Every Economic Decision Has a Moral Consequence: Toward a New Personalist Capitalism
Sustainable Investments Conference
October 13, 2011
As we come to the conclusion of today’s conference, I want to thank our speakers and all of you once again for your presence here.
I think our speakers today have done an excellent job of explaining a number of the key types of sustainable investing and some of the reasons that people may choose such strategies, so I thought it would be appropriate to view with you in some detail a case study of the ethical foundation of a sustainable investing initiative with which I am very familiar: that of the Knights of Columbus.
In my remarks this afternoon, I would like to focus on what it is that guides our investment strategy, and why we do what we do.
During the more than a decade in which I have served as CEO of the Knights of Columbus, we have engaged in what is now commonly called sustainable investing. For many years, we referred to our investment criteria as “ethical investing,” or “responsible investing” and the ethical component has been – and continues to be – at the center of what guides our investment decisions.
For us, the activity that our investment money is funding is at least as important as the profit it earns. And our experience has been that by integrating social and governance criteria into investment decision-making, we can achieve superior financial returns.
We understand fully that to be sustainable an investment must be sustainable in both senses of the word: sustainable in terms of its business model, and in terms of ethical outlook.
The two are intertwined, certainly, although as we learned with Solyndra – and any number of other well intentioned business ventures – good intentions or claims of “sustainability” alone aren’t enough to make a company profitable, and profits alone aren’t enough to make a company a good investment.
Not surprisingly, as a Catholic fraternal organization, our ethical model is based on Catholic social teaching.
The Knights of Columbus was founded as a fraternal benefit society to protect families. Its creation in 1882 was a direct response to an industrialized system in the 19th century that cared little for its employees in life or death. In many ways, the Knights of Columbus anticipated the issues that motivated the creation of Catholic Social Teaching beginning with Pope Leo XIII’s encyclical Rerum Novarum in 1891.
Responding to the failure of the various social experiments of the 18th to 20th centuries, the Catholic Church has – since the late 19th century – called for social justice founded on a Christian humanism which ensures the fundamental dignity of human persons.
Beginning with Rerum Novarum the Church injected into the economic debate the importance of personal conscience, ethical action, the importance of private property and subsidiarity, the need to have living wages paid and to view people as people – not simply as a means of production.
Whether it was a warning against the moral bankruptcy of Communism, and its systematic reduction of people to means rather than ends, or it was warnings about the amoral manipulation of a market economy, the Church’s voice has been a clear voice for an economic system that takes everyone into consideration.
Interestingly, in 1985, Pope Benedict XVI – then Cardinal Josef Ratzinger – gave a speech that warned of the dangers of “deterministic” economic models. He warned that both Communism and the Free Market system missed the mark if they took the role of the individual’s ethical decision making out the equation. He noted that human beings were not an inconsequential cog in a broader economic system, but were decision makers whose decisions had consequences.
It might seem odd to look to the man who is Pope for economic advice, but what he said in 1985 rings very true today as we face an economic crisis that many have blamed in no small part on a failure of ethics.
Josef Ratzinger warned 25 years ago that this could happen, saying:
“It is becoming an increasingly obvious fact of economic history that the development of economic systems which concentrate on the common good depends on a determinate ethical system…. Conversely, it has also become obvious that the decline of such discipline can actually cause the laws of the market to collapse.”
One hundred years after the formal beginning of Catholic Social Teaching, Pope John Paul II wrote his encyclical letter entitled Centesimus Annus. In it, he too expressed a vision for an economics that took people into account. He wrote::
The purpose of a business firm is not simply to make a profit… Profit is a regulator of the life of a business, but it is not the only one; other human and moral factors must also be considered which, in the long term, are at least equally important for the life of a business.1
He also noted that a human being “is not at all a ‘thing’ or an ‘object’ to be used, but primarily a responsible ‘subject,’ one endowed with conscience and freedom.”2
With Popes for more than 100 years weighing in on the importance of ethics in business, the Catholic Church released an encyclopedic Compendium of the Social Teaching of the Catholic Church in 2006. It explains that “the exercise of responsibility by business owners and management requires… constant reflection on the moral motivations that should guide the personal choices of those to whom these tasks fall.3
In light of this rich history, and heavily influenced by it, at the Knights of Columbus, our values influence more than just our investments too. They also inform every aspect of our business, from the way we conduct our business, to the way we sell our products and treat our employees.
Our marketing code of ethics is based on the Ten Commandments and our “Golden Rule” requires our sales agents to pledge to those they serve the same standards they would apply to themselves. In addition, we work hard to make sure that the same approach is applied to our employees by offering excellent benefits – including health care and a defined benefit pension – and by maintaining an excellent relationship with both our management and union employees.
That same ethic of putting people first and of treating them with dignity is also the primary driver of where we invest. We believe that an investment cannot be looked at simply as a vehicle for making the money invested grow. By its very nature equity investing is the financial support of a business venture. What our money is doing is as important to us as what our money is earning.
The Compendium of Catholic Social Teaching puts it this way:
The possibility to influence the choices made within the economic sector is in the hands of those who must decide where to place their financial resources. Today more than in the past it is possible to evaluate the available options not only on the basis of the expected return and the relative risk but also by making a value judgment of the investment projects that those resources would finance, in the awareness that “the decision to invest in one place rather than another, in one productive sector rather than another, is always a moral and cultural choice.4
With this ethical foundation for action, we see a useful foundation for the sustainability of our investments and in broader context for the sustainability of the system of free markets.
As a company, we have decided to follow this “common good” approach. It fits well with the fundamental mission for which we were founded – the protection of the financial future of Catholic families and the strengthening of faith through works of charity.
From the beginning, one of the main goals of the Knights of Columbus – in addition to providing an avenue for charitable activity and a means to strengthen the faith of members – was to protect Catholic families from the financial consequences of the loss of their breadwinner. That goal required us to take a longer term perspective and to avoid a disproportionate focus on the short-term performance.
What started out as a “pass the hat” system to aid the families of those who died, has now grown into an insurance operation that protects many of our nearly two-million members and their families with more than $83 billion of insurance in force and $17 billion of assets under management. What hasn’t changed is why we do what we do. We help our “brother Knights” and their families to protect their financial future. Our “profits” go back to our members in the form of dividends and interest, and into the community as charity.
Having an ethical filter based on Catholic social teaching as the basis for our investments means that our investment screen is likely more restrictive than many sustainable investment models.
Our investment rules prevent us from investing in more than a hundred companies that are at odds with Catholic teaching in a number of areas. Our securities investments are screened to prevent investing in any companies that deal in abortion, contraception, pornography, for-profit healthcare, embryonic stem cell research, human cloning, alcohol and tobacco products. Each of these areas damages the human ecology by violating some aspect of the dignity an individual is owed.
Our holistic approach to sustainable investing works to understand the “personal” consequences for all those understood to be affected by a particular trade or investment. The ethics of the investor matter, so does the guiding philosophy and ethical standards of those people leading the company being invested in. How are the people who work for that company treated? Is that company a good neighbor in its community?
These and the questions like them – which could be considered extra-financial criteria – are critical to sustainable investing.
And in an every changing marketplace, we must constantly make sure that our screening is up to date as companies develop new products that may be objectionable or may merge with or acquire new companies with objectionable products.
Several years we had substantial holdings in two large, well-known corporations that made decisions to enter the “adult entertainment” market in cable television. When it became clear that senior management in those companies had no intention of altering those policies, we disposed of all our stock holdings in that company even though it resulted in a loss of approximately $775,000.
In isolation, that may look like a questionable decision from the standpoint of earnings. But we concluded the corporate integrity and reputational risk was just too high. The investing model that motivated that decision and our consistent approach to investing based on it has helped us consistently outperform the S&P 500 during the last decade.
In fact, in one of the worst financial crises in memory, we have remained profitable, have become stronger relative to our industry, and today, there is no insurer in North America more highly rated than the Knights of Columbus.
We also strive to target our investments, using our investment capital to promote projects that serve the common good. One area where we have been very active in doing this is with our Church Loan program. By lending to Catholic parishes and religious communities, we have been able to support their vital work, while also making a profit. In fact, since 1980, we have made loans totaling more than $650 million through our Church Loan program.
Having core values and allowing them to guide which of the seemingly “good business decisions” a company pursues, can be effective and can allow a company to achieve superior returns.
We believe that this is true and know that our experience is not isolated. We are not the only company that does this, and in fact, many successful companies put something else ahead of profits, and succeed as a result.
Perhaps the best documentation of this is the book by James Collins and Jerry Porras entitled Built to Last: Successful Habits of Visionary Companies. It provides analysis of other businesses who have followed a similar route and have been successful doing so.5
The book was based upon the authors’ study of some of the largest, most successful companies in American history in an attempt to understand how companies that the authors describe as “the best of the best” could succeed decade after decade while their nearest competitor could not.
One of their most important findings is to reject the idea that “the most successful companies exist first and foremost to maximize profits.” The authors found that maximizing shareholder wealth or profits “has not been the dominant driving force or primary objective through the history of the visionary companies.”
What they call “visionary companies” “pursue a cluster of objectives, of which making money is only one—and not necessarily the primary one. … [T]hey seek profits, but they’re equally guided by … core values and sense of purpose beyond just making money.” Interestingly, the authors “found that the visionary companies make more money than the more purely profit-driven comparison companies.” 6
The factors that led Collins and Porras to describe these companies as “visionary” might lead us today to describe them as models of corporate sustainability in which the non-financial factors are leading indicators of their long-term success.
A common attribute the authors discuss among many of these companies is that they treat their customers and their employees with respect.
As an organization that follows Catholic Social Teaching, we share certain common values with these organizations and the many others that pursue a business strategy that puts people first.
In this way, I think that the Catholic Church’s focus on the individual as an end rather than means is something that all of us can take to heart.
One author in the late 1990s suggested that there was “the possibility of Christian personalism” in capitalism. I certainly agree.7
I think that sustainable investing that takes as its first consideration the effects of investing on people gives us the opportunity to do something even more: to pioneer what I would call a “personalist capitalism,” one that puts as central the value of the individual and the effects of a decision on people.
In other words, sustainable investing requires respect for both the environment and the human ecology.
Of course, non-Catholics might have a slightly different set of guiding principles, but the idea of looking at the human ecology – the human cost or benefit of an investment ought to be something all of us can agree on.
Implemented on a long-term basis, sustainable investing provides a pathway out of the current economic crisis without the necessity of radical change but using tools that are already part of the existing structure.
This isn’t a utopian vision. This is a vision that has proven successful time and again.
“A 2008 study of active responsible investment funds listed in the SIF Trends reports from 1997-2005 found that those sponsored by management companies specializing in responsible investment significantly outperformed conventional funds. Those run by generalist companies, however, underperformed.”
Sustainable investing puts responsibility precisely where it belongs: on each of us as we invest, purchase products, and make our daily business decisions. It puts personal responsibility at the center of economic decisions and it reminds us that we cannot have two consciences, one for home or church and one for the office.
And unlike the unsustainable models that seek to maximize profits at the expense of everything else, it can be an excellent way for us and our various companies to make investments that do good and while making a profit that is in fact sustainable.
Thank you very much.
1. Centesimus Annus, No. 35.
2. Christifideles Laici, No. 5.
3. Compendium, No. 344
4. Compendium, 358.
5. James Collins and Jerry Porras, Built to Last: Successful Habits of Visionary Companies (New York: Harper Collins, 1994).
6. Collins, p. 8.
7. Richard Bayer, Capitalism and Christianity: The Possibility of Christian Pesonalism, Georgetown UP, 1999.