Mark Brandon is the Managing Partner of First Sustainable (, a registered investment advisory catering to socially responsible investors. In addition to Socially Responsible Investing (SRI), he may opine on social venturing, microfinance, community investing, clean technology commercialization, sustainability public policy, green products, and, on occasion, University of Texas Longhorn sports.

Saturday, November 25, 2006

SEC Probes Ford Motor's (NYSE: F) Ties to Syria and Sudan

On Friday, the Associated Press reported that the Securities and Exchange Commission sent a letter to Ford Motor inquiring about the non-disclosure of it's ties to Syria and Sudan. The SEC contends that these operations constitute material risk to shareholders and should therefore be disclosed. The company states that, since its operations comply with the law, the information is not material, and therefore does not require disclosure in the company reports. Given the lawyer-like response, an examination by the social investment crowd is in order.

The allegations center around the activities of Ford subsidiaries Land Rover, Volvo, and Jaguar, as well as Mazda, in which Ford owns a one third stake. Both Syria and Sudan are on the State Department list of terror-sponsoring states. U.S. Companies are not prohibited to conduct business inside Syria as long as the Syrian government is not a party to the transaction. Sudan, on the other hand, requires an exemption issued by the U.S. government, putting that genocidal regime in the same league as Iran, North Korea, and Cuba. A loophole exists for products that contain less than 10 percent U.S.-originated components. Pardon the pun, but this loophole is large enough to drive a Ford Truck through it.

Anyway, Ford claims that is dealership in Syria is authorized, and it meets the U.S. origination requirement. As for Sudan, a U.K.-based distributor of vehicles has dealerships in Sudan for Land Rover, Volvo, and Jaguar. Since these products also meet the U.S. origination requirement, and the distributor is not subject to U.S. law, Ford claims that this, too, is within the law. As for Mazda, which also does business in Sudan, Ford claims that since it is a separate legal entity and Ford is a minority stakeholder (owning one third of the shares), the Japanese company is also not subject to the U.S. sanctions. Nonetheless, Ford benefits from these operations to the tune of $50 million a year, according to its own figures. Since this is a drop in the bucket compared to its $177 billion in sales, it could not possibly be considered "material".

I, personally, find Ford's defense to be correct on all counts. The operations conform to the letter of the law, and $50 million is not a material amount requiring disclosure. Still, even children know that what is legal and what is right and moral are often different things altogether. Socially responsible investing is about rewarding companies who embrace the latter.

Of course, even this position opens up more cans of worms. Every social investor has his or her own definition of social responsibility. For example, Wal Mart (NYSE: WMT) is a beacon for the crowd that seeks companies that provide opportunity for minorities. At the same time, it is a pariah for the environmental crowd. Fannie Mae (NYSE: FNM) is a darling to the community investment fans, but for the corporate governance adherents, few companies are worse. Ford has always been a labor-friendly company. They have even been making substantial progress on the environmental front with their embrace of Hybrids and E85 ethanol. So, even these revelations require one to re-examine what is important in your own definition.

On a related note, the press could do more to expose these multinationals doing business with our enemies. For all of the invective that our Vice President receives over his tenure at Halliburton (NYSE: HAL), not much of it is about that company's subsidiary which is currently helping Iran build its oil infrastructure. This relationship was ongoing during Cheney's tenure as CEO. Schlumberger (NYSE: SLB) is also able to help the Iranians, thanks to the subsidiary loophole. That company has a Dubai-based shell company to get around the rules. The company's address is nothing more than a mail drop. These are but two of the most egregious examples.

Monday, November 13, 2006

Yet Another Mutual Fund Industry Scandal

The SEC is investigating 27 mutual fund companies, along with fund service provider Bisys (NYSE: BSG), for allegedly paying kickbacks in return for fund servicing contracts. In addition to the market timing scandals of 2003, this provides another black eye for an industry that has long been a cesspool of corruption and long overdue for regulatory scrutiny.

Bisys provides back office processing work for various mutual fund companies. They might perform the fund accounting, prepare the statements and confirmations, mail out all correspondences to customers, etc. It is not bad work if you can get it, because the process is mostly automated, and it provides annuity-like revenue streams for the company. Usually, the service provider charges the company a percentage of assets under management, just like the management company itself, even though the marginal cost of adding additional investors is close to nothing.

The allegations are that Bisys and fund management companies colluded to overcharge investors for these services. Bisys then provided a "rebate", which amounts to a kickback, back to the management company. Because expenses are deducted from the fund before prices are calculated, this whole process is invisible to fund investors, who are getting robbed. This case is only the tip of the iceberg, as other fund service companies have come under scrutiny as well. The largest fund complexes typically do their own processing, so the fund companies under the microscope are smaller private-labelled funds, such as those pushed by your bank branch.

When I say "tip of the iceberg", I am referring to the myriad ways that funds management companies are getting kickbacks. Fund servicing is only one. For example, many companies, including the largest fund complexes, get overcharged on transaction costs in return for free research, office equipment, data terminals, even office space and travel junkets. Broker A charges Fund B 50 basis points per share when a reasonable cost might be 5 basis points. Transaction fees are not included in the quoted expense ratios, but those other costs are. The fund gets to publish a lower expense ratio, even though their actual expenses are probably far higher.

The real outrage here is that the "mutual" in mutual fund has been totally perverted. In the beginning, mutual funds evolved so that small investors could pool their funds, creating an economy of scale that could enable them to hire professional management and decrease their expenses. Since the 1980's, mutual fund assets have risen twenty-fold, but expense ratios have actually inched up a bit. At the same time, the digitalization of trading, trade processing, and clearing have enabled fund costs to go down. Lower costs distributed across many more investors should have equated to dramatically lower fund expenses. Instead, those savings are going straight to the bottom line of the fund industry and their willing (sometimes colluding) partners.

Far be it from me to say that fund companies should be exempt from raising their prices, just like any other business. However, they are doing so in ways that are not transparent. Fund investors do not even know they are being overcharged for services, until 30 years down the line when they notice that their fund underperformed the market benchmarks by a percent or two every year. That does not sound like much, but it can mean that your nest egg is half or a third what it would have been had the "mutual" in mutual fund remained.

Tuesday, November 07, 2006

My Advice To Whomever Has Control of Congress

I have proclaimed in this blog a few times that I consider myself a non-partisan, but that does not mean that I don't vote. I must implore anybody with a civic and social conscience to go vote today.

I am cynical enough to believe that, among the group of politicians now running things on both sides of the aisle, even a change in party control will not lead to genuine governance. Here is my wish list:

1) To Democrats. Please don't spend two years engaging in payback. It would be easy to spend taxpayer dollars investigating the administration and other members of Congress to the exclusion of the serious problems of the day. I believe that this tactic could result in a switch back in 2008. However many seats the Dems gain, it will be because of voter fatigue with the current regime. Unless you rise above, cynicism will take root, suppress turnout in 2008, and you will be right back in the minority. The strategy of just being the anti-Bush party is tired. Get back to the principles that made the party great: social justice, equality of opportunity, and looking out for the poor and working classes.

2) To Republicans. At the time I write this, the polls have not closed, so we do not know if control is changing. It is apparent that the GOP is going to lose a substantial number of seats. Take a lesson. Good conservative values like fiscal responsibility and minimal regulation have been abandoned lately in favor of fiscal piggishness, backscratching, and the curtailing of civil rights.

3) To Both Parties. How about actually meeting? In January, I heard the Republican leadership admit that not much would get done in this election year. So, if action during an election year is off the table, and we have an election cycle every two years, that does not leave much time to get substantive work done. This Congress has the lowest number of days in session since the pre-industrial era.

4) Please Abandon the Class Warfare Strategies. Sorry lefties, the GOP has shown twice now (during the Reagan years and now) that lower top tax rates result in a significant increase in government revenues. The lower taxes have resulted in renewed business investment. The unemployment rate is still well below what was considered to be the natural rate just a few years ago. I could spend a lot of posts on this topic. However, in both of those cases, the GOP has failed to keep a lid on spending. Spending is the problem, not tax cuts.

5) To Both Parties. Please figure out a way to decrease the power of Iowa and New Hampshire. Why do those two states get to pick our presidents?

6) Don't abandon the electoral college. I know that it stings when the candidate with the popular vote is defeated in the college. It has happened four times in our republic's history, and we have still managed to survive and thrive. Getting rid of the college would mean that candidates will only embark on a major city tour, and ignore rural and small-state concerns.

7) To Both Parties. Bring some common sense to the immigration debate. This discussion has totally ignored the evidence of immigration's impact on the economy. The right has reverted to xenophobic platforms, trying to make the working class afraid of all the "brown people" coming to re-conquer the U.S. The left has done nothing but make charges of racism.

8) Show Me. Medicare will be insolvent within 15 years. Social Security is still on its way to insolvency. The bureaucracy at all levels is still woefully unprepared for more terrorist attacks. One out of every three children is born into poverty. Vast numbers of workers are unprepared for the challenges of globalization, not to mention many of our children. You want it. You got it. Rise up and lead. Show us that you can tackle these problems instead of making of mockery of political discourse by trotting out base issues such as gay marriage, Terry Schiavo, and age and class warfare. We are watching.

Go vote.