Tuesday, June 30, 2015

Ethical investing

Do you have a problem investing in companies that does things that you normally don't do in real life?


I give an example here. I am invested in HSBC - the world's local bank - for a pretty long time. That was way back in 2007 when I just started this blog. Back then, the financial crisis had not happened yet and in the span of almost 8 years, a lot had changed. The whole landscape of the global financial markets had been changed and now you heard not only of companies bankrupting but also countries!


Back in June, I saw news of HSBC laying off 50,000 people globally to cut their annual cost. If you're seeing this through the eyes of an investor, you should be happy. And indeed, the stock price went up briefly following the release of this news. We're talking about cutting annual cost by up to $5 billion annually, so of course this brings the company a better set of numbers and a healthier overall ratios.




But if you're the employees working there? Seen through the eyes of the employees, there's only one word to describe this feeling - 'sian'. This isn't the first bank doing such head count cuts. I believe a few global banks, including Standard chartered, also did the same to adjust to the global changes that is sweeping across the financial landscape.


So the question is, is it fair for the top honchos to decide on the direction of the company, reaping the possible rewards of their actions and yet the risk is taken by the grunts of the company? Even if the decision turns out to be a bad one and the top honchos have to resign, they do so with a huge bonus, a golden handshake and possible another good career for them in the next MNC. How would you feel about this? It's not just this laying off that pisses me off but it's also the numerous charges laid upon them on money laundering and also other shady business that investment banks do.


Does ethics matter to you when you're doing investing?


I thought about this question long ago when I first started dabbling into the market. Back then, my stance was that we don't always know what the company is doing but what we can do is to reap the profits or dividends and do what we think is right with that money. But slowly, I'm wondering if that's the right decision. These days, I don't mind paying more for a local startup cafe just to support their business and what that represents, instead of some heartless MNC with dubious morals.


Does investing in a vice business troubles you? Does it make you sleepless at night? I've since reduced my allocation in HSBC by half but still hold a portion of it in my portofolio.

20 comments :

Sanye ◎ 三页 said...

Hi LP,

I read your blog frequently but seldom comment.

I don't think there is an ethical issue when companies lay off people to achieve a healthier financial situation. If they don't do it, the entire company may fail one day.

I don't agree there is an ethical issue when the top managers get big bonuses or compensation upon resignation. That is usually in their employment contract. We lower rang employees don't get to enjoy this benefit, because we are not at their level and do not have their kind of responsibility as well. that's it.

The "ethical" issue does affect my investment decision. For example I am against gambling. So I will not invest in Genting, for they are in this business. If I know that any company is involved in non-ethical business handling, e.g. corruption, I will not invest in that company as well. This is just my personal decision.

la papillion said...

Hi Sanye,

I think you misunderstood me. I am fine with companies laying off people during the economic ups and downs. I think that's what employees signed up for when they work for them. But what if the top management allow evasion of taxes by their clients, and doing money laundering and they got caught and fined heavily to the point that they have to reduce their cost by laying off people? That's the issue that I have with this.

On your last paragraph, that's exactly how I felt. In the past, I would not hesitate to say that I'm not affected by ethics when investing. However, I'm not so sure these days. I want my money to support companies that makes the world better. Is that too idealistic these days? Am I getting 'softer'? I do not know, but these issues start to make me think a bit more before putting down my money, not just for investing but in everyday life.

Basically, instead of just putting money that rewards us with the best returns, I want to see I can also put down money at where my ethics desires.

Singapore Man of Leisure said...

LP,

Our money only "support" the listed company when we buy them during IPOs, share placements, rights issues, and when we choose script instead of opting dividends in cash.

Other than that, the company don't benefit one bit what we do when we buy/sell shares in the open market.

OK, it benefits indirectly when enough speculators bid up the share price to facilitate the company's M&A activities by using the inflated company shares as payment in kind.


You brought up an interesting moot point!

How about climate change? Can I invest in O&G companies when I am a tree hugger?

What if I am a staunch vegetarian and animal lover? Can buy Breadtalk?

How about the 24% annual interests charged by credit card companies? Can it be considered usury?

The list goes on and on...


Me?

I keep what I own close to my chest ;)

I enjoy wine, women, and song as a grasshopper. I already got enough well-meaning flak form righteous ants. The last thing I need is to provide them with more fodder to chew me up!

LOL!

la papillion said...

Hi SMOL,

I like your argument that whether we buy or sell has nothing much to do with the actual company operating per say. It's very convincing.

But still, the point remains whether we should be consistent in applying our morals and ethical choices not only on decisions we make daily and the investing decisions we take. I'm half half actually, compared to years ago when I'll say a 'Who cares about ethics?' when wearing my investing hat.

And thus I find the Sharia investing, basically investment according to the rules of their religion, fascinating.

Maybe it's only me who finds this question interesting. Perhaps it's Maslow's hierarchy of needs...no money already who cares about ethics?! LOL

Jimmy L said...

how do we define ethical?

i remember during Lehman bro crisis, NTUC chief asked companies not to retrench staff till after chinese new year but DBS bo chap and retrenched staff before CNY. is it unethical?

unless u mean Genting where they have casinos or Marboro which produce cigarettes. Then i consider it unethical

la papillion said...

Hi Jimmy,

Ethical? Easy. If you don't smoke because it's cancer causing, would you consider buying into a tobacco company that sells cigarettes to others? If you love your kids and wife, would you invest into a company that does porn and exploits others? If you are environmental activist, would you invest into Shell and esso type of companies?

I am interested to know if the consistence of your daily choices are also applied to investing. Or is it a totally segregated and ring fenced domain of its own where the main purpose is to get the best returns for your money?

B said...

Hi LP

It's hard to define isn't it. Too many retailers are excited about the greek fall when there are many pensioners who lost their money. Ironic? Or ethical?

la papillion said...

Hi B,

Agreed that it's hard to define, but that doesn't mean we should avoid the question. You're right, when we're hoping for a bear, we're also waiting to profit from the suffering of others. But there's a clear distinction between investing in a company that does things that you don't want to know and waiting for bad things to happen. The former involves actively participating, while the other is more passive. Maybe the guilt is lesser? I don't know.

Seems to be that if we're too ethical, there's nothing to invest anymore LOL

E H said...

Talk about ethical. There's an index and ETF for that.

http://us.spindices.com/indices/strategy/sp-ethical-pan-asia-select-dividend-opportunities-index

la papillion said...

Hi EH,

Thanks! I heard about this kind of instruments but never really dig in further. Unfortunately, it's in US so after tax should be really low yields... Is that the price of being ethical? haha

Sillyinvestor said...

Hi LP,

I am not really affected by ethic. There are 2 issues of entics here, one is management, te other is nature of business.

GENTING for example, I will buy if price is low enough without batting a eyelid

By if I see a company pay themselves big time, and do nonsense and destroy shareholder / employee values, then I think I will give the company a miss because I doubt the integrity of management. As in your case, your HSBC e.g.

Personally, business wise... How "clean" is clean?

Sillyinvestor said...
This comment has been removed by the author.
la papillion said...

Hi SI,

Good segregation of ethics...I agree that most investors will just worry about the integrity of the management instead of the business, because that's what will affect the outcome of the investment more than the ethics of the business itself.

You're right. I was discussing this issue with my wife the other day. It's really hard to say that a company X does ethical business because we don't know what they do underhand in private. Hence, it's still better to take whatever profits you get from investing in the business, and than use the money in the manner of your choosing.

You've clarified the ethics in management and business and that makes it a whole lot clearer for me! Thanks!

siaoboindex said...

Hmm nice thought. Heard about this from a Buddhist friend, whom did not invest In sheng siong due to the fact they sell live animals.

Rolf Suey said...

Hi LP,

I have to agree that if my gut tells me something not 100% integrity or ethically right about the co after research, I will not invest in it even if it means making money. Or sometimes even after hearing the CEO talks and by gut I do not really think he is a truly sincere guy, I will not dabble in that company.

I do not care about which company, but if my gut suspect they have elements of unethical, no go!
If my gut tells me co is Integrity one, but later find out there is fraud! I just had to try harder next time in my judgement, but no regrets and no self blame.

la papillion said...

Hi Siaoboindex,

Wah, really ah? All major supermarket chains also sell live animals mah, no? Thks for dropping by :)

la papillion said...

Hi Rolf,

I like your way...probably that's the way that I'm adopting now. We still have to be accountable for my actions long after the money that we profited from it is gone, haha!

K said...

Does anyone know what is the industry norm?

http://www.straitstimes.com/business/companies-markets/lian-beng-resignations-bonus-dispute-key-factor

Bonus based on after deducting minority interests or before?

E H said...

The ETF I mentioned earlier is listed in SGX.

Anonymous said...

I'm very much against smoking (and other vices in general) but that doesn't stop me from investing a huge chunk in companies that together control more than 90% of the world's tobacco market. It started out as a way at not being in a lose-lose situation; my health is affected when breathing in 2nd hand smoke. Now, I don't get as irritated since these people are indirectly paying me for tolerating their bad habits (tobacco companies have very stable dividend payouts). Similarly, even if smokers start quitting and say the stock price drops, I still gain in terms health dividends. Hence win-win. I'm extremely practical; there's no way any government will ban worldy vices (gambling, smoking, drinking, prostitution) in the near future. And if society (or a significant portion of it) would prefer spending more on vices than they would food/education, I'll gladly reduce the negative externalities that I have to endure through dividends.

*ok, I've poured lots of oil on myself. Let the flaming begin :)*