of the socially responsible ETFs.

Here's a listing and discussion of the <b>Socially Responsible ETFs</b>, part of the new Seeking Alpha ETF Selector we've published.

2007 Jul 12 07:04 PM