Social Responsibility Social Responsibility ProfileProfile

September 28,2006September 28,2006

AgendaAgenda

Guidelines for efficiency Guidelines for efficiency during presentationduring presentation

Social Responsible ProfileSocial Responsible Profile

Corporate Governance ProfileCorporate Governance Profile

Guidelines for Maximum Guidelines for Maximum Efficiency and Efficiency and EffectivenessEffectiveness Respect of all opinionsRespect of all opinions Wait until speaker is done to raise handWait until speaker is done to raise hand Hand Hand mustmust be raised for you to be heard be raised for you to be heard Monitoring of timeMonitoring of time

– 45 seconds per person (additional time must 45 seconds per person (additional time must be requested)be requested)

SRI profile takes six months in business SRI profile takes six months in business world world

Animal TestingAnimal Testing

Tests the effects of certain Tests the effects of certain products before they reach the products before they reach the consumer marketplaceconsumer marketplace

Catholic Bishop’s Statement:Catholic Bishop’s Statement:– Humans are stewards in protecting all Humans are stewards in protecting all

of God’s creation, including animalsof God’s creation, including animals– "Our tradition calls us to protect the

life and dignity of the human person, and it is increasingly clear that this task cannot be separated from the care and defense of all creation...”

Animal TestingAnimal Testing

Some companies such as pharmaceutical Some companies such as pharmaceutical companies require by lawcompanies require by law

Most non-pharmaceutical products don’t require Most non-pharmaceutical products don’t require animal testinganimal testing

Alternatives: Eytex, Skintex, EpiPack Alternatives: Eytex, Skintex, EpiPack IWFinancial: IWFinancial:

– Official Testing PolicyOfficial Testing Policy– Pharmaceutical TestingPharmaceutical Testing– Non-pharmaceutical testing Non-pharmaceutical testing – USDA and PETA “Do Test” Lists USDA and PETA “Do Test” Lists

EnvironmentEnvironment

Environmental performance can influence a Environmental performance can influence a company's financial performance. Environmental company's financial performance. Environmental ratings reflect a company's performance in preventing ratings reflect a company's performance in preventing pollution and protecting the environment.pollution and protecting the environment.

Catholic Bishop’s Statement:Catholic Bishop’s Statement:– The bishops call for care and defense of all of The bishops call for care and defense of all of

creation:creation: ““We must seek a society where economic life and We must seek a society where economic life and

environmental commitment work together to protect and environmental commitment work together to protect and to enhance life on this planet.to enhance life on this planet.

– Ties into human rights, the poor suffer the most Ties into human rights, the poor suffer the most from environmental declinefrom environmental decline

– Promote and support ecological heritage, Promote and support ecological heritage, environmentally sensitive technology, energy environmentally sensitive technology, energy conservation and alternative energy initiatives conservation and alternative energy initiatives

EnvironmentEnvironment

To adjust for differences in company size, the ratings for To adjust for differences in company size, the ratings for some environmental issues are derived from a combination some environmental issues are derived from a combination of raw values and values that are adjusted based on the of raw values and values that are adjusted based on the company's domestic revenues company's domestic revenues

IWFinancialIWFinancial::– Superfund SitesSuperfund Sites– Toxic Emission ReleasesToxic Emission Releases– Toxic Emission TrendsToxic Emission Trends– Number of Oil and Chemical Spills,Number of Oil and Chemical Spills,– Spills TrendSpills Trend– Fines for Environmental ViolationsFines for Environmental Violations– Fines TrendFines Trend– Waste generationWaste generation– Waste Generation TrendWaste Generation Trend

Human RightsHuman Rights

Catholic Bishop’s Statement:– “USCCB will seek means to encourage

efforts by companies to promote a respect for fundamental human rights, especially in those countries in which these companies operate that have documented practices that deny or violate the human rights of their citizens.”

– "Racism is a sin: a sin that divides the "Racism is a sin: a sin that divides the human family…” human family…”

– Human rights, racial/gender Human rights, racial/gender discrimination, access to pharmaceuticalsdiscrimination, access to pharmaceuticals

– Actively promote and protect human rights Actively promote and protect human rights by meeting basic human needs, sufficient by meeting basic human needs, sufficient wages, equal opportunities, etc.wages, equal opportunities, etc.

Human RightsHuman Rights

Human rights activists Human rights activists particularly concerned with particularly concerned with international practices of international practices of companies. companies.

IWFinancial:– Ties to oppressive regimes– Ties to China– Operate Maquiladoras– Global Sullivan Principles Signature

Labor RelationsLabor Relations

Reflect a company's relationship with Reflect a company's relationship with organized labor.organized labor.

Catholic Bishop StatementCatholic Bishop Statement– ““The thing that must shape the whole The thing that must shape the whole

economy is respect for the workers' rights economy is respect for the workers' rights within each country and through out the within each country and through out the world.”world.”

– The Church fully supports the right of The Church fully supports the right of workers to form unions or other workers to form unions or other associations to secure their rights to fair associations to secure their rights to fair wages and working conditions.wages and working conditions.

Labor RelationsLabor Relations

IssuesIssues– Is the presence of unions important to Is the presence of unions important to

support and promote workers rights?support and promote workers rights?– Are prolonged strikes detrimental to Are prolonged strikes detrimental to

society?society?– Should products be boycotted if managers Should products be boycotted if managers

attempt to suppress workers from gaining attempt to suppress workers from gaining fair working conditions?fair working conditions?

IWFINANCIAL SubcategoriesIWFINANCIAL Subcategories::– AFL-CIO boycottAFL-CIO boycott– StrikesStrikes– UnionizationUnionization

WorkplaceWorkplace

Evaluate which companies have Evaluate which companies have proven most effective in creating proven most effective in creating a positive work environment.a positive work environment.

Catholic Bishop StatementCatholic Bishop Statement– Work is in the first place "for the Work is in the first place "for the

worker" and not the worker "for worker" and not the worker "for work." Work itself can have greater work." Work itself can have greater or lesser objective value, but all or lesser objective value, but all work should be judged by the work should be judged by the measure of dignity given to the measure of dignity given to the person who carries it out. person who carries it out.

WorkplaceWorkplace

IssuesIssues– Should women’s rights be promoted based Should women’s rights be promoted based

on gender?on gender?– Should businesses be encouraged to Should businesses be encouraged to

create a positive working environment for create a positive working environment for employees?employees?

– Should businesses try to earn the respect Should businesses try to earn the respect of employees by fair treatment and of employees by fair treatment and outstanding benefits?outstanding benefits?

IWFINANCIAL SubcategoriesIWFINANCIAL Subcategories::– Working Mother’s top 100Working Mother’s top 100– Fortune 100 rankFortune 100 rank

WeaponsWeapons

An instrument of attack or defense An instrument of attack or defense in combat as a means to defend or in combat as a means to defend or defeatdefeat

Bishop’s Statement :Bishop’s Statement :– All nuclear and conventional arms All nuclear and conventional arms

dealing/usedealing/use– Disproportionate military spending on Disproportionate military spending on

weapons making/dealingweapons making/dealing– Will not invest in any companyWill not invest in any company engaged in engaged in

weapons production or development not weapons production or development not consistent with Catholic teaching of war consistent with Catholic teaching of war (bio/chemical, WMDs)(bio/chemical, WMDs)

WeaponsWeapons

Companies that manufacture Companies that manufacture weapons for both the private weapons for both the private sector as well as the US Dept of sector as well as the US Dept of DefenseDefense

Ratings based onRatings based on– firearms sales for non-military sectorfirearms sales for non-military sector– Revenue (total and %) from nuclear arms contractsRevenue (total and %) from nuclear arms contracts– Revenue (total and %) from total weapons contracts Revenue (total and %) from total weapons contracts

minus support systems contractsminus support systems contracts

Defense ContractingDefense Contracting

Bishop StatementBishop Statement– Large portion of US economy stems from Large portion of US economy stems from

defense-related industriesdefense-related industries Close connection between economy and gov’tClose connection between economy and gov’t

– Poor and vulnerable members of society Poor and vulnerable members of society suffer from this dedication to defense suffer from this dedication to defense spendingspending

– Spending priorities need to be revised in the Spending priorities need to be revised in the interests of peace and justiceinterests of peace and justice

Defense ContractingDefense Contracting

Companies relationship with US Dept of Companies relationship with US Dept of Defense in contracts for goods or Defense in contracts for goods or services used for the country’s defensesservices used for the country’s defenses– Anything from weapons to paperclipsAnything from weapons to paperclips

Ratings based on:Ratings based on:– Company’s placement in the US D.O.D. top 100 Company’s placement in the US D.O.D. top 100

contractors listcontractors list– Revenue (total and %) derived from defense contractsRevenue (total and %) derived from defense contracts

Nuclear PowerNuclear Power

Bishop’s StatementBishop’s Statement– Very clear in the importance of Very clear in the importance of

preserving the environmentpreserving the environment– No specific mention of nuclear powerNo specific mention of nuclear power– Can infer that nuclear power is not Can infer that nuclear power is not

the preferred source of energy and the preferred source of energy and should be avoidedshould be avoided

– Do not invest in companies involved Do not invest in companies involved in the nuclear energy industryin the nuclear energy industry

Nuclear PowerNuclear Power

Evaluate company involvement in Evaluate company involvement in the nuclear power industrythe nuclear power industry

NOT nuclear weaponsNOT nuclear weapons

Ratings based on:Ratings based on:– Involvement in sale of products used in the nuclear Involvement in sale of products used in the nuclear

power industrypower industry– Percentage of electricity derived from nuclear Percentage of electricity derived from nuclear

powerpower

BioethicsBioethics

Evaluates a companies involvement in Evaluates a companies involvement in controversial medical research and controversial medical research and development by evaluating:development by evaluating:– Adult, umbilical or placenta stem cell researchAdult, umbilical or placenta stem cell research– Embryonic stem cell or fetal tissue researchEmbryonic stem cell or fetal tissue research

Catholic Bishop Statement:Catholic Bishop Statement:– Will not invest in companies that engage in:Will not invest in companies that engage in:

research on human fetuses or embryos research on human fetuses or embryos Stem Cell researchStem Cell research Fetal tissue researchFetal tissue research Human CloningHuman Cloning

Bioethics Bioethics Are we destroying life?Are we destroying life?

Pro-lifePro-life– Each one of the Each one of the

embryos embryos destroyed in the destroyed in the course of stem-course of stem-cell research is a cell research is a person.person.

Pro-ChoicePro-Choice– Were slated to be Were slated to be

destroyed destroyed anyways.anyways.

– Donated with the Donated with the informed, written informed, written consent of consent of patients.patients.

Life/ChoiceLife/Choice

Evaluates a companies involvement Evaluates a companies involvement in marketing, licensing or in marketing, licensing or manufacturing of contraceptives or manufacturing of contraceptives or abortifacients.abortifacients.

Catholic Bishop Statement:Catholic Bishop Statement:– Excludes companies who support or Excludes companies who support or

directly participate in abortiondirectly participate in abortion– Will not invest in any companies who Will not invest in any companies who

manufacture or derive a large portion of manufacture or derive a large portion of revenue from contraceptives revenue from contraceptives

Life/ChoiceLife/Choice

Evaluate a company's involvement Evaluate a company's involvement in marketing, licensing or in marketing, licensing or manufacturing contraceptives. manufacturing contraceptives.

Take into account:Take into account:– Contraceptive manufacturingContraceptive manufacturing– Abortifacient manufacturingAbortifacient manufacturing– Contraceptives/ Abortifcacient Contraceptives/ Abortifcacient

marketingmarketing

Adult EntertainmentAdult Entertainment Adult entertainment ratings evaluate a

company's involvement in the adult entertainment industry

Catholic Bishop’s Statement:– The USCCB will not invest in a company that derives

a significant portion of its revenues from products or services intended exclusively to appeal to a prurient interest in sex or to incite sexual excitement.

– Adult entertainment ratings evaluate a company's involvement in the adult entertainment industry.

Adult Entertainment Adult Entertainment

IWfinancialIWfinancial– To reward companies involved in the provision or To reward companies involved in the provision or

production of Adult Entertainmentproduction of Adult Entertainment– To penalize companies involved the provision or To penalize companies involved the provision or

production of Adult Entertainment.production of Adult Entertainment. Example Problem: Using a High Importance Example Problem: Using a High Importance

in the S&P 500 would penalize:in the S&P 500 would penalize:– General Electric Company and Time Warner. General Electric Company and Time Warner. – However, this will not penalize companies such However, this will not penalize companies such

as Hilton, Comcast, and other cable providers.as Hilton, Comcast, and other cable providers.

Sexual OrientationSexual Orientation

Sexual orientation ratings evaluate whether Sexual orientation ratings evaluate whether companies have or don't have employment companies have or don't have employment practices that specifically support gay and practices that specifically support gay and lesbian employees and other aspects of the lesbian employees and other aspects of the company's performance regarding this issue.company's performance regarding this issue.

The Catholic Bishop Statement does not The Catholic Bishop Statement does not address Sexual Orientation within their address Sexual Orientation within their doctrine.doctrine.

– Within the Catholic Bishop Statement IWfinancial Within the Catholic Bishop Statement IWfinancial Screen it is not even factored in to the weights.Screen it is not even factored in to the weights.

Sexual Orientation Sexual Orientation

Just as previous issues, IWfinancial Just as previous issues, IWfinancial allows us to put weight on either side of allows us to put weight on either side of the issue.the issue.

Within the Issue there are 3 optionsWithin the Issue there are 3 options Non discriminatory policy Non discriminatory policy Same Sex benefits Same Sex benefits HRC Corporate Equality IndexHRC Corporate Equality Index

Applying all of these, and implementing Applying all of these, and implementing High importance, provides a wide range High importance, provides a wide range of scores within the S&P500of scores within the S&P500

MinoritiesMinorities

Evaluates which companies have proven most effective in creating diversity in the workplace by being supportive to minorities.

Catholic Bishop’s Statement:– USCCB will divest from those companies

whose policies are found to be discriminatory against people of varied ethnic and racial backgrounds that have been historically disadvantaged..

MinoritiesMinorities

Diversifying.Diversifying.

Hispanic Magazine’s top Hispanic Magazine’s top 100 100

Fortune 50 rank Fortune 50 rank

Board percentage of Board percentage of minoritiesminorities

Applying all of these, Applying all of these, and implementing High and implementing High importance, provides a importance, provides a limiting range of scores limiting range of scores within the S&P500.within the S&P500.

With the S&P 500 only With the S&P 500 only 15 companies scores 15 companies scores greater than 75. greater than 75.

Judging by the criteria Judging by the criteria for the 4 variables only for the 4 variables only a certain amount of a certain amount of companies can be on a companies can be on a top list of 50top list of 50

IWfinancial fails to IWfinancial fails to properly gauge this properly gauge this issue. issue.

Catholic Bishops’ Stance Catholic Bishops’ Stance on Tobacco, Alcohol and on Tobacco, Alcohol and

GamblingGamblingThe USCCB investment policy is The USCCB investment policy is designed to “ 1) avoid designed to “ 1) avoid participation in harmful activities, participation in harmful activities, 2) to use the Conference’s role as 2) to use the Conference’s role as stockholder for social stockholder for social stewardship, and 3) to promote stewardship, and 3) to promote the common good.” the common good.”

TemperanceTemperance

TemperanceTemperance is the moral virtue that is the moral virtue that moderates the attraction of pleasures moderates the attraction of pleasures and provides balance in the use of and provides balance in the use of created goods. It ensures the will's created goods. It ensures the will's mastery over instincts and keeps desires mastery over instincts and keeps desires within the limits of what is honorable. within the limits of what is honorable.

The virtue of temperance disposes The virtue of temperance disposes us to us to avoid every kind of excessavoid every kind of excess: the : the abuse of food, alcohol, tobacco, or abuse of food, alcohol, tobacco, or medicine. medicine.

USCCB, Office for the Catechism, Article 5 (5USCCB, Office for the Catechism, Article 5 (5thth Commandment) – Commandment) –

www.usccb.org/catchism/textwww.usccb.org/catchism/text

TobaccoTobacco

The long and short of this issue is The long and short of this issue is whether the firm is involved in whether the firm is involved in manufacturing Tobaccomanufacturing Tobacco– High/Low level of involvement in High/Low level of involvement in

production or marketingproduction or marketing– One-year RevenueOne-year Revenue

Total dollar amount and % of revenue Total dollar amount and % of revenue are equally factored in ratingare equally factored in rating

AlcoholAlcohol

This filter applies to firms This filter applies to firms involved in manufacturing and/or involved in manufacturing and/or marketing of alcoholic beverages marketing of alcoholic beverages under their own brand nameunder their own brand name– High/Low level of involvementHigh/Low level of involvement– One-year revenue One-year revenue

Total dollar amount and % of revenue Total dollar amount and % of revenue are equally factored in ratingare equally factored in rating

USCCB on GamblingUSCCB on Gambling

Gambling operations are associated Gambling operations are associated with exercising an inequality over with exercising an inequality over another man’s temperance, yet we may another man’s temperance, yet we may also note that churches are exempt from also note that churches are exempt from UBIT (Unrelated Business Income Tax) for UBIT (Unrelated Business Income Tax) for real money Bingo games, thus there is real money Bingo games, thus there is room for gambling operations which are room for gambling operations which are contributing to charitable causes. State contributing to charitable causes. State lotteries benefit public education in 39 lotteries benefit public education in 39 states. states.

GamblingGambling

Identify companies involved in Identify companies involved in casino, racetrack, lottery casino, racetrack, lottery operations and/or lottery and operations and/or lottery and gaming equipment manufacturinggaming equipment manufacturing– Percentage of total revenue related Percentage of total revenue related

to gambling operations to gambling operations

Corporate Corporate Governance Governance

ProfileProfile

Corporate Governance Corporate Governance and the Bishop’s and the Bishop’s StatementStatement USCCB keep in mind the shareholder’s USCCB keep in mind the shareholder’s

best interest at all timesbest interest at all times USCCB encourages corporate USCCB encourages corporate

responsibility:responsibility:– “Ethical responsibility is not just avoiding evil,

but doing right, especially for the weak and vulnerable. Decisions about the use of capital have moral implications…While economic returns are important, they should not take precedence over the rights of workers or protection of the environment."

Remember every company has wrinkles.Remember every company has wrinkles.

Board CompositionBoard Composition

Board Composition evaluates the Board Composition evaluates the makeup of companies’ boards. Issues makeup of companies’ boards. Issues include: level of availability, control, include: level of availability, control, entrenchment and diversity of boardsentrenchment and diversity of boards– Tenured DirectorsTenured Directors– Directors over the age of 70Directors over the age of 70– Female DirectorsFemale Directors– Directors that are active CEO’sDirectors that are active CEO’s– Directors on more than 4 boardsDirectors on more than 4 boards– Absentee DirectorsAbsentee Directors– Problem DirectorsProblem Directors

Board CompositionBoard Composition

86.4% of the largest 86.4% of the largest Fortune Fortune 500 500 companies in the U.S. have at companies in the U.S. have at least one woman director on the least one woman director on the board board

Board IndependenceBoard Independence

Evaluates the board’s level of Evaluates the board’s level of affilation with the companyaffilation with the company– Majority outside directorsMajority outside directors– Independent audit committeeIndependent audit committee– Independent compensation Independent compensation

committeecommittee– Independent nominating committeeIndependent nominating committee– Separation of CEO and ChairSeparation of CEO and Chair

Board IndependenceBoard Independence

"Nearly two decades of research find "Nearly two decades of research find little evidence that board independence little evidence that board independence enhances board effectiveness. Studies enhances board effectiveness. Studies have, however, found a negative effect.“have, however, found a negative effect.“

"The most important predictor of director "The most important predictor of director effectiveness is not independence, but effectiveness is not independence, but strategic experience that matches the strategic experience that matches the company's needs."company's needs."

Board AccountabilityBoard Accountability

Evaluates the level of Evaluates the level of responsibility and answerability of responsibility and answerability of companies’ boardcompanies’ board– Formal governance policyFormal governance policy– Business ethics policyBusiness ethics policy– Classified board electionsClassified board elections– Non-executive director meetingsNon-executive director meetings– Director removal for cause only Director removal for cause only – Shareholder power to fill vacanciesShareholder power to fill vacancies

Board Accountability Board Accountability Current EventsCurrent Events

Hewlett Packard board fiascoHewlett Packard board fiasco

Adelphia earnings manipulation and Adelphia earnings manipulation and bankruptcybankruptcy

SEC probe into FBR’s CompuDyne saleSEC probe into FBR’s CompuDyne sale

Wal-Mart director fired for misusing Wal-Mart director fired for misusing funds funds

Enron, WorldCom, Merck, etc.Enron, WorldCom, Merck, etc.

Takeover DefensesTakeover Defenses

Poison PillPoison Pill Business Combination ProvisionBusiness Combination Provision Fair Price ProvisionFair Price Provision Control Share Acquisition ProvisionControl Share Acquisition Provision Stakeholder Constituency ProvisionStakeholder Constituency Provision Advance Notice RequirementAdvance Notice Requirement

Shareholder RightsShareholder Rights

Vote required to call special meetingVote required to call special meeting Special meeting rule compared to state Special meeting rule compared to state

lawlaw Vote required to act by written consentVote required to act by written consent Written consent rule compared to state Written consent rule compared to state

lawlaw Vote required for merger or other Vote required for merger or other

transactiontransaction Vote required to amend charterVote required to amend charter Vote Required to amend bylawsVote Required to amend bylaws Cumulative VotingCumulative Voting

Bishops Statement Bishops Statement View on Shareholder View on Shareholder RightsRights The Bishops Statement states that The Bishops Statement states that

shareholders should be actively shareholders should be actively involved in voting on matters involved in voting on matters involving members of the board of involving members of the board of directors, and other corporate directors, and other corporate decisions. decisions.

Shareholders should also be active in Shareholders should also be active in guiding and influencing management guiding and influencing management towards socially responsible activities towards socially responsible activities

CEO CompensationCEO Compensation

CEO compensation ratings evaluate CEO compensation ratings evaluate the incentives of CEOs.the incentives of CEOs.– Total annual CEO compensation, salary, Total annual CEO compensation, salary,

bonusbonus CEO compensation policies that CEO compensation policies that

reflect company performance and tie reflect company performance and tie both short and long-term both short and long-term compensation closely to shareholder compensation closely to shareholder returns suggest a strong, effective returns suggest a strong, effective board.board.

CEO Compensation CEO Compensation Current EventsCurrent Events

CEOs now making 431 times CEOs now making 431 times more than the average worker, up more than the average worker, up from 142 times more in 1994 from 142 times more in 1994

New York Stock Exchange New York Stock Exchange Chairman Richard Grasso has a Chairman Richard Grasso has a lawsuit over his large pay lawsuit over his large pay package package

Company OwnershipCompany Ownership

Composition of companies' Composition of companies' shareholders shareholders – Dominant shareholder ownershipDominant shareholder ownership– Insider ownershipInsider ownership– Over 5% shareholders ownershipOver 5% shareholders ownership– Institutional ownershipInstitutional ownership– Multiple share classesMultiple share classes

Audit PracticesAudit Practices

Evaluate companies’ policies and Evaluate companies’ policies and procedures related to auditing and procedures related to auditing and financefinance– Audit and related fees as a percentage of Audit and related fees as a percentage of

totaltotal Percentage of total fees paid to the companies’ Percentage of total fees paid to the companies’

auditors for financial statement auditauditors for financial statement audit Significant non-audit fees indicate…..Significant non-audit fees indicate…..

– Financial expert on the audit committeeFinancial expert on the audit committee

Audit PracticesAudit Practices

PCAOB issues staff audit practice PCAOB issues staff audit practice Alert No. 1Alert No. 1– Issuers may have not properly Issuers may have not properly

accounted for stock option grantsaccounted for stock option grants– Auditors need to watch for material Auditors need to watch for material

misstatements as a resultmisstatements as a result– In general, investors should be aware In general, investors should be aware

of how sound companies’ audit of how sound companies’ audit policies are policies are

Corporate Library Corporate Library GradesGrades How well companies’ perform How well companies’ perform

under the scrutiny of the under the scrutiny of the Corporate Library, an Corporate Library, an independent investment research independent investment research firmfirm

Also a summary of the grades of Also a summary of the grades of the other corporate governance the other corporate governance categoriescategories