By Austin Pryor*

August 1994 – The responsibility to invest with the next generation in mind is fundamental to responsible stewardship. This is not a distasteful task, but is welcomed by most parents who desire to leave their children not only an inheritance, but also a healthy society within which to live, work and serve. Every reader can use the information in this article to begin “fighting for your kids” more effectively.

“Socially-responsible” investing
Every responsible individual should want to see his investing efforts not only generate a competitive return but also lead to a better world for his/her loved ones. This desire is the driving force behind the socially-responsible investing (SRI) movement. SRI investors employ different strategies in attempting to bring their vision of a better world to pass. It is generally agreed that SRI falls into three main camps:

1. Penalize the bad guys (avoidance investing). This strategy uses a set of portfolio guidelines in order to avoid investing in companies engaged in objectionable activities or practices. This is probably the most common approach, and is what most individual investors mean when they say they are interested  in “ethical” investing. This is primarily a passive strategy.

2. Reward the good guys (alternative investing). This is a proactive strategy where you search out investment opportunities in companies that are working to achieve what you consider to be positive societal goals. Community housing projects, alternative energy sources, and manufacturing pollution-control products are other examples of areas targeted for proactive investing.

3. Convert/replace the bad guys (advocacy investing). This is the opposite of avoidance investing because it deliberately seeks to invest in irresponsible companies with the intention of changing objectionable corporate behavior by exercising one’s ownership privileges. Because this strategy calls for an on-going effort after the investment is made, it is sometimes known as activist or interventionist investing.

Advocacy investing
Advocacy investing involves buying stock and becoming one of the owners of the company. The ownership of even a single share brings with it many privileges. As a shareholder, you are entitled to:

■ A stock certificate with your name on it that signifies the number of shares you own;
■ Receive quarterly and annual reports that contain the financial results from the company’s efforts as well as messages from the officers;
■ Receive quarterly cash dividends, if any have been declared;
■ Attend the annual meeting of shareholders and participate in the discussions that take place;
■ Vote at the annual meeting of shareholders to elect the members of the Board of Directors that oversees the company (normally you get one vote for each share you own, and you can cast an absentee ballot if you don’t attend);
■ Vote at the annual meeting on policy resolutions, and even submit your own policy resolutions for a vote by the other shareholders (assuming you have owned at least $1,000 worth of stock for at least 18 months prior to the meeting).

As you can see, you have the opportunity to influence management’s decisions “from the inside.” When you make telephone calls and write letters to the management regarding its practices and policies, you are writing as a shareholder/owner to a manager/employee. When you do this in concert with others of like mind, you can bring pressure on companies either to change their ways or replace their top management. Sometimes the second course is the only way to bring about meaningful change.

Why I became one of the owners of Kmart
As I have considered the merits of advocacy investing in recent months, I decided it might be interesting to do a case study of the concept using Kmart as the targeted company whose behavior we might hope to influence. In addition to the obvious fact that Kmart’s refusal to stop selling pornography is clearly irresponsible, I chose Kmart for four reasons:

1. Kmart’s refusal to stop selling pornography is demonstrably irrational. Imagine it’s early 1991 and you are the head honcho at Kmart. One of your key executives comes to you with this report:

“Boss, Wal-Mart just announced their sales and earnings for last year and they’ve finally passed us up! We’re not #1 any more. We’ve lost ground for six years in a row and we now have less than 30% of the market. Our core business has big problems – poor quality image, outdated stores, and prices that are still too high. And our subsidiary companies aren’t contributing much to our profits. Waldenbooks, for example, contributes only about $2 of every $100 of profit we make. And this pornography they’re selling has caused us huge PR problems! It goes completely against the kind of wholesome, family image we want. We’re receiving calls and letters from Kmart customers all over the country asking us to stop selling it. If we don’t, they’re taking their business to Wal-Mart. It looks like we made a mistake letting Waldenbooks move in this direction. Why don’t we just agree to pull the stuff out? It probably accounts for less than 5% of Waldenbooks profits, which means it amounts to only about 10¢ of every $100 we make. It’s insignificant in terms of profits, but it’s hurting our core business. Of all the problems we’ve got, this one is the easiest to fix. I say we should get out of the pornography business. How about it?”

What possible rationale could you have for disagreeing with your executive’s recommendation? From a business perspective, it’s a “no-brainer.” It’s a decision that costs you almost nothing in terms of Kmart’s overall profits yet would renew your pro-family image as a company that cares about your customer’s values and concerns. It would generate great PR and lead to the return of tens of thousands of customers at a time when you need every dollar in sales that you can get. That’s why I say the refusal is irrational. It can only be based in ego and pride: “I’m not going to let those crusaders think they can tell me how to run my company.” A CEO who is thinking this way has lost his perspective and is not acting in the best interests of the shareholders. He should be replaced.

2. An army of potential advocates is already in place. There are millions of people who could be mobilized for this effort. The Southern Baptists, the nation’s largest protestant denomination with 15 million members, has voted to sell their Kmart investments in protest. Same for the United Methodists with nine million members. The AFA has mailed out 17 million “Boycott KMart” cards in the past year. There are nearly 1,000 Christians in leadership positions in their denominations and ministries who have endorsed the boycott and they have influence with millions more. If even 10% of those concerned about Kmart’s sale of pornography were to become advocacy investors by buying a single share of Kmart stock, the pressure on Kmart to abandon its irresponsible behavior would be almost irresistable. Let me explain why.

First, there’s the potential for uniting behind the nomination of new directors for the board who will not be tolerant of Joseph Antonini’s obsession with this issue that is costing Kmart a fortune in lost sales every year. Advocacy investors could also unite behind shareholder resolutions that force the issue onto the negotiating table at every annual stockholder’s meeting until the company changes course.

And second, large numbers of shareholders are unwieldly from the company’s viewpoint. It’s true that when all the small holdings of millions of average investors are combined, the total Kmart stock represented would still not be as large as a single large institution might own. Therefore, you might be wondering why Kmart would listen to “the little people” who are shareholders when it didn’t listen, for example, to the two large denominations mentioned who owned almost $30 million of Kmart securities.

It’s because what may appear to be a weakness is actually a strength: millions of advocacy investors have a tremendous nuisance value. Just imagine: the nuisance of processing a million new stock certificates; the nuisance of mailing out a million more quarterly reports every three months; the nuisance of mailing out a million more dividend checks every three months; the nuisance of mailing out a million additional annual reports and absentee voting ballots (called “proxies”); the nuisance of dealing with potentially thousands of additional shareholder resolutions every year; the nuisance of answering millions of letters from shareholders responding to their questions, suggestions and criticisms; the nuisance of coping with an ever-increasing level of bad publicity; the nuisance of dealing with unhappy mutual funds when investors start writing to all the mutual funds that own Kmart stock asking them to support the grass-roots movement of shareholders. It’s one thing to have to mollify a few unhappy large shareholders; it’s altogether a different matter dealing with a million unhappy small ones.

3. Kmart has a Christian heritage. Consider these memories that Stanley Kresge shares in his autobiographical book about his father Sebastian S. Kresge and the building of one of the great retailing companies in America’s business history, the S.S. Kresge Company.

“Even though father had saved a considerable sum of money, he still had to borrow additional funds from a bank or two to open Store No. 1 in 1899. There were 18 employees to start. When they heard that father had borrowed a very large amount to purchase Christmas merchandise, they got together and knelt in prayer for a successful holiday season... We were raised in a good Christian home. Our parents did not send us to Sunday or Church School, they took us, and participated in it themselves...My father’s initiative, business sense, administrative know-how and abiding faith in God helped him to build a business of great magnitude....”   

If Sebastian S. Kresge were running Kmart today, this assault on our families and children would never have even been proposed by anyone in a responsible management position, let alone defended at such an enormous cost. The Kresge Foundation is the largest shareholder in Kmart with some 22 million shares. If the trustees have kept silent, they’ve treated their legacy disgracefully. On the other hand, perhaps the kind of grass-roots advocacy uprising I’m suggesting will embolden them to act forcefully.

What you can do now
Fight for your kids. And their kids. And the kind of society they’ll be living in. Begin your advocacy investing portfolio by buying at least one share of Kmart stock. It will be an excellent learning experience in free market capitalism for your kids. Here’s how you can get started right away.

1. Round up $60. It will probably cost less than this to buy your one share (the minimum commission is usually in the $30s, and Kmart is trading under $20). If you feel like really getting into this thing and decide to buy a few more shares, it probably won’t cost you any more in commissions.

2. Open an account at a broker (if you don’t already have one). There are ads for them in all the major financial magazines. You won’t be trusting them with much of your money, so the main thing is to find out their minimum commission charge. Tell them you want a cash account, not a margin account. Here are four of the leading discount brokers:  Fidelity Discount Brokerage, 800-544-9697, Jack White & Company 800-233-3411, Charles Schwab, 800-435-4000, and Quick & Reilly 800-533-6171.

3. Once you’ve received your new account statement indicating that your $60 is in your account, call your broker and enter your order for one share of Kmart stock. Tell them you want to buy it “at the market.” This merely means you’re willing to pay the current market price in order to acquire your new share that day.

4. Tell your broker that you do not want your share of stock held in your account. Request that it be registered in your name and mailed to you instead.

5. Also tell your broker that you do not wish to have your quarterly  dividends reinvested. You want them mailed to you. Since the annual dividend is presently set at 96¢ a year, you’ll be getting a check for a whopping 24¢ every three months. Enjoy.

6. After you receive your stock certificate, place it in your “Kmart File” for safekeeping. It’s not that it’s so valuable, but getting a replacement if you lose it can be a real hassle.

7. Call Kmart’s Investors Relations Department at 313-643-1040. Tell them you’re a new shareholder, and you’d like to receive the most recent annual report, the current quarterly report, and any other information about the company that they have available.

8. Take your time and carefully read the reports they send you. You don’t need to understand all the financial data, but try to understand what the reports are saying about the company’s corporate strategy and goals.

9. Write a letter to the Chief Executive Officer of your company, Mr. Joseph Antonini. Let him know that you are a shareholder in Kmart and you’re disappointed that earnings have fallen for five straight quarters. You understand that Moody’s Investor Services has lowered the quality ratings on Kmart bonds. What does all this mean and what is he going to do about it? Your letter should be neatly hand-written. Be brief, courteous, and always be sure to request a written reply to your letter that addresses the points you raised.

Don’t let anyone tell you that your opposition to pornography is censorship. Censorship takes place only when the force of government is used to prevent or punish publication. Publishers are free to publish what they wish within the obscenity laws upheld by the Supreme Court. Kmart is free to carry the merchandise it believes will most advance its sales and profits. And you are free to do business with – and invest in – the companies you choose. While the First Amendment guarantees freedom of expression, it does not guarantee that every form of expression will meet with public acceptance or commercial success. The evidence is unequivocal that pornography exploits and devalues women and has led to emotional and physical abuse of children. We must be unrelenting in our opposition to this curse on our society and our families.  

* Excerpted from Sound Mind Investing. Copyright 1993 by Austin Pryor. Used with permission. Sound Mind Investing is a monthly financial newsletter targeted to “today’s Christian family” (12 issues $59) and enjoys the support and endorsements of such respected authors/teachers as Larry Burkett and Ron Blue. For a free sample issue, write to: SMI, P.O. Box 22128-W, Louisville, KY 40252.