A quest for clean hands

Industry watchers say corporate governance is not an entirely new consideration for socially responsible funds, since some have for years looked at the independence of board members and executive compensation when evaluating companies.

But today, these concerns have not only become universal, but they have come to seem indispensable to the task of judging a company's true character, according to Mark Thomsen, research director at SRI World Group, a Brattleboro, Vt., consulting firm for socially responsible investors.

"The number of fund [managers] looking at corporate governance before the scandals was few," Mr. Thomsen says. "But all of them have now expanded the criteria they use" to evaluate corporate character.

At certain funds, recent scandals seemingly vindicated long-established screening processes used to judge character. Pax World Funds, for instance, has not changed its official criteria, which kept the company from investing in Enron and other environmental polluters who turned out later to be guilty of more than green washing.

Yet even at Pax World Funds, those in charge of social research fear that a corporate portrait might be misleadingly incomplete without a keen sense for a company's leadership and willingness to abide by restraining principles. One sign of trouble - an auditor who receives more than 25 percent of pay for nonauditing activity, such as consulting - gets even more attention than it did before recent scandals began.

There are "other things [beyond basic social criteria] you will note about a company in a screening report, things that just give you a feel for how worthy they are," says Anita Green, vice president for social research at Pax World Funds. "If we see these corporate governance factors painting a picture, then they'll make it into the report, whereas five years ago they might not have."

Where prior screens proved inadequate for detecting crooks, a fresh interest in tools for ranking management has taken off, perhaps as a glimmer of hope for the possibility of truly understanding a company's moral mettle.

Calvert Funds, for instance, has been burned more than once. Analysts saw Enron making progress on the environmental front and approved it for investment in March 2001, months before the energy giant's collapse. The Fund also owned HealthSouth Corp. and ImClone Corp., both devastated by ethical improprieties among executives.

Having been bruised by deceptive information more than once, Calvert now processes three times as much corporate governance data as before the scandals began. And the new techniques are leading to swift action. Calvert has dropped Computer Associates for exaggerating revenue figures and bagged Oracle for a series of ethics violations, including an alleged payoff to a California legislator. Neither move would have been possible without the arsenal of new questions in place to provide new insights, according to Gorte.

"One of the things you can't see, no matter how you look at it, is fraud - because it's concealed by nature," Gorte says. "What we're trying to see is good management because you, as shareholders, basically hire management to create value that isn't a house of cards."

And to see good management, according to Domini, is to see leaders willing to abide by restrictive policies to rein in the darker side of human nature.

"We do all this to stay alert to how vigilantly management is looking out for themselves," Domini says. "With a piece here and a piece there, you're eventually able to get a picture of the mosaic. Then you hope you know - as well as possible, at least - what kind of company you have."

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