A quest for clean hands

Ever since Enron's collapse two years ago, and the wave of corporate scandals, Julie Gorte's job hasn't been the same. As director of social research at Calvert Funds, she uses new criteria to decide if a company is "socially responsible." She's asking previously unasked questions. (Examples: Are executives getting personal loans from the company? Are board members indebted to anyone at the firm?) The point: to plumb not just a company's business practices but the morality of its management.

"It's a puzzle," Ms. Gorte says. "I'm just trying to deduce things from clues."

For more than two decades, socially responsible investment funds have been refining their tools for evaluating corporate character. Social screening criteria have expanded through the years to weed out not just flagrant polluters, sweatshops, and enemies of public health, but also "green washers," a term for companies whose sophisticated public relations strategy masks a pattern of serious infractions.

In the wake of recent scandals, however, the search for solid moral character in corporations has turned the spotlight inward to management itself. As the shift unfolds, companies getting the highest marks for trustworthiness and devotion to social responsibility are those with strongest safeguards against human weakness, especially greed.

"If you cut corners in one place, you're likely to cut them somewhere else," says Sophia Colliers, president of Citizens Advisers, a socially responsible network of funds with about $1 billion invested. "We really are focusing more [than before the scandals] on how a company is being run. We now ask what kind of environment is this for management? Is it given to cronyism and back-scratching?"

To find out, Citizens now investigates relationships among board members. Do any benefit from contracts or philanthropic gifts from the company? If so, their voice is compromised, Ms. Colliers says, because they might hesitate before taking issue with the CEO. Disney, for instance, gets demerits in Citizens' eyes for affording a seat on its board of directors to the head of a school where CEO Michael Eisner has children enrolled.

"Our concern with boards [before the scandals] was for diversity in gender, race, and ideology," Colliers says. "We never before asked what relationship do all these people have."

Though analysts across the industry are testing management in new ways to discern corporate moral character, the tools they use vary from fund to fund. Domini Social Investments, for instance, has begun investigating whether companies are involved in tax disputes. Those said to owe more than $1 million in taxes are ranked as problematic.

Similarly, although the fund has long frowned on companies that pay hefty fines to regulators, Domini now places double the significance on fines than they had in analytical reports three years ago. Companies owing more than $100,000 to state governments or $1 million in federal fines may as well be carrying a bright red flag that reads "trouble."

"The fines they pay are an indication of a lack of concern for authority," says president Amy Domini, who is also author of "Socially Responsible Investing: Making a Difference and Making Money."

Pay to CEOs in excess of $10 million per year, like board member pay beyond $100,000 per year, also raises more concern at Domini than in the past: "The theory is that after a certain point, if you make too much money as a CEO or board member, you become more concerned with continued employment than with vigilance," Ms. Domini says.

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