Investing in Companies that Do Good

The slump in the market is making investors more choosy and capital is flowing to companies that have good values. But if the market turns bullish, the really discerning investors may find the going tough.

Dinesh Narayanan
Updated: Feb 2, 2012 06:45:08 PM UTC

Investor activism is increasingly on the rise in the West. Many investors want the companies they back to be not just heartless corporate entities but caring citizens of the globalised world. They would frown at smoking chimneys and overbearing managers. Remember how the Pension Fund of Norway and the Church of England sold their shareholding in Vedanta citing environmental concerns and human right violations at the company’s Orissa plant. (Read Forbes India’s April 2010 story on Vedanta).

Such activism is good for the world in general. Unscrupulous companies would clean themselves up if capital becomes scarce for them.

I met some such conscientious investors at dinner a couple of days ago. Talking to them, it dawned on me that the winds blowing in the West are yet to turn eastward. Businesses in India largely are still insensitive to bigger concerns.

The people I met worked for investors in the West who are committed to backing businesses that are responsible to society, have good business practices, are concerned about public commons, environment etc. As a rule they will not invest in companies that were not fully committed to protecting the environment. They met more than 2000 companies last year. ``By meeting companies, I mean meeting the people who run those companies,’’ one of them told me.

What he meant was the topline and bottomline alone did not matter. What mattered was: are the people running the companies good? Do they have good values? In short -- Do they care? The promoter of a company was a little taken aback by the line of questioning and said, well, I don’t know how to answer you. Nobody has really asked these questions until now.

So the universe of opportunity available to such investors remains small. Most stars of the stock market do not figure. The ones that they like tend to be young and small, perhaps from the post-1991 era.

``But things are getting better, thanks to the slowdown!’’ he says.

Now that is interesting.

He helpfully explains that investors become choosy in recessionary markets. They begin to care about managements and practices. But in an ebullient market, the mob takes over. Then even the well-intentioned are sucked into the frenzy.

``People like us do badly in such markets. We have to have longer staying power than the longevity of irrational exuberance. It is tough.’’

For them the long run is really becoming long. Just hope it doesn’t become Keynesian long.

The thoughts and opinions shared here are of the author.

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