The national dialogue on racial inequality brought about by the death of George Floyd at the hands of Minneapolis police officers has resulted in more questions from Aperio’s clients: How can we reflect our concerns about racial inequality in our investments?
The purpose of writing at this time is not to provide a laundry list of the options that Aperio makes available to address racial inequality but to address some larger themes.
Four hundred years of racial inequality in the United States have created a Gordian Knot of public policy, cultural norms, and economic systems that continue to deny African Americans and other minorities the “unalienable Rights …[of] Life, Liberty and the pursuit of Happiness” promised in the Declaration of Independence as well as the promises of “equal protection of the laws” from the 14th Amendment to the US Constitution ratified following the Civil War. Publicly traded companies are a huge part of our life in this country. They employ us; we buy their products and services; our retirements are funded by investing in them. So the question is, in our capitalist system, how will capital be put to work through these companies to pry open the knot of our racial strife? I don’t have a definitive answer to that question, but how we think about companies and investment portfolios could help create a society that shows that Black Lives Matter.
Every company has an impact on the world, and therefore every investment portfolio creates a basket of these impacts. The behavior of companies through their management and employees changes the communities in which they operate, and the world, for good or ill. The products that companies put into the marketplace change the world for good or ill. Investors own these behaviors and these products. Each of us as an investor may have a slightly different list of what products and what company behaviors create the greatest problems, but we need to acknowledge that we own the impacts and if we don’t like something we own, we must figure out a path to fix it.
No company is perfect. This idea is a way of doubling down on the first theme. Every company can improve how it contributes to racial equity. At Aperio, we talk about the “journey.” For society as a whole, the issues we face will not be solved overnight. Maybe what we should expect from the management at any company is an authentic effort to understand the issues and the related impacts of their behavior and then to seek to make improvements. Each of us will have to evaluate the authenticity of the effort because there won’t be a single standard by which to measure what level of company effort is enough.
Too often, companies are not transparent about their activities and how they fit into the larger economic landscape. The list of things we don’t know about companies is voluminous, so one example: we don’t know what the racial and ethnic makeups are of company workforces. (The government does because companies have to report this information annually, but the public doesn’t have access to this information.) I have a corollary to the old axiom that “you manage what you measure”: if it’s not disclosed, you didn’t really measure it. For many environmental, social, and governance issues, and particularly for those related to diversity, equity, and inclusion, we need more access to data to be able to better evaluate companies and manage our portfolios.
We shouldn’t anthropomorphize companies. While legally companies have a distinct identity, people are making the decisions. It’s easy shorthand to talk about “companies making decisions” (I’ve done it in this piece), but with this kind of language, we accept corporate behavior we would never accept from a person. (We don’t give people permits to litter a given amount per day, but we do allow companies to pollute in this manner. Frequently, through land use planning, we allow companies to pollute more in areas where communities of color live.) We need to think about any company as the aggregation of its investors, boards of directors, management, and employees, and consider the actions of each company as the aggregate actions of these groups. To that end, investors have the right to boards and management teams that will represent their broadly defined interests. Boards and management should be replaced if they are not representing investors’ interests.
These thoughts feel wholly inadequate to meet the challenges we are facing as a country. We all know we can’t snap our fingers and have a just and equitable society. Addressing our history of racial strife will take substantial work on multiple fronts. Engaged investors can demonstrate a desire for more information about companies and based on that newly available information make decisions that influence the behavior and products of companies. On this basis, investors may play a part in moving our economy, country, and culture toward the equality we seek.
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