THE HAI',IPSHIRE COLLEGE REPORT ON

SOCIA],LY RESPONSIBLE INVEST}4ENT

A P R I L 1 9 8 3

Ed i ted by

Doug Tool ey

TABLE OF CONTENTS

I . Pre face Page 1

II. The Power of Socially ResponsibLe Investing 2Doug TooJ-eY

II I . . Some. Phi losophical Quest ions 4Kurtiss Gordon

IV- Legal Issues Report 16Michael Current

V. . Financial Issues RePort 60Debbie Knight

VI. Waging Peace at Another Level 91Ctruc]< Collins with Doug TooleY

VII. . Social Injury and the Production of Weaponry 94- Bram Levin, Beth Marcus, ctruck collinsr Matt Goodman,

Tom Stoner, and Barbara McQueen

VIII. ResDonse to Memo from Preaident Adele Sinmons 106Ciuck Coll-ins

. APPENDICES

A. Sunnary of College and University Divestment Actions 1O8T'he Af,rica Fund

B. chronology of the Hanpehire college rnvestment Policy 110with Regard to social Issues

C. Hampehire CoJ-lege Investment Policy 114

/

In L976, Hampshire Col lege became the f i rst school inthe country to divest f rom companies in South Af rica. Ttrisopened the door for us to a mueh larger idear that of usinginvestments to reflect our ettrics instead of those of thecap i ta l is t ic ideo logy.

In the seven years since thenr w€ have been exploringthe potential of Soeially Responsible Investment ( SRI ) . fnOctober of L982, we became the first school to pass a com-pretrensive SRI policy and in March of 1983' we included aclause barring future investments in companies manufacturingnuclear warheads.

Although we have led the way, it has not been easy.Our Board of Trustees and President have challenged us againand again to show the feasibil i ty and the appropriatenessof SRI. Instead of becoming angryr w€ responded to thesechallenges in a responsible and intell igent manner. Whatlies in your hands is the result of this.

Some twenty people have contributed toward this publi-cation directly. But in front of us l ies the real challerge--Can we make it worlc?

f

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THE POWER OF

SOCIALLY RESPONSIBLE INVESTING

'Doug ToolgyAp r i l , 1983

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The issue of Socially Responsible Investment, (SRI) h"_"- gai.ned muchmomentum in the last few years, now lllor€ than ever. YeL few areaware of what the fu1l i-npact of SRI nay be. Before we go on to thespecific issues surrounding colleges and universities let us look tothe future and try to understand what, we are reaching for.

SRI i,s leadi-ng us to a $ray of controlling the economic beast. Notthrough socialism nor through goverment regulation, but bytransforming the system as it exists. Through considering more thanthe profit notive a SRI system becomes an evolutionary step forward.

A society with cooperati.ve banks, conmunity economic planning'responsible pension funds, college and university endowments, churchfunds, insurance compani-es and individual investors would have thebest of both the strength of the free narket and the beauty of thesocialist vision.

This nay all seem hard to believe, the clains presented here arevery large. So 1et us Look into this in more detail. First how doesSRI allow the capitalistic to work when it weakens it, t s prirnenotivation, profit?

A person or institution might fight for an inefficient or poorlyconcei-ved goverment progran sinply because of their good intentions.But they will not be so lackadaisacal when it comes to i.nvestingtheir noney. SRI does not subtract anything from the i,dea of tf,e t

profit notive, it sinply adds to it the idea of naking thoseinvestments responsible. This does lead to a more complicateddecision making process and bad decisioins utll be nade. As todaythose that can handle the chalLenge rrill be the ones to create oursociety. To put it rhetorically we are giving the invisible hand aheart to go trith its brain.

How can SRI have any sweeping beneficial effects when at its coreli.es the greed of capitalism. Ihis is a valid criticism. For howcan it change the distribution of power in this country?

It is obvious that it, can do nothing di.rectly. But what SRI doesis attack the disease of which oppresion is only a synpton. Selfinterest is a fact of human exlstence, as is our capaci.ty to give.The disease is merely the over enphasizing of one half.

SRI can help the inequalities in our system in two further hrays.0ne, it could change the organizational structure of a company sothat nanagement riras controlled by the workers and/ or developed fromthe ranks. Because of the the increased conplexity of the decisj.onmaking process the size of the management class will also gror,r. SRIalso lays the groundwork for a decentralized porder structure.

Hopefully SRI can acconplish one further thing, the killing ofapathy i-n this country. People care about what happens to theirmoney, a tangible thing as opposed to the abstract nature of ourpoliticalness.

The actual structure of a society with socially responsibleinvestors is far, very far from conceptualization or reaLizati.on. ,What I have attenpted to do in this paper is paint an unformed goalfor us to work towards. The remainder of this report addresses thethe problens that face us today ln making SRI viable in our collegesand unlversi.ties.

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soME PHILOSOPHICAL QUESTTONS

by

Kur t iss GordonMember of rask Force on rnvest,ment Responsibi l i ty

October 1982

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A. INTRODUCTION AND GENER.AL ISSIJES

What is the cortext of this study of socially responaibLe lDveatmentpolicy?

At llanpshlre Col1ege, the present queation is not whether toinltlate a socially responsible investrnent policy, siuce the Collegealready has a policy statitrg that Hanpehire wLlL not invest inconpaniee whicb cause social injury. The curreot policy is theresult of a good faith effort by atudetrts, faculty, adtrinistration,atrd trustees to grapple rith a serles of vexing iaaues.

So far, the only applicatio! of the social injury clauee hasbeen to the ridely cotrdenoed plactice of apartheid, or govertuentallylnstltutiolalized racLsn. Over the past trro years, studentE andfaculty have raised the isaue of whether this one exclusionadequately representa the Eanpshire co@unity r s grave social concerns- ln particular, uhether the llvestoent policy can fail to addressthe iseue of uar and peace. Ttris Task Force vas created by theFlnance Comittee of the Board of Trustees rrto exanlne, inconsultation slth other renbers of the llanpEhlre conEunity,procedures ald criterla that nould place greater enphasis oa sociallyresponsJ.ble Lnvestneut. rr (ninutes, ltay 1982 rcetfug)

Itlhy have a socially responsible investnent policy?Partlcularly io the U.S., noney hae great syu.bolic value (in

addition to its intlllsic practlcal value). fire eocJ.ety paysattention to what people and insuitutions do with theLr noney, audread lnto decLgione involvlng Eoney a great deal about the characteraad values of the declsion nakers.

Given this eynbolic i.nportance, we believe that if the CollegelE going to pay attention to social vaLues j.n any of its pollcle8, itie entirely coDaistent aad proper for the sane values to be reflectedin its investEent po11cy. In fact, to have contraating soci.al valueseobodied 1n policles governing different aspects of the CoLLege wouldindicate a kind of lnstltutlonal echlzophrenia. For exanple, onenight argue, tf the College is an equql opportunity eoployer,wouldnft it be hypocritical to invest the College's fuads in a fLrnwtdch is kuonn not to be?

However if the irctitutlon uorks to change the corporatlo! it isinvolved 1n the issue of schizophrenia beconeg bLurry. Certsainlythe anouat of poEitive chaoge that could be affected is much greater.But to do this requires a Large body of cooperating institutions andindlvtduals to pass shareholder resulotions.

tr

The myth of the neutral institutionEvery decision has a noral implication, even the decision not to

decide or not to take a stand. Many would argue that not to take astand is to give tacit or even active consent to the status quo (ourweapons stocks support the industry even though they are cal1ed forin portfolio theory). At the very least, such a decision inplies thatthe issue is not i-rnportant enough to nerit serious consideration or aserious conmitnent.

One argument raj.sed against the taking of institutional standson social issues is that neutrality is a necessary precondition forthe academic freedom and diversity of the faculty and for Jhe freedonof the institution from governmental control. Both of these factorsare essential for the intellectual endeavors of faculty and studentsalike. But, these intel-lectual endeavors cannot be carried out in avacuun.

trThe pursui.t, of truth is usually held to requj-re a certai.ndetachnent from i nrmediate political- and social probLems; yet ifinstitutions are not deeply i.nvolved w-ith the life of the regi.on andthe nation, they vJ:ill faiL to produce the well-trained tal-ent bothneed. tr ( Fletcher , L97 4r p . 864)

o

A sense of prioritiesIrlhile there are nany important issues at any tine, one cannot

involve oneself effectively in all of then - one has to choose. Thepriorities change as world conditions change. In the 1960rs, therewas more attention to local issues; in the 1980ts the balance ofurgency has swung more toward national and world issues.

Anong the ftLocaltt issues of the 1960ts one can include racisnand environmentalism. These issues, wh:ile having national scope, areof such a character that the indirridual concrete acti.ons of 1ocalconmunities provide the core of ttre soLution to the problen. Forexanple, cleaning up the Connecticut River requires that, individualtowns and industrial plants process the wastes which they dischargeinto the river. Federal laws and tax regulations can provide strongincentives, but in the end the local institution has to take action.SiniJ.arly, providing equal access to higher education requires thatindividual colleges and universities enploy nondisciiminsf,sryadmissions practices, whether or not there are federal laws mandatingthat they do so. While it would certai.nly be consistent to have asocially responsible investment policy touch upon these i.ssues theinvestnent policy is probably not the nost effective institutionalresponse. An exception to thls would be the conmunity developmentmovement which is in need of capital.

The partlcular issue of the 1980ts which instigated this taskforce and its study is that of the danger of nuclear war. This is aquali.tatively different problen from those described above, in thatthe actions of individual institutions and 1ocal conmunities are not

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concrete st,eps tor,rard the solution of the problen. Rather, they areprinarily exhortations from members of a national cornnunlty to actionon the part of national institutions representing in one vray oranother the interests of the comnunity at large. The, nostlyinplicit, recognition of this difference has definitely nuted orrestricted stances by educational institutions on the issue of worldpeace except for those of a rhetorical nature. However, worldpeace and the avoidance of nuclear war have certainly been highpriorities for Erany years. The growing arareness of these prioritiesis i-nportant, and should be seen by all of us in education as anopportunity to put into practice the values we have held all along.

Why at a llberal arts college, and why with student involvement,?It is a najor gaal of liberal arts education to develop in

students (1) engagenent and leadership in the comunity, (2)inquiring ninds capable of analyzing and evaluating statements orarguments in all areas, €rnd (3) noral and ethical values for theirl ives.

t?If we would teach our students to care about inportant socialproblems and think about then ri.gorously, then clearly ourinstitutions of learning must set a high example in the conduct of .their own affairs. In addition to respondi.ng to its students, auniversity nust examine its social responsibilities if it wishes toacquire an adeguate understanding of its proper roLe and purpose inpresent-day societ,y. fr (Bok, L982, p. 10)

It hat 18 the Eoat inportant goal of a socially responsible investneotpolicy at Eanpehlre?

Is it to achieve a ttcleanrt portfolio - so that the collegeprofite onJ.y fron activiti.ea nhiclr ne do not consider norallyoffensive? Is Lt to nold corporate behavior? 0r is it to cal-l theatteotion of the College aad the broader co@ulity (nation, world) toissues of great and general urgency? To what extent do these goalscall for differeot strategiea?

It is necesaary to consider not only the intrinsic inportance ofthese goals, but also the likeLlhood that we ui11 be able to

. acconpLish then. Fron thls standpoint, the order nould be, first tocall attention to the lssue, second to achieve a rrcleastr portfolio,and third to affect corporate behavior. In order to nake a atatementit lE Eufficieat to design a policy which nakes clear the vaLueswhlch underlie It. Ttris, it nould appear, nas the splrit of thestudent initiative of last spring. Ilowever ae we organize thispriority llst should be open for change. Ue should then be able toaffect corporate behavior.

To achieve a rrcleanrt portfollo is a far more conplex businesswhich lnvolves deflnlng what we nean by rtc1e6trtr, decldlng uhele todraw the inevitable lines and nake the inevitable conpronises, anddeciding how nuch effort and cost we can afford to achieve

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t

ttcleanlinessft. Here we get into tradeoffs and comparison of narginalcosts and benefits. Under these circumstances, the attenpt todevelop a college-wide consensus could well be extrenely tineconsuming.

As far as nolding corporate behavior j-s concerned, we are facedwith an alnost, hopeless task. If Hanpshire acts alone, the i.mpact ofour divestment or our jnpact in proxy votes or letter r,rriting isj-nherently negligible. 0n1y when our example is followed by manycolleges and universities and maybe soneday by TIM/CREF cansome impact on corporate behavior be hoped for.

Philosophical and practical differences of divestment vs.ttresponsible shareholderrt activities

Several earlier writers (e. g. trThe Ethical fnvestortr and DerekBok) .have argued that the effect on corporate behavior is muchgreater if the institution holds on to the stock and applies pressurethrough shareholder resolutions even'if the resolutions receiveonly a sna1l fraction of the votes. cast at annual shareholdermeetings. (Any resolution which gets even 3Z of the shares in favoris taken extrenely seriously by nanagement.) This approach may notbe as emotionally satisfyiog, and is certainly nore time-consumingand costly to inplenent, than is divestment. Also, because theearlier arguments were made fron the point of view of universitieswith huge endonments (Yale, Ilarvard), the percepti.on of ttre relativeeffect of shareholder acti.on over the synbolic value of divestmentnay be quite different than would be the case for a smaller school.fn fact, Hampshirets current policy provides both for divestment andfor voting the college I s proxies on stock which it owns. On allissues w:lth social inplications appearing on the proxy ballots, themembers of two trustee subcomittees €rre polled: CH0IR (wlr:ichincludes student and faculty representati.ves) and Investments (whichdoes not,). If the votes of the two subconnittees agree, thecollegers shares are voted in accord with the approved posi.tion. Ifthey disagree, the colLege abstains. Since this procedure was putinto effect, the two conmittees have often disagreed, with the resultthat Hanpshire has abstained from voting on a number of shareholderresolutions addressing questions of great social import.

Given the effect of the current policy, a proponent ofdivestment night be tenpted to concede the point that voting proxlesmakes a stronger statenent than does divestment and then go on toargue that the choi-ce seems to be not between making a stronger or aweaker statement, but between making the weaker statement or none atall. (And argue further that not making a statement is equivalent tosupporting the actions of corporate nanagement. )

lfhat about controversial issues?To some people, the mere fact of taking a stand is more

important than the content of the stand or the substance of thei-ssue. Does the taking of a stand inply a closing off of debate on

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the issue? Does it mean the establishment, of a college-w'ideorthodoxy? Certainly it should mean that the issue is one ofsurpassing i-mportance to the school and society.

First of all, we must distinguish between the issue of the basi.cjustificati.on and general forn of the policy on the one hand and, onthe other, the particular social issues addressed by the policy.Certainly, no one wants to contenplate an ongoi.ng, perpetual debate

particularly one of the scale of the present exercise on thebasic outline or structure of the Collegets investment policy. Thepurpose of having that de.bate now is to come to a decision wh:lchsatisfies nost people, and then to have that be our policy untilthere are again conpelling reasons to change it. So in this sense,it should close debate.

With regard to the implenentation of the policy and the specificissues addressed, the situation is just the opposite. Ttre virtue ofeducation is that decisions €rre continually challenged. The soclalissues are too inportant to be considered once and then put out ofnind. For that reason, the pollcy cannot be static: it must containprovisions and procedures by which the decisions made are regularlyreviewed and renewed.

It is crucial to .realize that the adoption of such a policywould NOT i-npose a political uniforuj.ty on the canpus. It wouLd notaffect the hiring and firing of faculty, ttre adni-sslons or evaluationstandards for students, or the abiLity of the nenbers of theconmunity to express their political beLiefs in any way they choose.In no way could such a policy be interpreted as an infringement ofanyoners academic freedom.

The College cannot avoid having some poLicy on investments. TheFinance Conmitteets establishment of this Task Force in response tothe student initiatives has opened the question of that policy todiscussion by the full conmunity, so that it will be a policy whichcan be subscribed to openly and consciously by the largest possiblesegnent of the conmunity. Ttre fact that some people rrill disagreew:lth it is inevitable, but no different in principle fron thedemonstrated fact that most people in the connunity (at the veryleast, in the on-campus comnunity) disagree with the present policy.Ultinately this issue must be decided, if not by unanlmous consentthen by negotiation and conpromise to create the largest practicalconsensus. Most inportantly, the policy must not be or appear tohave been - i-nposed from above by arbitrary fiat.

How would a revi-sed' investment policy affect gifts already rnade tothe College?

In the absence of specific instructions to the contrary in thegift instrument, all funds owned by the College are subject to theCollegef s i.nvestment, policy. This flexibility is i-mportant to thehealth of the insti.tution, and its legal basis is docunented in thelegal chapter. However, there are both ethical and practicaldifficulties raised between an institution and its benefactors, if

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the institution were to undergo a radical change in policy orpurpose. This dilemma does not arise for changes which alterspecific policies whl1e continuing to express the basic character ofthe College, since it is a fact of life that for an educationali-nstitution to remain both viable and true to its founding purposes,it has to evolve in response to the changing needs and conditions ofthe connunity around it.

B. STRUqTRAL AND FOR},IAT ISSTIES

Can purely positive guidelines be adopted?The aspiration to draft and adopt investment guidelines in

affirnative rather than negative language surfaced often during thecourse of this study. fnstead of a black-list or a set ofexclusionary clauses, could not a school develop guideli.nes that saidonly where its money SH0UID be invested? Beyond the most general,and therefore not very helpful, affirmative verbal formulas, thisquest for purely positive guidelines cannot succeed. The effect ofhaving a limited nrrmber of specific affirmative guidelines is muchnore restri.ctive than the effect of a limi.ted number of exclusions.Hence the result of purely affirnative language is nuch more likelyto be inprudent from the standpoj.nt of managing the College t sinvestments for their primary purpose. It is certainly appropriateto state some positive goals for a schoolrs investment policy, butany guidelines that nay be developed wilL alnost certainly containexclusionary language as welL. Avoidance of certain forms ofinvestment cannot be maintaj.ned unless those forms are specificallymentioned.

Why can t t Hanpshire put all its nqney into trgoodtt investments thatraise no controversies?

This question raises another forn of the aspiration to find asimple and affirnative route out of the dilenmas facing investmentpolicynakers for the College. We have come to label it thettblue-skytr proposal. Surely there are enough conpanies that dosocially beneficial things build houses, heal people, grow food,and so on - that the ColJ-ege can invest in these directions andslnple bypass the tornenting questions about weaponsnakers,polluters, and other arguably socially injurious firns. 0f course,the reali.ties of investment decision naking are not so sinple: itwould be extrenely difficult to find a large, publicly traded companythat doesn t t have both good and bad aspects to its corporatetrcharactertf . A somewhat more feasible version of the ttblue-skyrl

approach would have a stated fraction (perhaps 2/3) of the endowmentbe committed to investment categories and firms of demonstrablesoci.al benefit. Yet trying to assign one or another company to therrblue-skyrf group poses constant riddles as described the thefollorring paragraph.

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The effort to fornulate a socially responsible j.nvestment policyrequires a distinction between groups of pernitted and impernissibleholdings. Careful definition must be given to the boundarycondltions or threshhold that distinguish al1owab1e from disapprovedinvestnents. l4aking these dj.stinctons will be especially difficulti.n the complex, interlocking patterns of modern businessorganization.. How can the balance be struck between comslendable anddeplorable behaviors among the many rlnits of a large conglomerate?Any proposed guidelines must address this question of structuring thethreshold criteria. A guideline focusing on weapons producers nightsay, for example, that conpanies ulth more than 2OZ (\OZ-3OZ) wouldbe excluded. Setting such structured thresholds seems arbitrary, butthey probably will have to be incorporated in the text of anyproposed guidelines.

Should a school put some funds into alternative or non-traditionalholdings?

A few nenbers of the conmunity recommended that Hanpshire put allits money into sol,ar energy of local co-ops or food production. Suchnarroring of the endovment

'trould' violate rrprudent investorrr

requirements for diversity and reasonable assur€rnce of overall ratesof return. More suggestions were urade that the College put afracti,on of its endowment into a separate fund for speci-al purposes,usrrally higher risk projects or activities with very explicitintended social benefits(e.g., low income housing). Ttre mostlnclusive of these proposals recomrmended that Hanpshi.re start itsown mutual fund. 0thers urged that a portion (perhaps LOZ) of theendowment be set aside for venture capital projects (as BostonUniversity does ) . A few alunns nba dlmiled pioposals for arevolving fund to support entrepreneurial ventures by Hanpshiregraduates. Seteral who suggested creation of a high-risk or specialventure portion of the endonnent also said that it should use onlyearnarked funds raised explixitly for such purposes. The broadques'tion to be faced in developing an investment policy ls whetherany portion should be applied and adrninistered separately from therest to whatever special projects or unusual investment circumstancesmay be sancti.oned.

While this general appproach does appeal to us in principle, ithas a serious practicaldrawback. Ttreoverhead involved in managingLhis special fund would undoubtably large enough that, for anendowment of lirnited size the effective rate of return fron thesej.nvestments would be severely compromised. However in a largerschool or rrith an organization to provide finacial services nany ofthese things rvould become possible.

How public should the investment policy be?

There are different school of though about how a new investmentpolicy shouldbe publicly announced. Representing one point of vietrwas an alumnus who responded to our questi-onaire, ttThe quieter we go

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about fornulating this policy, the more restrictive we can be.Since no one really cares what little Hanpshire College thinksr w€can probably have cleaner hands and cleaner investnents by keepingthese gui.delines internal. tf (James L982)Yet this strongly conflicts vrith the notion of making a politicalstatement as the Colllege did in the case of South Africa. In thatcase, by taking a symbolic action in €rn area of growlng concern, thecollege helped to clear the path forother institutj.ons. Despite thefact that, Hanpshire was quite reticent over its South africandivestnent (there was not even a press release), it is likely thatmost members ofthe conmunity would want to announce the policypublicly rather than keeping it secret.

The major danger of going public is the possibility of alienatingthe outside comnnity by appearing to assume a rfholier than thourtattitude. It would seen appropriate, therefore , to nake some nodestpublic statement, but shy away from strldency. It would also seemappropriate to nake this report, and any other results of theresearch of the Task Force, available toother collegesanduniversities trying to developtheir own policies on sociallyresponsible investment.

rights of ownership and responsible shareholder actionsBecause of the College t s linited resources and because of the

ninuscule fraction of any companyts stock the Collegets holdings canever encompass, the Task Force is convinced that as long as we workalone responsible sharehoLder actions cannot represent an acceptablesubstitute for dlvestment in addressing the sociaL issues of majorconcern to the Colllege. Howeverr w€ recognize that ethical, noral,or social issues wiLl be raisedby some of the questions and proposalson shareholder ballots for the stocks in Hanpshire t s portfolio. Thetrustees have the right and resporlsibility to vote their shares infavor of any proposal which would enhance (or against one wh:ich woulddlninish) a company t s ability to conduct its business in accord w.iththe principles enbodied in the College I s investment guidelines.

This posistion does not represent a change fron the currentinvestment policy. However, the procedure by which the votingdecisi.on is reached needs to be improved. Two major aspects of theprocedure need to be address. FirsL, we should create an opportunityfor members of the commmunity who have done research on the specificissues to inforn the deci-sion-:making body of the results of theirresearch. Perhaps this should be funded by the school. Second (asnoted above), the decision-making process has to benade less subjectto deadlock.

C. IMPLEI-{EI{TATION AND MONITORING

How much of the college t s energyits investment policy?

Whatever investment, policy mathe boundaries and conditions of

should be devoted to inplenenting

be devised must not only specifyapproved investment. It nust also

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identify the exact means by which the policy is to be inplemented andits operation monitored. The i-mportant point is that theoverhead-ttre cost in tine, energy, and money-of long-terninplementatoi,on must not be so high as to put serious drain on thehunan and financial resources of the College.

we nay expect that Hanpshire w'i11 continue to have aprofessional portfolio nanager who acts under the immediate guidanceof the Investment Subcommmittee of the Trustees, and i.n conformitywith whatever formal guidelines for i.nvestment the Board of Trusteesnay adopt. The current stipulati.on regarding investments incompanies which do buslness in S. Africa of which cause tfsocialinjurytt are monitored by the CHOIR subcomnittee of the financecommittee. If more far-reaching and detailed lnvestment guidelinesare adopted, is CHOIR as now constitutedan adequate mechanisn tomonoitor confornity to the policy guidelines?

Whatever staffr comrnmitteer or volunteer work might be done tocheck on various firns and their conduct, the total infornationrequired to inplenent a detailed set of guidelines could be immense.Computer-based resources available to a professional portfoliomanager would be essential. Fu1l utilizati.on of agenies such as theIRRC, the interfaith Center for Corporate Responsibility and anational organi.zation of colleges would also be indispensible.Defining the exact procedures for irnpLementation and moni.toring of asocially resPonsible investment policy whithin acceptable overheadcosts renains one of the most challenging features of the endeavor tofornulate such a poLicy.

How can lde insure that the investment poLicy continues to reflect theschools priorities

Two major threads are intertrined in ttris issue. One is the goalthat the investment policy not be. a piece neal response to the isiueof socially responsible investnent-a document requi.ring conpleteoverhaul each tine a new social issue is identified. Ttre other isan answer to the charge that divestnent, €rs a tactic, is a once-andfor-all response to social issues which require constant attention.For both of these reasons, the inplenenntation ofn the policy needsregular review. The Finance Comnittee should be required to subnitan annual Seport on the success of the pollcy to the Board ofTrustees, so that the Trustees reaffirn the Collegets inplenentati.onof the policy.

An additional concern is that the social issues addressed by thepolicy continue to be ones of importance not only to Trustees anAmembers of the on-campus conmunity, but also to the less accesiblesegments of the communtity(alurnns, parents). For this reason,periodic surveys of the enti.re constj.tuency of the College should beundertaken, perhaps every 3-5 years, and the results incorporatedinto the reports of the Finance Conmittee.

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BIBLIOGRAPTTT

Bo]<, Derek C. L982 , Bevond the Ivorv Tower ( Cambridge : HarvardUniversity Press ) .

Fletch€rr Basi l A. L974, "Higher Educat ion' f EncvclopaediaBr i t ann ica ( r s ed . ) r Mac ropaed j -a ' vo l .B l pp . f f i

.Tames r Brian ( 71F ) L982 , letter to Prof . James Matlack datedJuly

'l .

Patterson, Frankl inr.and Longsworth, Charles R. L966r TheMakinq of a Col]-ecre ( Cambridge: MIT press ) .

Simon, John G., Powers, Charles W., and Gunnemannr Jon p. Lg72,The Ethical Investor (Wew Haven: Yale University press).

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I,EGAT TSSUES REPORI

by

It l lehael CurrentMember of Task Force on Investment Responslb l l i ty

October 1982

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Sumnary of legal Issues Report

Because ny report on the iegal lssues lnvolved inemphaslzLng soeibl responsibl l l ty ln the Collegets lnvestrnentpolley conslsts of approxlmately 40 pages of technl.cal argumentsand documentatlon, I have been asked to prepare a sumnary ofl ts contents. f t should be stressed that the report l tselfwas dist l11ed from several thousand pages of source materlal,and is of the mlnlnum length I felt was adequate to addressfu11y the complex lssues under consideratj .on. fhus, Irusteeshaving specific questlons about any of the polnts presentedhere are eacouraged to revlew the approprlate seetions of thefulI report. I have fol lowed the sectlon headlngs used ln thereportr and have referenced the approprlate page numbers.

f. INIRODUCTION (Pp. 1-2)

lbls seetlon frames the speciflc questlons to be consld.ered,ln_ the rdportr and dlseusses the srpeclfic nature of HampshLreCollege as a legal entlty. llanpshlre ls organlzed as aireleemosynary (charltable) educatlonal corpoiatlon under thelaws of t l re state of Massachusetts, and l ts lrustees (teehnl,ca1ly,the nnembers of the governlng boardr or ndtreetorsil) arerestrl.cted Ln the exerclse of . thelr lnveetnent powers by thestatutes under whlch the College rr,as organlzedr-by theprov_lslons of the Collegets eharter, and by the prevalllngtegal.

Hstandard of caren for the nanagenent of tnvestrnent-funds. [he sectlon establLgheg that the report ls an attenptto Justl fy _tbe oursuit of social responslbl l i ty goals as an#re?ct g! 4g piudgnt manasement of ttre Collee-e'i endoiliiletT@ TtE-e s nEffit@frrS-sAAAEFTEIET-T6E1tfrequire a substantl.al saerlflce of the two tradltlonal goalsof lnstltutl,onal investlng - preservatl,on of the endownentcorpus and naLntenance of an adequate rate or return at anacceptable leve1 of r isk.

rI. IJEGAI SIANDARDS OF CARS - ENDOWPIENIA. Background (p. 2)B. Conmon Ilaw Roots of Cbaritable

(pp . t-4)1. fhe rPrudent InvestornRule (p. 4)2 . Prj.vate f rust Standards (fp. 4-6 )5. Char l table Trust Standards-(pp. 5-g)

FUND PIANAGERS (Pp . 2-21)

Corporatlon Standards

- r7 -

Surnmary of trega1 Issues ReportFage 2

4, Buslness Corporai i .on Standards (pp. t -9)

Because the charltable corporation as a separate Iega1enti ty is of relat lvely recent origln, various aspects ofcharitable corporation 1aw have been derlved fron th,e comnonlaw of prJ.vate trusts, ctraritable trusts, and _business corpor-at long.- [hese sections trace tbe evolut lon of investnentItstandards of caren through ttrese related areas of the law.They polnt out that the 1aw Ls nost strlngent ln the cases ofprlvate and charitable trusts, which exlst solely for theeconomic support of a speciflc individual or indlvlduals or aspeclfte charltable purpos€. Suetr trugtees are genetal lyrequlred to conslder- only econonle faetors in the naklng oflnvegtnent deelslons, and are subjeet to e str i ,ct standardof l- labi l l ty. BusLness corporation directorsr otr the otherbandr possess a much nore I1beral anount of discret lon to nakedecigions for the beneflt of tb,e corporation based on a vari.etyof factors, and nay only be heLd llable for lnvestxsent practlceson the order of gross negllgen,eeo

C. G:lrarltable Corporatl,ons (Pp. 9- 1 1 )1 . Hanpshlre 0o11ege as

-a- Charititte Corporation (F. 1 I )

2. Ihe- trBuslness Slandard of Ca.ret Argun-ent (Fp, 11 -15)5. lhe n0harter Purposesr Argument (Pp. 15-17)

Ihese seetlons survey tbe devel,opnent of charltableeorporation law over the past .decade , focuslng on key courtdeclslons and new statut€g. Because of the need to addressthe arnblgultles in tb,e connon law, and to make the applleable1aw nore uniforn, there is no!{ a trend to apBly a standard ofcare to charltable corporation dlrectors sinLlar to the oneapplted to the directors of business corporatlons. Ibls trendappears to-be upheld ln the Unlforrn Managenent of InstitutlonalFunds Act ( t gOA- MGI/,A.) wbleh applles to charitable corporatLonstn the etate of Massaehuset tg.

fhe seetions also discuss in sone detai l the broad,dlseretlon of col lege and unlverslty directors to act ln tbefurtherance of the ingtl tut lon.lg charter purposes, and theaff lrmative duty to preserve the cl imate for education. Varioussuggest lons are nade as to how these Iega1 doctr lnes could beused to jueti fy tbe enactment of soclal ly responslble invest-nent pol ic i .es. I would encourage Trustees having concernsabout the appropr iateness of such pol te ies for educat lonalinst i tu t ioni - to- especla l ly s tudy t [ is seet lon (pp . 15-17) .

The f l rs t of these sect lons eoncludes by spel l lng out thereport ts pr lnc lpal concluslons :

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Sunmary of legal Issues ReportPage 5

trDo the d.irectors of a charitable corporation organl zed,to provide blgh.er edueation - speelf lcal ly, do the lrusteesof llampshire College - have the 1ega1 authorlty to adopt asoclaLly responslble lnvestnent pol icy whlch would requlredl,vestnent of those corpoxate seeurlty lssues currently lnthe College t s portfollo wbich are deened socially lrreeBoD.-slble, and. would l-iuit further investlng to ttroee securityrlssuee whlch neet the Col legets standards of-socla l r€spon-siblHty. Based on the two argulnents which (are) advan6edin thls sectlon, the present authorts ansuer would be lgg,subJect to two eaveats:

1. Any pol lcy whieh threatened the seeurity of theendownent corpus would alnost certalnly be i l legal and wouidthus expostTFlrustees to the potenti i l of t ia6it l ty.

2. Under most cureunstances, l t would seen unl lkely thatthe I rugteee could be sure of thei r abl l l ty to Just i fy apoll.cy whlch bad the potential of causing a severe negatlvelnpact on the faetors of ftrisk and return. n (Both in lega1and 1n fLnanclal terms, tbLs questlon restg baglcal ly on theablltty of the lnvestnent nanagers to nal.ntain a gufflclentlydivergtf led-portfol lo whlle carrylng out the terms of thepo l l cy ' . ) t (Fp . 1O-11)

4. Glfts (Pp . 17-19)

fhis sectlon exanLnes the questlon of the legal i ty ofutlll.zlng soclal erlterla in .the nanagenent of lnvestmentfunds whieh cone to the Col3.ege as glfts. It coneludes tb,atttlt is unllkely that nsoclal Lnvestlngt actlons by charitableeorporatlon -dlrectors could result elther ln l labi l t ty or indef6asaaee (1.e. forf l ture) of funds ln favor of a dolor (orh is or her hel rs or sucessors) , except lng where such act lv l tyj .s expressly prohiblted by the- glf t lnst iument . r (P. 1 9)r lhe fact that one ox more port ions of an inst i tu tLontsendowment funds are Bo encunbered need not prevent util izingsoeial cr i . ter la witb the -reit of the fund r so long as theencunbered port ion(s) are naintalned ln a separate lnvestmentBool. Presently, Hanpshlre College I s endownent does not aBpeario eontaln any gif ts that are restr lcted in this nannerr so i twould not seetn to be a problenr . t r (?p. 18-19) lhe sect i6nalso makes mlnor suggestlons about irnprovements in the College t srecord-keeping pract lees in regard to endownent g l f ts .

5, Ineome [ax Exemptlon (Pp . 1g-2O)

lh is seet lon exanines the posslb le ef fects of eocia l lyresponslble i .nvesting actlona on the College t s status asexenpt frorn state and f ederal lncome taxe s . I t concludes that

- 1 9 -

Summary of !egaL Issues ReportPage 4

n (t)t te type of poltcy belng contenplated at I lampshlre wouldconsti tute nej, ther an attenpt to lnfLuence leglslat ion norparticipati.on ln canapalgno for public off ic€ r and would thusnot jeopardLze our conpllanee wlth thb (Federal InternalRevenue) Code. No bars to such a pol lcy appear to exlst lnivlassachusetts state 1aw, eLth€r. n (P. 20)

Ihe report also eontains a brlef Conelusion (P. 21), andlogl appendicles. Appendlx A ls 4 copy of the EanpshlreCollegA-Art lcles of Oiganization (nctr i i terr), and, lppendix Bis a copy of the Unlforn Management of InstitutionaL- FundsAet. Appendix C examlnes and cri t iques some of the rna jor legalarguments advanced against soclally responsible lnvestingschemes. Append. tx D discusses a case on South Afr lcan d ivest-PeTt_ - A.SIUI0. I . Hunt - current ly being l i t lgated at thetr ia l court level in the state of Oregon. fn addi t ion, thetext ls ful1y annotated and contalns a complete bl.bliographyof seeond aryr rnateria. ls eonsulted.

-20-

. ' . 4 .

' - , --:-- '-._, / : .

_-)

r i '

EII{AI RFOnC - LEE|AL ISSUES Michael Current

At tl|e l,gy 1{, 1982 joirt GeUrg of tne Imrcs@, Srbqmittee ard tlF OEmittee

cn lrrres'tsrE rt Espcnsibility (@I$ of tne Earpshire Oollege Board of T:iustes, a

notian tEs oassgl cr'lring fior the creatiqr of a llask tlre @t lrr\reststEnt, Espdrsibifity.

!|e lbsk lbrce Es dtalged with exaninirq, "in cdrerltatlctr witjr the rErbers of the

Ealp6hile Ocnunity, the irwesffi preeAues dd crit€ria of ttre OolleEe $ as to

plae a great€r sg:trasis cr socially resesrsiUe iwesErcnts.'I ft" rr=nt"* of the Tasl<

nouce reogdzd tltat aE aspect, of'fulfillirg tJEir dratp lrculd be to strdy carefully

the legaf isss irvolrreil in qhasizing seial resporsibnlity in tie 6llege's

ijtttestsctrt policy. Sn prpoee of tlis ::€porE is to er.ilfiine tbo€e legal issrs in as

clear ard tltcq$r a [Erler as pasille-

I. INIMETTCN

!€rbers of tle faqshire Oollege Board of Ttuste€ are, techrrically, ffier:s of the

go\terning banl' (c 'directots') of an eleaosynary (dnritable) educatioal

corporattcr organizd lrder tjre povlsicrs of Chryter 180 of the Massachts€ttst

stabrtes. - fhelt ale 'ltustees' by cE]nur usage - ad bf virU:e of tie wlnraticr's

dtosen legal nae, "The Ttustees of HatE)ehire @llege" - ratlrer than in a strict legal

sense. A €msr fegaf @.iln is tfEt tJle afi:rectors of a dnritable orlnraticr a:re

"tie trustees of its assets ia the pblic ilterest.n tre T:rrstees* are tle kgaf frrd

rnilage!:B rith a fieriary responsibility fc tle Oollege's erdomrnt fwds. Gl"y f,"fa

the prer of invesffi, as a tEa|s of frtfrering tlre 6llege's charter Frposes. fhey

ale restrictd i'r tlp ocrcise of tleir funesurEnt F|€lis by the statutes rrder *dctt tlE

611€9e ms organizeil, by tlE pouisicns of tbe Oolleger s d nter, atat by t$e Fre\raiUrtg

eiAriary stad.d of care.' (IIt tne case of gifEs, t-tE Ttustees ttEy be $bject to

- Ilt GG"t€es" uhelr capitalizecl, refers tlu:aglurt to the Tlust.ees of nanPstrire6lt€qe. .r1

furtlE!. lestricCia|8 pLa€d l,y tne dbE ra to their iJrvestsrE rt qr use. ) Ihe fhlsteeg

are $$ject to potential liability danld tt be lEld ttrat tJrery ercrcised tneir irnEs@rt,

porers i.rr ar inplsper c irqlrrd€nt Flr.

It is thb Pot€ntial riabiuty of tl|e lrustses t}at rsrld be tne kgal Erbjec{ of any

titigartian Ucr$rt agirut tlE 6fle6 fu tne irclusiqr of sciat criteria i3 its

jr$resGrt pliclz, Eo it is cn tJp issue of Itrjstee 1r ebility - and, d\rercely,

I|nrste dliscrcLicr - tlrat Uris Gport sill focus.3 The issue of nho ucnld have sta*irg

to iniliate acticr aqairst the f:rlstees for violatiqr of tleir fidhriary ahlt!, vriu be

qlsidetEd later ln this neport. It shdrld be not€al here, lnever, that liability tDuld

be in'oked crly irr a case ritre ctmrstrabLe alattge had been iJrcrrreat - "tiattilitlt

is an *dgaic if tlre[e is rD haJrn ddre. "4

ft ftas been. t]te assuttFLidr of tlre ltaslc lEoe thna$rcut its ercistene trrat t.he Ttustees

orLl rot be enpectd to edorse 4y sei,ally regpcrsiUe fur,estrEnt &tivity r*ridt $crdd

require sl$Etafiaf ssifie of, the llF traditjoal pals of institutisral in\reetiry -

peserrtnttot of tne erdoucrt €rpug ard mirtenare of an dequate Jrate of Eatr'r.

(Tb ctmtstrate that ertain types of saaffy reaarlj.ble in estsEtt aclivitiee can be

prsrea wit}srt rqtrir&rg tJp sacrtfi.e of tltese goals is the prr;nse of the finarpial

secticn otr tne fasl( fue E[Et. t AEt being the case, this 5ryer wilf be cierrteil

re tqrard justi&tng the Frsuit of rsptr.adtitianal goals as an aspec,t otr t}e guderrt

ttEnaqgurt of tlte 611ege's erdore:t fimds than to atterpting to justify tlle sacrifice

of financiat stabifity fc tJre sake of seial causes.S C,. irrterrlisr here is prLnarily

to qrtsd "t&at. fidria:ry stadads of care stpuld be tterprettea to gl\re tcolteEe

ardl uiltelisitlt trust€ tbe ficegaq to atet elcp i,rwestrgrt gddefips fc uriversity

erdomnt fil|ls shictt enable tne uriversj.tyt s irrrresffiIt policies to be otsistent rith

its lnsritarian rrahe iJl goci€rty.'6

rI IEI, SNUNG (I CEFE - EU:NGIST rtID ICSGEBS.

-22 -

A. AaO<g3ord.

llE liabifit!, of an €rdcrGrt fi:nrl rurager - sudt as tlE lta|E)shi-le 6l1€ge Irustees -

ts goverrd trt tlte pa*iGrfar legal "stardard of €re" 4plicable to Uassadilsetts

dprltable @rpcatnm dfirectors. lb detenire $hat starlatad (s) of cale shold be

elied b tfre narEq@rt of Ue lnestsert frDds irl queeticr, ard rfiat the rarge of

pssiSle irte!"oretatidrs of, that stadard are is to dl$€r rDst of tl|e leea.l qrr€tia|s

tjrat midlt arise abilt a rcially r,e+astfe hresting policy. thforbnately, it

is rpt as easy ars ce night tdsh to mke tJGe detennilatiqrs, c to nnke tlra

cbfinitirtely. A revis of tle evolueio of tne kgal stadards govel:rdrq draritable

@pcaticns sturld, l*ver, help us to udelrstard lsr eEh dleteruirtatjcrs are mde.

B. Ccmsr Iar bs of Clraritable @Epo8ate Starlards.

ste cfiariitable @rpcatlar ts a relatirely rsr legal enlity, vi€rtedl ir te!ils of tlte

historiy of herican lan. tmil the adryticn of a fs fairly re statr*es ilt tte

fraaing dorsr of a f*r relatively tlacnt oI*, decisicns that dress thenselrps

Tec' ficalty to the charitable @Iuatiar, UEEe ms rp cler legaf stadad by rrnridt

gpuelrdDg boards anlcl be glrided an grdr iss.Es as tlte fidrEiary standads of ca::e

eryectea of tlm. As tlc etiqat @rfereee of @issidEls cn tlrifo|m Stat€ lalrs

stateal in t}eir 1972 kefatory lbte to ttp tldfmn lEragurt otr Institrrticral Elmds

ect (U.&r.F.A-l:

Sbdies of tlE legal a*fstty ard respdrsibilitl' fc the nanagem$ of tbefr.srds of ar irstituLian lra\re pointd l{) the urertain gta@ of tie 1il ir lrDstjurisaicaios. E ere is vi:tally tD statutoq7 Lar regarttfug tqstees or governingboards of efeercsynary institrtiots, alat tJle case La is sSnrse.'

tds befurg t}e case, draritable @r;uaticrr Ld r€a to a large e!.t€nt dblri\real (often

in q1e* ard drErailictory trays) partly frtn each of the t-hree dher areas of lan

ritere a sinilaE ttDe of ficbiary &tl, elcists - prirrate tnrst La, cfiaritable trilst

La, ad (hrsiress) orpcaticlt Lar. Scne of tie rsrt statutes ard qrrt ibcisicns

leferred to abse dlc clariff rEtters orsiderably, ad tJt€y will be e*aninedt later itt

this r€Fort. Ib ..reqr-+erf ans tJc qEsti6rs !r ale qerned with he[€, luE\ter,

reqldr€s an uderstardijlg of ls ctraritable 3rror:aticrr

standards lrave erplved frql

tlre€e dhr are.s of tne la.

l. [|e 'hdent fit:stci tufe.

the fist ujc Jrdicial statgrnt of a fidniaqr stardard of care irr .briadr

La cm irr the case of Eanrard Aolege v. &rlr. Itds lEsEadrusetts opiniqr, writterl

_ in 1831, Btates:

AII tl|at can be reEried of a tnrste to inrr€st, is, that he Etrall qdrt.lrineelf faithfirtty ard *relse a sowrd aliscreticn. tb is to &genrc tsr- Gr of pudene, discretian anal hteufg€rE rErage t}|eir ffr affait8, r!'t ir:legatd to EEcrrlatidr, ht in legartt to tne penarant dispositicr of tbeir fr:nds,carsndeliing tne^pqrbabfe iJrE, as uell as tjte g$able Eafety of ttE c4ttal

- to be inveatd.E

Srdr Lcquage @ to be *rffr ae tle lrrdent rur' (nore reertJy, 'trlrrderrt [=rscr"

c 'lrrdent inneatc') nrle. *

S= targrage of tlre 183I case set t]re Ftt€Jrn fc aII

_ t}at foillcnedl - \rariatios dr t]e lul€ are applied h the realnE of charitable trusts

and charitable @IDnatidrs, ad t}e sctio cr llabillty in t.he U.U.I.F.A. beus a gpoct

* ibal of slrilfarity to t'he Giginal "gn&rt investc" fonrrlaticr, egpec*affy rdren cre

tJlat raarly cn hldrrd ard fifty years of l€qaf histtry s€patrat€ the !ro.

2. ltivat€ Thrst Stardads.

It is in tne !€alrrl of pinate trusts, ltrver, that trhe ipaUert irrvestor" nrle

ms fit-t fuirrJ:Gd, dd it is ths reearlz to e*aire lrivate Euets irr Ecre ahtail.9. 3

Are fiatniariea rcferteat to irr t.lp Enrad Aolleqe v. trcrv case $ere tbe tnrseees

- of a gitrate t€tentary tnrst rfiich provtaea fc a dtirect beneficiai (tfie testa'tor's

tdfe) anil t€ irstituticral rgeilderrrn. ltrp existere of a spcific beneficiary (or-

beoeficiaries) is tJte test of a lrilate gilst. flat the !,ais6r dt€'tre otr a lri\rate tnst

_ is to ;zovide for tJre edmic s*port of a specific fudivj.afuat or intiviahals is tie

Frimry factc rrderly:Lry tJe starrlard of care to tdtidr its trrstees are heldl. 'Ihe

- esserr of tle tnrstee's fidriary relaticrship is his respcrsibility to dteal trith the

tnst propeEtyr for tlre beaefit of' tJE tnrst beneficiary. "10 " (r)t= birsteer s dlrty of

care nDs to ad ts €nfqod tg tlle nd irrtirilual."[

- -E@-in t;1e case of grdaeicrs, tb rrcdern usage "pnrdknt irnrestc' is eqfloyredl:re tfxu$rort

[n fiduciary stddad of carc regtifued of tJre pivate tnrstee in nEking imres€cnt

decisicts i5 tl|e trt'et, etrfugent anil restriciive $lch staltad. ltre tnstee is bondt

fiEt, to tlE dictates of tl€ ceatc of the t$st as tJrey are erpressed fu tje tlrrst

instrrrE rt, to r*ridr tj:e orrts terd to Equi:.e stric* fidelity ercept uder \Eq'

uusual ccJcrr€t nes. seord, tjle tnstee is eoq=cted, as irdicated above, to act

witn elctrsc loFlty to the t:r:st ter=ticiary.l2 *rird, t}e trustee is Sliged to

act. ijr arEd rritn *ardards dbri\real frcrn t}e lntent irrrrestc nrle. "13 Basically,

tipse stardards !€qtrirc that irnlesErent. decisicrs be nade fur tlte pwpose of preseruing

the tJust @Irrs in tie interest of :rr presene ard frar:re berEfiqiaries ard of

prordairy arr dqgrate raate of returrr retatirn to the tlllst p4ou".14 In otlter rmrds,

strict att eralusive Fr rsuit of essnic rotirrati.srs is gercrally aooeptd as tne

"standard of caren fc ttre nranagsefit of pritrate t:rlst fur\reslrcrrt firds.Is

Ary aE G tEF of tl|e beneficiaries of a private tnst has staniilg at quity

(ard easicnlly at la] to bring suit against l*re t:ustees to €nforce the tnst,

or to enjofu G &taiJr rdress fc a beadr of tlust. Eicegtirg fc tfte legal

$ardian of a. beneficiaqr rdp is ircagacitatea, stardirg resides solely wtti tne atrect.

beneficiaries nftd ir the trlrst insE rcfit. .Otber persrs rho Ey Srritlentally

benef:it 6!@ tJF tsrst are rpt atlord stadjlg.l.6 A sEict standtard of liability is

Qlied to Srirrate trustees fc Lcses sustalrrd as a result of heac$ of tnst, lere

negligene, * i4orra*.I7

EEl|e arre a fgv excepLicrs r lrever. l\p of the rcst ftrequer*fy citedl ale t}te

case In rc LsrlcnlS ad tlre secalled 'nrle of illegality. "19* witt \raryilrg deg€s

of q*rasis, tnese ercpaicos are rptedt ilf 4l)lieat to tf,re !€alm of dtari..Dde

@rFoltatjctts by a n$er of antlpritiee. llle present auurtr, l*ver, feels ocupelJd

to take a qrsavatlrn sitarEe sr drese poittts. Wlile hh aryuurts ctriorsly

harn re valiiity, raitber eess to m to be of sufficiefit stt€rgth to juseify

decisict to r"f.-t frcn traatitlcnal aclivities sitJurt rwe €rllelling subsndiary

ar!'tErtsi

* $ee arErcnts are exanrined in rore detail at rrctes 18 t 19, i-nfrq.

-25-

!rrr- !

Oe furtner ereptjor stsrld be qsiater€d. tlt}rcrplr it is argnrably rrcEe a

reogritfcrr of an erel$ng M tltan a &firrite Firrt of lar, widle rptie rns talen

tltren Astir lf. S€tt artlored a rp sctidr of his autlsitatire sle latr of thrsts,

irr wfridr he "auu.nd his etdfi€€nE rt of wial invest-ilg. ...20 Er tJris secti.6l,

first ryearing in a It78 ${I,lgErt, S@tt writes ilr part:

lu:stes in ibcidirg uiEtber to irlr est in, c to r€tain, tie securitiesof a orpontict rnay 1tt;lerly srsider the soctal perfmrwe of the orpcaticr.Ery rry abclirb b irrt €t lr, G to !€taful, the seqriLi€ of ctrnraticnsstoee acLivitieE G srrc of t]r€rn are qrtr:arl, to frldasrtal ard generafly acoeptdethical prfncipfes. 8rey my qraidler Eudl ntt€rs as trnl}rticr, rae diserj.uinaticr,fair qllofrst ad qrsrrer respcrsibility.

llt an iJseasit€ eattert inetituLicnal fi&rciaries, r*rether charitable, sJdtas fqlldaticts, d edralioral ad otlFr draritable inseitrrtiors, or ruFcharitSle,slrdr as tnrat oqanies ad ircurae cttlEnies, have beooF ayare of tnis prdfaas to tlE dDi.e otr iruesEsrts, a[d ha\E @ to realize tbat tfElr ]rane a qernin the social behavtc of the orporaticrs ir rrhose secrrities t}ery irw€t. Oforrse tJrey tny ELI betie\re that' a orporatian elfrich has a Froper- sense of socialcbligatict is nore Ukely to be sressflrl in tlre ldtg nn than ttD6e r*ddl arbent qr *taintq tne mdnn aEnt of, gofits. hlt evEr if ttris Fre rDt. so,the irweat*, ttnrgh a tnl8tee of firds fc others, is entitleil to cqlsidbr tlErclf,are of tlp cuDtty, ad 5gn:afur fton anoriJrg tlre use of tJp fi.rrits irr amnrEr detrircntal to sieltlr. -*

SEtt's tEtise is regufarfy citedl blr tln ccrrts as gg artlsitatine sq)re 6r

truat Lan, so the aignificre of this statsEnt stpuld rDt be r.rderratd, Sre

pres€nt arrt}tr, luever, sculd ryly the s@ carreat to Sottrg dbclaratiqr as Es

a€gested fc tJc Irr re Isdcn ad 'riule of ileg.Lity" poirts rrt€d abone.2l

3. Charitable eust Stardards.

A dnritable trust is a trust established for ctraritable FrrID€es r:ather than-

fc the eqsnic st{)port 6g 3 cE€cific nanedl inctividlual or grsip of irrlivichrals. A

_ wide variety of acLivities ha\re been held by t$e qrts to ccrstihrte ctraritable

. FEpo6€s, alt}rcirgtl €nactfy *Ere tlE lire befr,een dnriEble ard rsrdraritabLe

- Ir:Epose lies is rpt alra]rs €s!, to Aetelmire.23

fe dnritable t:ust, ad the stadad of care teqnircd of its tnEtees ale to

a large enctent identical to tlE Fi\rate inrst. 'Ganerally, a draritabl.e truste is

_ anbje.t' to tl|e l.as of pivite tnsts if dtariEbl.e tJ|Ist La is inccrnplete or

ud*idd.'2{ lErre are tF Ejc differerres, tu€\rer, ard ir bth of t}rese tlte-26-

durit$le tnst bears @e sisilarity to tle draritable €rpou.atirrr.

AF fiFt differere is in tlE area of tnEt pEtrDse. bth Srirrate ard draritable

trilste€ are gemrally allqrd brod aiec-eLio to elclcise F€rB rcc€saq, for carryirry

cut of tlusE trEl$es, arrt the outs will rDt lrtt€rfeEe $ith t.he erclcke of sEh

aiscEetiarary po,crs €rcpt in cases of ahse.2s fE l'atitlde alLcneat charitabl€

tIlrstees is re*bat btoader, lwvetr, because iJr ditiqr to tne lri\'ate t$st dtrt!,

to mke tlte tnst assets padrtirle, dEritable tnstees have the respcrsibilfiQ b

trEnaEe their assets irt a rnyt tlEt rill beet. effectrnte tie tnEt FEposes. El tI€

case of ctraritable tlusts, tiis alroet afuays requires tbe qrsidleratio of f,actor:s

ottrer trh.tr edE dc goartiviry. SEEe is tlu8 :irt ohr€al a reogniticr try the orts

tbat tlE best, tea|g of fir.lfillirrg trust IrElDs€ is an anolvilg lather tJEn a static

stoegt. Sfrbstantial &viatims fi:Ertr the €rqllicit tenrs of a draritable trrrst

hane been allcnd $fEe ttre tnrstee3 have aUegeal a dtrty to depart frtr!

tlre spectfic tere of tb tlllst h o& to ntilize furlvative te*rfqrs to accotPlish

tlE tnrst, trrrtpse. A fEirEqr e$q)le of this is tl€ case hnlen-.Man lre fG

@r\ratescert Glpled Childrsl v. fury 61teqe.26 ls eae U. t.l,8tdr qrnElrts:

(Tlle ltissri S4E@ 6Et...itttd tiat 6rts of eqlrit!, will rct futerfeceldtlr tlle fdr ant rsscnabl.e exercise of suctr discc'etio unless tjte errelciseof disretian aflrurts to $rch a substantial aeparture fifii the prinary Frposeof the cttarity as b aunt to penrcrsiqr of tte trrst prrtrnse.27

Gte sedrt differerre befrreen lrivate ad dsiif:ble tnrsts r€1at€ to t}te natrre

of tle beneficiaries, ard tftrs to t.lte issues of stadirtg anat enforoaent. A. tJlrst

riU rrt be r*held as draritabl€ rnless tlre Ferscls rilD ar€ to benefit frrcm it are of

a srfficiently larF d irdefirdte class that t}re omrnity iE irrteresteat in its

enfoarmrt.2S "(tlh" benefit of the ciuritable tzrst dri the dtrtsy of the tnstee

nn to tJre generaf g$lic :atlrer tJran to an identifiable beneficlary."29 ft -r"t"

have rylied t-lE strict private tnrst stardard ef rirhirlty ftr IGs dtE to jryrcper

trr,restsgtt".30

lds fus rDt Edr tbat. all tfp ptereial beneficiarles of a draritable tnrst

rsrld tE te staniry to kiJtg arit. ltr 1rrsrqrt cfiaritable trrstees ftil beirg eCtjec'ts

-27 -

-

to \rE c.tLos sd ureaslble litigaticr fim a Jarge ard Bhiftirgr clasa of potendafIt

bercficiari.es,'-- tJE AttGney GerElral of the stat€ urder rfio8e La||3 the tt|lgt ks

Ggadzd is usuaUy tfF party cftarged with enfqcesrt of draritable trqst".32 S,e

IrttEEry GetElal uy initiate scalled EErenE patrjae prcdirys cn befialf of the

citizeng of the state. crauenges by other Felrsqts are gerecatly .not peEnitted.33

rf, lrrever, a benefieiary can derrnsEate that he or slE "is entitledl to receive a

berEfit rrder tlre tnrst dridl is rrt rcrely the berefit to lnricfi rr=rbers of the ptblic

in greraf are entitledr '3il e+.',ai ng ttq, be gl€11td. EE Attorney General is sLiIL

a m€sary lartt, b tle acticr in rrpst instances.3s the lads lelatirq to stanttiJrg a16

enforwrt fu ctrarit&le tnrsts ant draritable orporaticrs a:re afirpst identical, s

tlEse qEstiqts will be treateal in rue dt€€if in the iltscusEiqr of ttte latter whidl

folfors.

4. B.rsiress erporati,ar Stardads.

ore of tbe aqurEnts in tlp secLio of thiE !€port tlrat, foltcrrs t.ill be t.hat tl|e

mdeur t:erd is to 44rly the h:si-rss @ponatiidt stadard of care to mny aspects

of dtaritable @pdatidt e€ivity. Se ranificatios of the hreiness standard of

care rill be erahd tlEre i! sore detail, tfts crly ttre basics are resiteil lcre.

Briefly, tlp gjmry ali"sti.nctio befr,reen a b:sirEss @rpo!:-dtiqr ant a Fi\rate

(,r ciaritabLe tnrst is {:hat a hrsirEss orpcati,cn directc's pEirnEry respcrsibility

is to po<bre ad rcrtrrn a lEofit ftrn the oqnraticrI s _ b:eiress activities to its

slrattirldets, ratler than to prodhe irre for a specific beneficia4, or beneficiaries

c a dpritable FEpose. As !ffidr writes:

ft tre ry !e@ects, tlre stardards for a hrsirrss c:rpmtidl cli.rectc eito tfet€quirsEcs of tnrstees: a direc@ lras a dbty to qrilre.t tlre affai:rs of the@rporaticn rith tfie ut@st gDoat faitfi ant fidbfitlr to the inteEests of tjre@Fffibe-ad rith &n care, skill, ad diligene i.tr the rndertakirqs ofrEEgeErC.re

ltte @lrlt of dlieseticr afb,gl b8ir€ss spcatisr <li-r**cs t€nds to be crsidterabLy

gEeatett tl|an trtrat alLold trusteeE, lrevrer:

Itrder t{E our J-an, orrts ale afupo€ed to dve ttirectcs a rridb latibde in theEDagGrt of tb erpa| icrr s aff,ai.rs, as lcg as they resoaUfy erercise anlust,_rnbiasd jrdgwtG. Dds is often referreil to as tJE bsiress jdgsEntnrle. "37

-28-

Ic@Edingly, bsirgs orpratic.r direc+ors rgy b hefd liabl"e crty for groes legligere,

a srsidenble differere ftcm strict tlust, liability standads.

C. Cfrarit bl.e epratims.

As t€8 noted irr the introdnrLicn to this leIDEt, grrpshire 611e9e is organizetl

trder Massach:setE la as a charitable orporati,*r. At tfris trrint, rn can bEn to a

specific olsiabratior of Eaqrsldre, and of ctraritable oorporatidls in generaf. lEre

foregodng disgressicn into the stadards of care htdch ha\re Aevefoeea in lelatecl fields

seerccl necessary becar:se "the 1E!, ltoverniry clraritable is rc't ItErely a

bmrr*t of tlust la, G @rpcafe 1*r, or qttnc.E l"ar, hJt is instead sri generis,

areilirg to s@ €!.tent cn all tlrr=e of tie older disciplires. "38

lAe \rast lEjGity of bodlies qganizeal for draritable Er.r4Dses in the U.S. aE

c$aJiitable ltre poolifentior of tjris entit''1/ is, lwver, a pheruerur of

re.latively recent ci.gin. As lat€ as 1969, a EbEd Eldrdatiat !€pct an endcnslt firds

statd that " tJe great ard rapi,tl irsease fu tjc ruber ard agglegate rcaltll of

charitable @rpoltaticns lras talen tlp }a b1z srrlqiser' andl the corts ard ccngrtntors

are still groping ftn a olutiqr. -39 By tnat tire, l*ver, ltdesEicnal opiJdcn,

ad, slely, k6f rbctrirn hd be$n to rc\re iJr the directians sr ritrich t}e rEiJr

a4ntrE tts of tjris t€poft arc based. fEre rEs a gnrf,ing rleoglitior of tlE grobla

tlrat by I9?2 hd l€at tle f€ticnal @rfererre of CoilrissiaE!.s dt tlrifors State tac

to attsrqrt to 6dify a rs Etardard of care for charitable @rporatid! dinectors:

Fear of r i rhiLity of a. . . tJrrste tB]r ts\re a tlebilitaling effect updr r|Erbersof a govecri.q board, v*o .ir€ often trrcdQensated pUic-spArtea ci$zens. _Gleyare tnnagere of rurgofit @rlDlatids, grnaing a Erique . . . iastitutisr.{o

Itp elgEtts of tl|e tJ|Jst, are absent in tlle case of tbe draritabLe @rpon-atiqt.

Uissing is, fi-rst, -tl- irrtenticr to G€ate a t$str'r*ridr stee ftsn ttte tnlst

fustrusrt ard s€ts fdtlr t}re tss rlder htrictr tjle trust is to be a&nilistereal ad

i.dentifies.tlc beneficiaries. ur its plae is a dlarter gEdrte.t by the state in hfiicfi

tfc orpooaticr is cgrizd. It foutrs tiat, Eesd, tle draritable @rpdatjct

lad<s a qvecticrnf beneficiary c beneficiaries. Insr€ad, tjre @rlDratio is its

-29-

(r.!t bQe€tci.4r, ln a sense trhat rilt be etabcateal cr shetly, d stadisg to entroEe- rlrhility usnffy rests with tJ|e state attoErey gerEral, ratler t-han rdth an indiviatal

or irdivicisls for ufse bEfit alaE the trrrst ercists. Ee trD distincticns mke

tle draritabte @pomticn a quite differ€nt $rt of legaf edity ftsn tbe tn:st, ard it

* is crr t]le h'eis of these irD di'EtiEt, bt hterrelat€d factcs tjlat a rs stanitard of

cate arrl rule of liahi r ity for draritable corporatim directors ltas been ernlrdng.

In qE lesF€ct, luEvetr, tle strict, trust standard carri€ over irrto tlris realn:

Aftlrrdt a dlaritable orporatlm direc"tor rurld rct be subject to tmst stardardsin otielr iJlsuuG ' the ctraritabl.e ortrnraticr is organized- to drdrdster thedft! of afsss ftr edrcatioal 1uryo€es and tJris irr@rporaticrr cbes trt liersetlp <firector 5 rr{ csi trEte the property placedl in tJnlst.- Dr uqz acticr refrAingthe'1-umnent dispoeitict of tjteir furlds, " Eliversity airectcs lrrrst be lEIdto t]te Pr€entatiat of er&Nf,frrt fird assets, rat}er tlan Ule riEk inbererrt iI€rprate profit rrtirraticr. -.

GIE, it turld sea e!rtt@\, urf:fcefy tiat glfficierlt jusAificaticr cqrld be forr'd

- fon any 'sial ifirestirrgn sctte tiat mrtd plae ttn endcrn:nt €Exrrs in jeqarray.

It stnrl-l be notd ttete that m,rctr of tle dlebate abut t}e cbaritable @rpdatldr- statdard of cale bas focuseit ot t}te q$restiar of t}e omership of the endorrsrt 99CES.

_ 8E StELidt is a ocrq*e* on. lre rrcst liberal qstnEtiqt of tlc pr*len rdEold lDil..l

tltat tJle draritabfe orpontiat is tlte ab€olut€ cnrsr of its erdolrEnt filds, ad t]rre

* is sre s:Epct fur tlris vierFoi$t in tJre reoerrt case f.ilr.42 Ge argnerrts adrrancd

lnre, lrever, do rrt. d€e€rd ug[l an], particular nesolutidt of t}is questirm.

b the dli-tectors of a draritable orporatiqr organizeit to prc\ridb hidrer ectrcnticr -

_ specificaffy, do tlle fusteeE of Earpshire ollege - tra\re t}le legal arthorlty to adcFt

a ocially lespdtsifb irrres@rt policy whidr rrrufd requirc tlirrcstncnt of tlose

- €lrFoEate security isse elrre*fy in $e 6lfege's potfolio dricfi are dle*d saially

, i^rresporsiUle, ad rnrld liutt firtlrer ilrrrestfuq to t]tose securit!, is$es rdrich Eet-

t}e oll€ger s staldatds of seial respcnsibiuty? Based cn the ED argLnEnts drich sitt

_ b dvanoeil in tfds section, tfe poreserrt anthr's ursrer rnrld be E, stJbject. to trp

careatg:

-30-

1.) Enfr poliey *ddr threatend the Eecurity of t}re erdarncrn o ns hnld

alm't etairlly be iuegaf atd Eu]d t}us eopose Ure $irstes to ttre Srtential of

rirhilfQr.

2.1 Et.ler Dst circtctarcesr it Errlit seen rnf:ikely tlat u|e Tlust€es elrl|l be

ertain of tlEir &ility b jugtify a plicy r*ridr hd u,e po,teitiar of aar:sing a

severe rngative tnpact qr the factcs of 'risk actd r€tutrn.', (eth in legal arrd irt

financiar tcros, tlris Erestl,clr rests basicauy cr t.tre sility of tlre tnvesilcrtt

tEragel!ts b trEintain a sufficiently AiveEsified pctfofio rdrile carryilg 6111 t5e te!fist a

of the policy.")

1. &:glrirc @l1ege Ae A Charitable Corporatiar

gaqlsttre Oollege is organizd utder tne provisicrs of CtraSrter lg0 of the

Massadarsetts c;errral r,ars, "cGtDraticrs fior Graritable ad cecitain other RxSnses. "

Its dtarter, tdnically lcffi rlraler lbssadrusetts Lar as lts '&*icles of Orgarrizaticr, "b

ms dopted Septe*er 17. 1965. It trrcyides:

qP FirEltt FIriEes of tne corpcatidl are to €lErrage ant adrrarce rlr fr6srclEaof lcudedge ad learring' ad to prote tlre .a,'eatlqr of yong ncn srd rrnenUy estaUfO*ry anil cdrcing a ollege to be catld naetrire-Offege, atd infirtlcrare of ttlese trrjrrEry prrpoees:

-

4. to solisit ad ..oeFt Slfts of lurey, securities -illat r€al and perscraf!rc[]ertli, eitner for clr:tertt use G for erdomrt ard eitjhr foE gene!:afFryles c ftr s1-clfied trrJriD€ea, ard to ddnister ad dlistrnse of t}e sae ilecoordanne sith tjle telans of tne several giftsl ,q5. to irweat,, teinrrest, and ddrrister trhe fi.[lals of tlle or1rraticr...."

As noted earlier, Farpsldrc @lleger s Thrstees are srbject. to the lars rlrder whictt

tne orpcaticn ms orgarrizeil ad tne dictates of its clrartcr. SiJtce its adrytior

by tfte leg'islatue h 1976, it has also b€n srbject to the pEoyisidrs of ttre

lassadusetts versictr of tlre ttrrif@n tEnaEsrEnt of fnstiurttcnal l\rds Lt.46

2. Ap "Asiness Stadard of CaF' ergrrrErt

fta cigjnl te*t of tlp ltrrifm terag€rsrt of Institutioal nmds ec*,47 rms

adryted ry tfE l{atiatal Oqrferere of hnissicnrs cn ltrifoun State lr:nrs in l9?2.

l,F hilre afreaay torctrd cr tlre i4e{rrs befiirrt t}re anftinl of t}e .ece.48 ltre raticrale

-31-

4odieat ln ttE Ac{ ts 5er?rape best eplicated b[' t}E 19?3 al*lsisr of tne l{l't

Hiq'sbfue SEEIETTE Oanrt, rrtrich raheld tne qrstiurtianality of tiat state ' s nersisr of

tlD lct. !E Jlrsticee wzse:

Itre rcseat lct qflies e*clnsively to f,wds held by an elemeynaqr iasLitrrLiqrfior its erclusive use, Hit, qr !rrrpo€6. Iblre ttrere erd-sts rD qflic+ bebcenan irre beneficiarlt ard a rtr. irdeutun, lpr is there tbe uenEl fialrrcia4trelatianship tmrtls beneficiaries rlridr eilists-rfu-a 6st-t nnaffi--rga artjle erelusive use, benefit, G Fr4Dses gE its ddnisbiator alr are the firdsregtdatd b1' this ect. (EEhEsis nite.)--

en aside of a sqsrhat saEntic nabrre is neoessariy he!e. Ere teun 'fidrciaq,"

is fre$srtly nsed, both in lay fargtnge arrf in legal uritjrq, to bAicate a IEr$n

er4)ies a peiticr of sfldere tmrd otheB, urd nust act dr tlEir behalf ad

h their interests tather tj|an in a self-lnterestedl nanner. It is iJ| tlat s€$se tj|at

- t}te te:o "fidrsiary" is frequently Alied to clraritable €rporatiilr directors, ard

evsr brsiness €rlpratim directors, Fitjrort rrcsarily being irdtcative of the

particrlar get of stardards rdlich goven the relaticrship in qr-sLian,50 ud it ts in

_ tiat sense that tbe telo has beelr €q'loFd tfusrghcnt this r€port. In tie qrteert of

tlE llrifolrn Et, lrever, "fidrsiary" is useil to refer €nly to tnrEtee ad their

- retat-iosttip to tJte tnst benefieiariee, and senree as a Ey of cltstirguislrirg

dtaritable @rF:atlcn clirectcs frctn tnrgtees. tre rcdirlg of trE !€r Eilrpstrj^re

deci siqr irlr olres a nEgrritiqr tlEt '(b) eca:se tle trnstees ale to nnnage tle

- enilerert, filds cn befialf of tlp trd\refsit!, as a v,irle, tbe endomrt, fsrils are rS

an erd ln tnemselves. Rat}elr tIE]r aE a ttEans to adde\riJxt tfre uriversityt s Frogrrar.'Sl- ! .rs, " (af draritable ortrnnticr is itself tlre beneficiary of t}le fillds it

afuirristers.'52

lEE ll€rd naq)stUre opjJdqr €nliirres!

tcse inslitrti.qrs are irr a eitr:atiqr slt}l regidtd to ttEir erdouent frnd.ssiffilar to tiat gf a brsiness @rporatiidr wittr respect to tbe adninistratiqr ofits gtl-l*y....15

lris reogritncr tlat in tle mraEacnt. of their erddd€srt firds, clraritable

_ sFllatjclr di-tectcs ressble brsiress €Eporatndr directors, ad crSrt to be so

grrrcnd, is tlte Ein ginapaf $hictr guidd the @mlssidErs h their dnfting of

tfle Giginal 'versicn of the Inrifouat lct: ??_

l . : . l ;

tn gtper Etadard otr lespduibnfity [for a dnrit$le corpontl*r directclis u€ a|a:ogils to tiat of a directc of a busiress oorpomtldr than tlrat ofa . . . trulrte. Ete kt establish€ a starda$ of hrsirEss care ald [rr|dererdtt\in the qrteoct of a tugoflt institxrti@.S4

AE Etadad of care portisr of tte &nnisEiorrs' versidr (Sec. 6, Starrlard ofRR

ffitct)'- "fecificafty 1rro\tf&s t}st ffiers of a governirrg barrt Ehall erlelcl,Ee

ostlnary hsiress'caE ard lEuaere urder tt€ facts ard cinr[gtancE€ preuaililrg at

t'he tie of tlp ac+ian c dsisiqr. "56 t" staniard of ca:re porticr of tJre I'Essactusetts

lct' lsrever' tns a ctsiderably diffe!€irt $ording. l$e cigbaf sdidr 6 is diwicted int

ItD sectiqrsr crr labeld "&rues@rts, ' ad tJte otler labeleil "ldrd.rristralicr of

traners of bardl liahitity of rders. i CE bsirEss st*rtard of care Ls rC

engficitfy srticnd.

StiIL, tl|e secLisr dl nDwestrErts' of the f€ssacfusetts e"t (?. 6) pEolrides

a fistirg of tlre rytable tftEs of fui,es@rrts fc a draritabl.e trporatjar. Elis

eciicr begrin:

Dr dilicr to dr l.rnesffi otlpnrise artJrclzd !1l U!, c by t}le a4plicabl€gift instrucrrt, ad qltrcut Estrictjar to in esfisrts a fl.dtriarrr u,I ruke,frre gollernrg 6.d, Effi-alry speciElcffi-4plicabfe gd-ft inEtnmtt c tn r:ta aplicable lar3@ than l.a rcIatiry toir|\eststts I a fidhrfary, Etz.... (EEhasfu drEls-r-

[lrB, irir tlre cctidrr s ir*roartory par:agraph the dnritabl€ @Foo?tirm dffu€ctof ig

dUstingnisheit trrie ftrcrn Ure (trnst) ridx'iary - in rcgarif b tne boeailt.h of d.iscreticr

as b in\r€sffirt options, dd in tlegard to t}e linitaticre dr tiat discreLion.

' nrthennre, in the sectidr nldninistntiqr of porers of board; liability of

rs$ers' (Sec. 8), tlre trtresactusertts versidr usee aLrret veriatrln t}e language of t]te

d.d.rtaf te.t b *ecify tne fiactcs to be qpide-redl in t}le e*ercise of "busiress

carc ad lndere':

Er ri'nin.i Ffr?lian of thelners. . . to Eke ard r€taln furtregffirts . . .,de!.s od a guternirry boad shalt qrsiibr lc:g ad Ehort te@ needs of tIEingtifuCicn fui carryirg cr* its a/trnariorrl , teligiore, cluritSle, or dherarcynry Frposes . . ., its EE€e$t ad anLieipateil finarsi^af lequirrsrEltts,eqEcta toEl rear4-dr its irtr es@s, Irie level trrrds, and genenlsnrlc dditi-dg.58

-3 3 -

tre taesadnrsetE \rersicn even adds dDtber factd b be qrsidbrd, -tfn pdlerc

pecufiar b the instituticr,'S9 ,ot fcud ir ttre @mdelidrra' versicr. IhfortrirEltdllr,

ro sigrdfiort caee la bae rearltd sirE tJ|e UassachEetts \rersion of tlE Act Es

adrytd. Espite ttE lack of *,eific rlErrtidl of tl|e hrsircss stardard of care,

lu€rrer, tte language of tj|e nersian of tlte ect qllcable to EilrErBhfue I s $tuatees

seft to inply tnat solt of stanalard as strog\ as tle ciginal tect.

lEssadttrsetts ctEritable €rpo!.atidl airec{ors tsild ba\re a goodl dear 6f

juslificat.ict fc aillnrirg to tte h:sirEss stariard of care even rrlthcnrt tne antJrcity

of tie t[rifm tcl' bas€d^dr tJn grcrirrg body of case Lan ufridr ppliee tlre hrsireeE

stzllard to UEi.r aeeivities. Altlsrgtr in tln past 6rrts hane sG.ims aplid tne

tnst stardard of care to ctraritable dpotlatian dio.t*=,60 sine ttre early

ni.rEteerFse\rsrti€ ure tred lns clearly been irr the @oeite directicn.

FerfEps the nDst alecisive c:se to utilize tne rbrsirpss stadard argrncnt"

ras !!g y. Irrrt l*bb Fayes Natianal kailiru Scfrcl fu lbaspss€ and lftssidraries.6l

lhis caee funtolvd an *Lior by a grqp of patients agai$t ttre tnstees of a Dlstric€

of 6ltr&ia lrspital qerated as a dutitabLe orporatidr. te glaialiffs alfegd

tJtat tJte tnrstees hd brcadrel Unir fiiircdary.clrlry to $per/i6e tne mnagan:trt of

tlE lDsgita.lr s invesffirts. tr€y ask€d tnat tln tnrstees be held fiable for any Jss

of irse tltat rEight bave becn sufferd b4l t}e @rtrmatiar, dil tlat tlre tnstees be

rgowd. ltte f,acts in the Stern case irdicate tiat tlte anlrt of irlresFdtsibiliqr

dgrsrsEateat by tfre &ferdarrt trilseees ms reatly quite rajor. As just cn eorenple,

"tEitber tne Finilce Gilnittee rpr tle lrn estrEnt Ocmnittee ever rEt or cqducted

hrsirpss ft,or tlre abte of tf,reir <seaticr t19601 until 1971....'52

En orrt, as laight be elgecteil, todc a clim visr of all tJris, anat folrt the

defettddtt tnrstees gtrifq, of beadr of fiawiary ttrty. lte @lrt refirsed, lpwener,

to gant aqr of tln relief sorgfrt by tJe plaintiffs. In lej€ctfutg tJE tnrst, starilads

of, care td liabilfity, the olt rde:

Basically, the tn:stees are &arged witJl nriwnagwrt, trcn-mn4pelt, and

-34-

serfdelirg- tre :rp:icaute Lan is rnsettled. EE ctEritable orpooatiorr is atefad\rafy rsr legal ertity driclr does tpt fit reatly^irrto tl|e eetaLfisheal 6mlrr" categories.... (ll he rcdesr trend is to €ly coiilte ratlrer t}ran tnrstFillciPfes jn ikttendning tne Uability of tle directus of charitable erIpratiolsr,becarse tneir-$lrticrs arc rdrtlaUy inliseirguishabfe ftqr tneil '1rlre' aorp6ateonterparts.63

[te Stern dbcisicr is rw widely cited, ad t]te leascitiry db{relcped t$elie tEs be€rr

erylqpit in a rar$er of rore reoerrt qlrt qinicrs.64

fhe girniples of la.Afuqrsseat here arle applicable to rrl charitable @rlEnrtidrs, _

so it is rrurecessaq, to Frove tj|at orleges ant mi\rersities in E=cific strcurd be

subject to brsiress @rporratjdl stanrdarrls. rt is rcrtlr notin€t, lurever, that ttte

sifiilarity be|trEen $ese irstturLidrs ard Fivate bsirpsses has been ryecificarly

le@Sdzd irr tlte -rert cae Larr.65

ft tfiild ttnrs sea quite clear that bot]r fui t€lms of t}e mnt of diseetiqr

allqred, ad the stadard of liabifity irrv*d jrr regard to inreslrent decisiors, tlre

directors of an ir|etiirrtiqr srdr as silrpsldte 6uege rf,ild be srbjec{ to a thrty of

cate tudr rue similar to tne ubenl brafuEss standard t.}rdr to tlre strict ttllst

stardard. 'Brcn before tne develogurt otr tne orpuate stadard aPfied to dtaritabl€

qFratjat dietors, t.he H ms to arnid a slstrrrticn of crrirers[ip feadj1:g

directcs torard tbe Dre strfuEesrt, staErnard for dbtl' of care t€qufu€d of trr:stees.'56I

3. En 'Gnr*er Arriges' argr.ert

$tten lpld to a hsiress stan&rd of care, tlp disaeticn allorcdt ctraritable

@Eporatidt alirectors in tlre rnalcirg of investrent dlesisicrs is a goodt dteal broader than

tbat altcr'red trustees. tre arglrant ftr ,fplying tjre lrrsirra.s starrtard is rct that

less acco.urtabiliq Blsdd be elgected 8m draritable deGatidl directors, brt

r:atlrr t}at bJ virlrp of tlp rnrue of $Eh institlticts, tne dir€cto!:s' iesporsiJrilities -

exd tJtae of tJte fidrciaries of trrirrate ard draritable tfilsts. [r t}e case of colleges

ad uri\relcsities, tle dtiEctors 'are to ensr:re tJrat tlre eahratisraf goals of tJ|e

irstibrLicnr s ctrarter arle ffi, anil tlEry rrltiretely qrtrol all of t}re fwds, and

oversee rll 1t16 rniver:sity's lrlogtrins. i67

- 35 -

As rrtd beftEe, epdlire Gllcger s ctrar*er trrotrldbs that "tie 1ti.m4r trrr4oses

of tbe clnraticn are to erErqte ad dyance a1l brardEs of krurleitge ard lerdrg. . .

by estabfishing ad crihrlirg a ollege. . .' lre orenridirg legal dligaticr of

tJE Thrstees, in GtdJrg| decisicrs, c iJr anyr otlrr rmtter, is to en$rc tl|e

of tl:e Ollegers prrtrnee as specified in its durter. It is ir oEder to

_ dve tJst tlE Tuiite

rEasure of discretio to rnet, tlris cbligatJor tiat the f:rrsteE

muLd be lELl to a hrsirress stardad of care.58

It is &eqturtly aqued t}rat tJte edsticnl irstitrtio is a unique entity ir a

dmoatic seie lz, vrtridr serres as a 'safety valve" against "the tyraury of tle-

rajcigy" b1z 1zodairq a plae rtse irrtellecural wtr can be carrieat cr unerrunberedto

_ UV prevaifing tjde6 of, grblic cpinior. * ttrile this nudr sesns dviors, scne rs:Id

claira tbat tlris special firr.ticr catrries with it at dligaticn tlnt ollege ard

- trinercity policiea be fortnrlated irr a cially ard pliticalty "neutlal'nay. SEre

is an anolvjrg tsderry, lnrever, bdlr in edhraticral trrilcoftty ad i.n la, to vis

srdr inelrtnllty" as beirg reitller oesible rs dlesirable.

ItE Drustees of 6lutbia lhiveEsitf, lrave writt€lr, '(el&stianal feaAercnip

irr todayr s wld requires rrt cnly ortstanfing'sdrolarstrip hrt ako tle nintenae of

- ethical ad lumre psiticns tlat, girE eff*tive erpressndt tt cr:r hidrest natianal

idea1s."70 AF ltic$igal 6Et of IEDeals has statsl ia a strcurgly,rrcrdd qinicr?t

tiat '(a) rni\re!!sit!, ales rpt eldst iJr a \raci.trln. "' " (T)he orept of a urivel:siQr actfuq

- h aeordae wit}r its seiaf respcrsibilities to avoial qrtrasrtior of tln prblic

irtt€liest tras been readily aeeptea by tJre o:rts. "72

A qoUary to tlc rdrarter prlses" agrcnt is that the ollege c rniversity8rt

director lns an affimtive &fy to ireserrre tbe climtct eercatio. Eesunably,

tJris argttrutt 6:Jd be usd to lold that irrrrestsrerrts irr nrlear Lreapcts grd.rers,

- for €!ran1lf.e, alurld be prdibitd, slrc nrlear nr, ad ttE tircat of rarlear rar,

qrstitrttes a th€at to the clinate rGsary f6s' €drr..ariqr.

' (Ifl idegFeaat caqrrs r.rrrest, detericratirrg faculQestrdent-aitdnistratjcn

_ relaticrs, ail tle dlissatisfac*icn with tlE exeuple edrcaticnal instiurticrs set a.s

36-

inrestrE. . .'73 lr." been lnJ.t a tircat to ttre eahrcatiqral cllmate, justjqfjrg

redless b1t tln ilstitrrticr I s di.EctG. In tlese cases, it is argnrd, "the

pEeserrratisl of tt€ drcatiaral clirute is rrcae t}lan plic,y, it i-s tne pcesenraticr

of tJre fildr s ;rulrere. '74

'!lorr' a8 SE Ett:icaf Dnrestc stabes, "in order to utilize tJris legl natiorale,

i3 it tEsat!/ that eadt fuveEas|t dbcisicn with respect to seial injury be nEde iJr

respcnse to wicbspead strdtert dsrund or gFtest, tlre brildliDg of Ebrdent qrfidence

is an crgoilg, grdral Fooess ir bfiich tlrstees can gqer.ly engage rfithcnt uaitiry

for a qisis to &rnlcp ouer a particular irrveetnerrt.'7s

etirrellsity di:cctc-s, as cE olrt stated,. norgtrt not be perrdtteit to close

(tlreir) eyes to Feserrt.day realltiee. '75 !{art}a J. olsor bas written that "(i}f

t}te tJtlst€es abttelrnitE a 'cleaDr portto':-lo is essential to fufftffing tne eahrcatisral.

ad hmnitarian goafs of tfte Etl,eEity, this desisicr rust be leEpected by tjle.t

orrts."' stbject to tne caveats otlired earJier, tlri.s stat@tt aFpears to be arr

acc{r:ate reflec'tior of t-l= 1e6fity of '.oeial irvestirg' by elleges arrt urircrsities.

l. Glfts

trE qrDstian of tle legality ard prcpariegy of utilizing sodal crttcria in the

mnarytt of ilwesffin firds t.,tddt src to the Gllege as gifts has been.raised

Aeqgttly dnEfug tlE orrse of tlre lask tlorce I s rork. ft Elsrld be sEesEed that

hgaairy ad psoFriety are rrt ressarily the sane issue, ald t}lat t}re oncern falls

jJrto tlE reln of plicy as vEIl as tlp realn of Lan.

I{b Etter *!at t-he legar "1rllr3

of an drratioal instituticn, dlsprs have a

right b pfae lhd.taticns via a gift instrurEnt qr the irtvestssrL c use of dcrated

frrds. Aoeptare of srdl grfts by tlE instibrtiqr @nstihrt€ a recogniticn that

tftey Erst !s a;fini ctpretl irr acoord*re with ury $rch specifieal t€strs. thless rcdified

by tlE (br c tle qrrts, institrLicrs are held to a strict stardad of fidleliQr to

-37 -

erplieit tid,tatians olaod cr gifts. Sote eutlwities hate sugFstd ttrat

srsidention of inplieit iltt€ntlos of, tlE abnor nsy be elpectd as rel1,78 hrt

- thc nodern trecl is b qrrize, irr the case of draritable clnrat3or, tJrat:

(I)n tle absetr of cl€r irst.rr.riicns to tlre 6rtrari/, it tn:Bt be as$cd tlrat

alll abrDr to a draritable organizaticn, uhetler his gift is fe g neral suFport G forJ-- s[=cial [rlr[Daes, drtrlbrtes rith tne waerstanaing t]at his acntJihrtl.@ will be

adninisteE€d in aoordse rith t]re nrles of la gp\re!:rrirq ctraritabte giarriarieg.T9

Dre lns Frerning tlre afuinietratisr of gl'fts by olleges ad uriversitiee

orga izeit as duritable @rpotatidts dliffers frcn tbose go\renilg trusts:

[E elelE[rt of irtentiar to creat€ a tnrst is abaent irr t]re ilstarr"e of anirprponta trd\tersity siJre tJre rniversity t s dtartEr sets fcth tne grrAosesald cirties of tlre cgrizaticrr. lte chnors are representd by tfre unirrersityar;nllatiilr ann ldle @Fo.aticr is bollil to use ttE filds fu drcatiqalpltpo€es * gah36a"a* of a trust ilstnurt, ht ty tl|e govisicns ofits orluate I

As in otlEr dtdlenges to tJre &'ttors of draritable ortrnraLicr fidhrciaries,- It i.e tlE state attdrEry gelEraf rdD bas tne gjrury respoeiU"fiA lor enforcirg

cl

_ tne dtaliticls of cturitable gifts. -' Ccurts are usually besitart to usurp 'tle

prercgatj.ne of tne attorrqr generaf to initiate. . . *tisr,'82 "rrf

O*ot= ha\re tst

- almlls been grdrtd staldilg, 6re!t rfiere Ed\rersity enabcrt fin& ha\re beell

srstruerl as a draritable tngt.83

!r those cases rfiere tne erpticit t€!ils of tle grft instrucnt poohihit the

_ srsiateratic.l cif rgrsuic factors in tne mnaganent of a grft, it is urliJ<e.ly tl|at the

furd mragers ould fiJd solid erurgh justificaticr to violate sudr t€!ils. Cre

- qild dri-tahly sed( b lE\re tne teEE difid try tlle corts uder.t.be secalleal

"g gess Grirt. " erican drrts, lwver, lrare terrned to dtorstrate reluctance

to ryly.9 Et, ild it ser dbnbtfnt that a qut rfirLt be sillirg to rcdlify a

- gift ittstnmrt in oEder to atld nryial inrestirg."8{ $e fact tlrat ap G trqre

-38 -

, .

prticts of an bglitrtLsrr s sdcrlctrt find are so errrdered neeat rd, prEuent

Gifizitg sociat crit€rja sith the lest of tJ|e fiI|d, so lcrg as tj|e erElderd

Frtj'cn (s) ale nirrtaiJred irt a separate fur\re8trEnt p@1. . he€ntly, Eilq)strire

olleger s erdomrt des rd, aFear to dltaill any grfts tbat are lestri,cteat fut

t}is mrurer, o it sould rS, Eea to be a gSlen.

tt tfn cpinicn of the pesent, artlu, it is utfikely tJrat 's@ial irrestirg"

rLiqls by cbaritable orporaUo dlirectcs @|dd result either in ltabilj'qr c iJr

defeasare G.e. forfitrull of firds irr farnr of a dspr. (c his or ter heirs or

snessors), €lcepting $fEre erh actilzity is eoqressly prOU-Uita by a grlfE

instnr€dt. ftbst' rccerrt ffirt cr tne qlstidt irdicates Up sae. It studd be

rrted, lurten, that this is pedaps t.lte rgmlest' alea of tlte t.ail to be stsi&t$

in this t€pct. Itris behg the case, it hanld be IEIL to sed( specific legal d\rioe

abart any $.ft invesA:nt decieicr tlrat, seeins $eEtiarabf€.

A furtler tde of cauLia! stro:ld be srsideredt tere. lte Naticnal AssociaLidl

of CoLLeqe dtit Urivetrsity "*ry

Officers dvises:

lftinis;tratian of erdorlstt ant sinilar firds requires Ehtenane of a regristerof elr grdr filds. [te tqistelr slror]d irr}ie su<*r infoomticn as (I) naes ofthe dbr ald de!.s of his f,anlly, *ith brief Uiogadtcaf qrtrElrts, (2) mntdrt date of &utiqt, (3) tdentificatio of tfE q/Fe of fird, ({) dbsignatisrs of,c,q restricticrs qr, use of tbe fird c lts earrirg, (5) idhntiftcatisr of souteof sdr limitatios (fuu, Etrantor, c qpn,€Erir4t boqtd), (6) linitaticrrs cli$resitrElrts, ad_17) referere to f@l aoeptare ald ot]Er acliqrs bry t}tegoterniry b6ad.85

Farpsltiie dbes rrt atlEpar to errertfy lDssess reords as tlnro4tr as t]bse

srgEested, PerftaPs becase gift :.estrictiqrs have rpt been systaetically lrntestigtea

ad reoordeal. S:ea$rer Atlen Mrey hae arygesteil that a lega1 qirdo be &tailedl qr

tJre rest.ricticrs pfad ry tlre ,nnscr r"e?uest,86 ard it rdqd.al sea adhrisable to tto

the src for rlr gift furfs abdrt which titerc nigtrt be ilry Erestias before any acticr

is taken b ipl@rt seiaf reacs:ibifitl'eiteria.

5. IrdE Ib< Eq'tiar

@E r bas been eeeressed abcrt tne pot€nEial lrpact of a seiatly !€spcnsible

-39-

iflresE€rtt pofiqr qr e'€q)ticr fttn fderal ard state jJrsE ta:€s. A3 tj|e lin B

govelrdng tax aaqticr eurrentfy atrrd, the!, tlo rot apear to present any subetanti.ve

_ imealgt to lnrdl a pliclt. AE Beabral Erternal blerrE Aoab povldeg tl|at a tuF

profit einntioal ilstitrrtisr fs eligjlrle for exenptncn ficun irsre tar pro\rided UEt:

rc part of tttsl tEt earnbg irures to the benefit of any private shareJplbrc irdiwidral, rD slbstantial part of its activities is carrying crgopgarda, or otlErrrise attgrptlng to influele leg:isl,Eti6l, dd titl does tECparcicipate in' c irrtenre h (irEfrdirrg tne prblistdng c dlistribrting of a.,statsrE rts), ag polttical cilFEigrr cr berhalf of anlt cadtdlate fc p.rblic of,fice.-'

Ean;xhire| s otn chdter q*airts prrisicrs barz&q any acticr rdridr rorld deprive it

of f&al c srtat€ iJre ta( elepLicrr, and repuodrns the cited qditicns of the 6de.

lEre tlFe of poliqr behg qrtaEllated at. Ea,pshire $orld srstiurte reitber an

- attapt to infhsre legislaticr rnr participaticr irr capaigns for prblic office, ard

Ellal tlus rst je4adize orr ccryliarre rditi t.he Code. lilr bars to srdr a policy appear- to €rdst tn tlaseactnrsetts state la, eitlre!i.88

6. Standiry

A bj€f srsideratio of tlte ls$D of stadirg as it relates specificatty to- chall€rFs to tjte *.ticns of ollege srt rrd\r€rgiq, <lirectors is in order tnre. ls irr

of draritabl€ tmstees, frarit

ble c1rnticr atirectcg are trt reg1usiUe

to a qeciflc beneficiary c beaef:lciaries, ad stadirry to dralloge t$e perfonsre

- of directc's is uaua$t resewed fori trhe state attcrcl, geneliaf. Ot]cr parties are

subject to a "qrcial interesti test. lrey rust aercnsU:ate that tneir interest, in the-

@lForatialr s activities is grcatir than that of tlre Frblic in generat.89

Mding to Eilpshile @Llege's legaf cqltsel, parties ritlr a potential to

E€t t-be "s1=cial irrterest" test,, ad be grartd standilg, are trusteee, &ilrisfulatG,

- f,adrlty, slldents, strderrt lprpa, alutrli, parefits aO arrs.90

Stitl tte lieoent aase Lr. inlicat€ tlEt trcet of tiese parties arc rd algIs

allcrd starlfurg as a Etts of osse. l.tirrity tJirstees ale t:dit3cralfy garrt€d

_ stadirlg in erits drall€nging tne a.ttcns of a bard's,ojdiry.gl Errs dd .

ahffti have sctfures tndl aHrid staniling, ts*,*.92 stuat€nts trarre generaUy been

-40-

tquid to 'pled elsrts of bail f,aiti, unfataEss, urjust enrictE t c a$ittr.rircss

to fesent a justicable issrn orernilg t}re sudent-urivetsity retaticrstrip."93 In

a Fcent C-r i foEria ese, tle orrt held that iJl order to hae stanfiry to assert a

breac*r of fichriary 6:rty, ebdents rnEt plead f,acts to dkrsrstrr:ate tlnt a fidniary

relaticrstdp €td.ste.gl |le orrt stateat tllat tlle $derlfdrg re.latioslrip bertrreen

tie sttdents arrt the uriversiqz dir*tor:s ms a ccrtratual e.

As rns dltsGrsseal earlier, rlder tne h:sjreEs stardard of care, dlirec+org ucnld

be teLdl fiabLe fion brEactr of dbty in tne mnaEeeclt of endofi€nt finds crly ln cases

niEre an &tEl loss Es srstained, and shere it ms slsm tl|at tj|e beadr of duqr Urat

resrrfbat irr tfie l€s Fa on tlle oder of gres rEgLigE r.

fII. Cocfusidl

b qEltde, it seena fittjrg to q$e frcrn tJc qrlusios of trro of tln l,a

jouEf arlicles rcet fr-qu€rtly citeal h ttris repoult. Uh qldatf.crs Aeat( in terins

of dtivesffi,,gs brt ttc articles they crtrde r€at an fegaf arEsrts sirftitar to tie

d|es aArdDed ir tli-s report, anat ar€ tJrrs troEe hldfy ryLicahte to soci.ally re.spcrsiUe

furresffiit x.tiwities:

fris qrcnt qrhdes t]at ativetitrue is a pqer i.urresGrt dbcisicr qrsist€nttdth tjre drcatioal FrIge of tni\remiqr i$restrE rt filds ard,.as sudr, m1'-poperly-b adliard urder tie elcrcise of a directcre reaecrSl.e U.rstess jniign-rrt.f

lltis nde qrltdee ttrat tlte trrevailiry eiauciary stadad of cale abes rct pr$ibit -Edvelisity tsrstees ftEn ttlvestilg cr political c rrml gror.rds if tle diWstiturecan be acqlistreit wittrdrt casiiZ arecorruic lcs to a-Ed\renity. . .97

Jtlstie hrglas I q[rEnt tjlat "EE ddfcoFhy of qrr Li.ne srrtr errterlrisesto be lEld to a higf€r stardard tlrar tiat of the nomls of the nad<e@Jace; tdrich€tlalts a sirtgle{Ldeal, trl'opic detendltatjo to rE riilize poofits as t}e tnaaitjdtalbe-alt {d €td-all of, @Iuate 6en,i seanrs especially apgcpriate fo tJerrdrrelsity in ilanfopdrg 4r ifires@rt pollcy rilridr an begt se!'ve hb tlteudtrersity ad ttE @rdty in rd\idl it pttys sdt ar i.qlrtart role.98

- 4L -

i "4€ - . ]

emendix A - Baqlehfue OoLteEe Articles of Orgarizatiqr('Charter")

lpendix B - ttrtiftun mnrysrt o{ Instittrti@al Elnds Act

(IUIE: lgtrprdix A, a afry of tlre narysnire Coltege Articles

of Ggrizaticr, ad lgrrrdix B, a oopy of tJre ttrifonI{anagaerrt of M E\ld est, bave been elclndd fuothie rtfort becaus cryies of bottr ha\re been preuiosly distrih:tdto Ure ffiers of the Task be.l

-42-

np'pendixc - ApmentergtnEnts

!E aE, of orse, legaf scbf.ar.s stD argtE aFfurst the use otr ocial

reaosSliUty qit€lria by inseifuticaf imreEtors. Ihe polesent artlDr's rcseardl

suggests, luever, tlat tn tle rsrt Fst t.lE prepcraerae of rrhat has been

1ubfiEhd cr tlle guesticr argws for tle peunissability of vario:s sociat\

r€spdrsi5le ijt\restrEnt *{ivities. Cds report ltas be€n geared tcrdad ecplicatirtg

the pofuts of lan tte artls feels are rc6t inFortant for the pres€nt trrrrposF-

tD attEr*rt tras be€n de to el.te erery argrrErt dvanced Uy prceoerts or to refute

6,er!, ar$Ett useil by otFcrsrts. Eris is eeeaaffy trnE in ligtt o€ the fact tlnt

twy o;parc rt argrrErtts tlest on leqal pofuts tbat are rn't qticabte to an jrseibrLidr

of tjre nabrrc of B4etrire Ottege.99 It ruight be r:sefirl, lprpver, to lod( briefty

at sE sElqrle statcrt of tne oSpoentr s argnnrnts. I l|arp droeen tJE teoent lar

jorf,ral arLicl€, 'scial Investj.ng arrt tjre Lar of Dusts"100 Lry llri\rersity of Chicago

La SdEl pofescs dn! E. falEbgl ard Richard A. BosrEr because rrariors rE$ers

of tln Epsldre €trllrity tgtte eryaessd faEfiartty with it.

tgr+An anat FEE aE, to be sure, both'rell-lcffii ard prolific writer:s irl

tbe field of fictriary Ia. brEver, ginen tne my tne lasl( lfce has fracd tIE

issrs irnrolrnd in cially resgouiU.e irrvesting, Idr$eh & h€ner's t.reaffiit fails

lr=r1, *rly c"r.101 E trary to tlE qrterLiqrs of tJre Task llrre reprt, tlrery abfine

tlle tsn "sod.al inestirq' crr the secodl pge of tleir article to nEan:

(Er:lchdfurg tlre securities of ertain djreErrise attractine dlpatdes frcrn anfuvegtc's pctlotlo bse tne qsries are jrdgeif to be socially irrequts5Jrle, _nral irEllditE tfie seurilies of ertail dhelihrise Eattractine cdPanies becalsetiey are judi€d to be Hrarirg in a seially lardable nay. By iatt:act'ive' ard'r:nattractiver e refer to the qrventioal &jectirc of irrvestirg, rndcfi is tomke uey...frr tlE i.uv€ffitt beneficiary. f02

It sesE, th€n, tl|at fu fanfi:il dd hsEr, "seial irrvesLilg" reans the

$bstifilLidr of finasially irynlent fuivestsErts for flaancially sold qres for

plitical qr mral reEsns. fris regort ct@s rpt attq't to jttstify that Eort of

1l:actie, 80 it is rDt 6rE r Essary to <lisagree witlr la$ein ald haner iJt order to

-43-

.irc- -7

acccp't tJc a!$rE rts advarrcd hee.

Are s*.ticr qrtainirlt tj|e clefirdtiqt is foltqred by a secLicr iJr *rich tlE

aut.tss elFli.cate tlp *eciaf M of "lrcdem po*fofio tlreoryi tlEy ha\re beq(EI fit

laurr fur,--- ad tids -ctiqr is of sctrs,*Et geater length tnan the secEisr qr

Iql argtrcnts hilidr it geoedes.

ltrte hlk of tne bgat algtrelts arc dirccted at private trustes, ard especially

pensiqrfud trEnagelrs. It orlrdes, lnrever, with a sectiar €ntitled. \tsrirrcrsier

ErlcrrtElrts. rl04 lbr tJrelae a:re a nurber of points nEate hr]rich sesn ftisleadi "rgt,

if rEt errsrecos. Rilst, tJrery FEEpce tiat dren aoe turns to tlc qrsLicr of higtnr

aduca+i q1 dom:nts, te ove. . . to dnritable €rtrEratlag, rt?ridr for present

1llrposes are indistingldshable firrn clnritable t$sts. . .:105 ftey lnake rD attsrE t

to sr+prt tJris assertiqr €lloeft by citirq a sub-seseiqr of Sottrs ltte law of frfgqr.l06

A ca=ftil t€adfng of Utat "**t

t slqFsts to tne geserrt a'tls;a ;;

Fo*er's poirL is EcrHfti4t ratler dtifferent frcn tj|e aE Scdt is tqdrlg to nate. tte

discussicr rlder "!ftetgsirEss lttadard of Carerergrrranti in tJris nqut rnkes clear,

tureverr that for tne p:r1se of evaluatiq "sial irue6ting', draritabl.e €rporatnal

stadards du.ffer sulstaltiaffy ftd tnce ftr tjotJl lrivate ild dtaritable trusts. ft

serrs dd {:bat arr arricle tlrat, d€ls wit}t the stadatd of, care requfu€d.of ollege and

ud\tersity esertrErt fird ungers irrblisfreit as E€rt1y as lit^rEnber of 1980 mkes ro

nE ttidt drywhere in its l0 pages of eitlrr tlre 1974 Stem dlecislqr d the ttnifotil

- $anaEsrEltt of lrrstitrrtioaf nr|als lct, (alraftd in 1972 aril aalopted bft the lGssadrusetts

leq:islafir!€ in 1975.)

tansein ard Foener dvare ttllee rrein argur€nts agailst "sia1 fuvestiJg"

_ by olfeges ant uriversities ridcfr tlEry J-abel tCharter, r tlcrdtaritable grrtrDses,'

ad "Errs.' IJI the fi.rst of ttnse tte anthcs rrite:

A \t rietl, of the ''a'rc* espoltsql in tle nae of social jJt\tesUirlg are t't wi€rinthe gETDses of o11e9e ad l'rirrc!.Eity dprters-for e'n4rle, er$€6itl9tlis4f[orraf of select€al foreign gp\rer Ents, or $Ff,orting ertair labor llriqrcadrizing capaigs. tu rrd\rellBiq/ t$stees to sFend rniverEity firds o srctr

-44-

carses alir€cltly rf,ild be ultla vireslo7 {d Frt tlre tlrstees i.n breactr oftfcir flitrcirry al*y to &-instiEisr.l08

-

|Etis mrdr is tnn, if ntls &triq:s. Itris reprt nalces rD attryt to Justify

adr activities bti buse tiery Erfd be, in tlr Ainnm of tJe present autJor,

ille4l, .ard becase the sbfy of sudr activities f,atls o.rtside tne perieters of

tne hsk lbEee cfrage. lle il$Ia cms with the tE(t senterFe3 niFre tne Eustees

to trrrSIF the s@ erd ty e'gagdq in sociaf furvesting of tfre Eri'versityt s eldom=nt

firrlils, tjrey nl"rl siply be attsqrLirq to rtc irdireclly what tjte], nay tpt clo directtlr.'f0Ian$ein and Foss ale fuplyirg tEre that rp clistirrtisr o$rt to be rrade be{lreen

airectfy dirtertirg rrttonErt nueyrs to tne Elpport of seial ad political acttviti€s

dd tle ueilizatlgt of sial resporsiUillA criteria as irr aq)ect of tlre mnagwrt,

of an erdc*mrt fird. ltris ranld sea to be nre dr eltF€sidl of a perscral\

cpdrrnar tnan a pofut of f.a. fp artlnrs qite ro iltJuity fur tlis pirt, arrd t}re

f€ent artllc is.mre of rur. Also, srdr a fomrlatlor fails to gatrl)le adequately

rdth the 'dratrtetr prpEes/pogantic goals" argrt=lrts psentd abote.

Se secrt argtrut, ct 'ruFdlaritable prposes", deals mirny in term of

ctraritable ttrusts, ad argrs fu a "starrbrd. of ounity benefLt" as to acoeptabLe

*:Livities of drariti€s tiDse Fecise ctgin, dbftnitio anf a1plicalility rgnajrcal

lrcIer b UE lt€Befit .rtls. '

GE thitd ar3uert, cn 'furo:s,i sryests tfat tJilstees w?o eoqage iJr "sial

irnreslirg" nn tle risk of triggerirg dlrfeasdce (i.e., forfitrre) of tJle finds in

f,aru of tlE dbu. fris popoeiticn. as re!! rests l€!:e cr the un-lzoven assuqrLict

that to er4age in "ryial fuwestirry' is to be guilty of itiveneiJg er&mtt fimds

fta ed'-'-+i cr to otls c4tses.

nr*herue, the artlnrs nake rp rsrtisr of tne distircticr discussed erlier

Hrreea the respcnsibility of Frivarte ad charitable tnst€s to t}|e tknce (atal their

-45 -

t

_._-_.- rj

blrr c JsEsl rIEr a tnrBt instrrrEtt ard that of dtaritabla €ElEEatfcrrs-

l'der r @.trErat drart r.

' Gllally, tt abrld b rotd that dter.drradq rrl QssE .trrgtmtts, fan$el.n

ad be's qgluslsr, (!gaitt, lhrasd olly ia te@ of drarl.tabl"e tnrstsrl erds

- t4l rcdfrg, in lrrt:

Orr aElysis 6ds cr {r l8rrtain rde. EteG arc l€Ff dskg to thedraritabfe tnr3te $ilD fatls to mcinize tlE vdtE of the drarityrsqdnsrt fid, h*, F are rct paepard to sa, th.t, tl|e t-r does, 9f^durld, abeotfitely ftdiil rv-lrr tn,eating bfr cbaritable tru8tees. *'

\

-46-

APFEIDD( D - A$D V. HTIIIT

or ritnder 18, r9zz ' in reagrse to stlurg saraLft T**, th eegr

state bard of Eidres Ehrcatsiqr votd b divest dd refrain fto fi:ture irtl esltE'rtilt tlp sFalties otr cprattcrs troirg'suustancfaf acdvity tn sar$elrr Africa.lle Aivestitilre r=aoll.uticr, **Jto t},e Gega, trilresugrt 6Dcil (a state agencl,tttidl is tl|e hardrs qltJacbiar trry rwrager), qrtained a clause crirectisg that:

rn carryiag ot ttds acticr, tne lr\resffi r*rager= are rsuestedr to &.trnte''trv gpil i'-?,murr *ddl wirr noc jec'padize trn intFty oe trreerdorncnt, fida.r l'l

Af,t€r rpivhg ur lttcre.lz Genelal r s c[dnicr, U tne Gegd, lnrcs@rt

6rEit votd qr JtrE 21, l9z8 to refuse to caEy ort tne cEvesfurt inst;1Etiais.

Ee Attmey GerErarrs qinicr h.d aryud tiat tie staF Boant of Ei*ler Etrraticn

did rd ltat e tne amcfty b tnlte qrdt i:n estrEnt decisicrs, ant tiat srctr a decisicrrfiild violate the O!€arr .lnd€nt ij!uEs@.. stadads.

Er a case tlrat rtas etE to be tsrrn as.Bssociatedt sbfus of tlle lhtverstt!,

of hgur, ee- al v. E!rt' et, al., the stralent g:ru4r, alcrg with a rnnber of jndivirhat

sbrdelrts, .r4$grar sbderrt gru4r ad a ratrer of otrer parttes *r.d i suit ford-.laa+'ry ndgElElt +inst tJE ders of the Orregur Im€tsEtt Oorcil (ald

serreral othr ressaryr parties). trn orplaint srit, fitd at aE tJial @Irt le\r{lcr lihqber A2, L97et sorgtrt a judg€tgrt try tJre drrt *tich rnrld enable the itinesagrt

atigt to fo..e-r.

As ttre case progresseil, fo:r ortstadirg issnns aevefopea. U3

1-l bes tJle state bad of ltidrer Ehraticr hare artlnria to Eke irnresugrt'kjsiilts fc tJE er&mrt filds of ttE ttrivErsity of orcqur ryBtsn (held in trust bry

tjle state otr Cegrl tiat it dnirrbters?

2.1 lrc the rrariols plairrtiffs, rdn alregeil "a srbetantial, airpct, trxdectabLe,

Fesent int€t€at, tDt. rlely stdr as tJ|at of tne generaf ;[blic, in tlle a&rinistratior,

-47 -

$rEEnrisidr, ad rtsraqsutt of, hi$Er edratiqr erdomcnt lin6""lltl ]rave stardirq

to blilrg sdr a erit?

3.) Is tlErc any vafiauty to ttn &ferdents' qltentiqr that a dttvestrEnt

*tiat by a state boaty is rsErstitrrtioal lIder the ${EerE('l7, fueign relati.drs

[*!r, irterstat€ cnretrce, arrt/c quaf potecU,qr clalses of t]re federal qrstitrrtiqrllls

4.) Ililtd the dilesffitt *tio qrstitute a rdolaticr of the O-gor 'lxrdenit,

irrves,tc" standard dd tlE stardad of care requiled of tlte furdts trr:steese[6.

!F filst trp of t}r€e EEtilcns have been resolv,ed by Ute tJiaf alrt. Itte

plainLiff par-Lies rrre lrkl to have stardirg, anal tJre clrregwr State Board of Eidrelr

Ehratiqr ms tcld b have arUutA b rnate irvesurErrt acisiqrs.[7

GosE Elians ar tIE b tsrEining affi:cutirre issues are erpectea to be beard

ann nfleal cr by t]re triat qrrt befe tj|e ed of tne qlt's ctrrEnt calerdat !ear.

trte l.citg pady is expectea b 41na1, fitst to the Gregdr 6rt of Atr4=als, tlEr to

the Oregar S4r@ 6rrt. Ge plailtiffs hane elqreesedl a rillirrgees to tal€ trhe

sstituLicna1 is$s to tI€ U.S. S€r@ errt if ,-o"".r1r. U8

Slurld a ateeisi.cr be readrat an tJre divesEsrt igsr as it lelatd to tlE

'trmdent irvegtc' nrle, Lt EDId be the fu€t ort (bcisidt to deal clirecafy witfr

tln leglity of, a ollege c uritrcrsiqr I s use of Eetal ctteria in tle nruragrarrnt of

its etdoGrt fiIrds. Ge plairtilfr s attoomelz has stated t]b.t, trtE stardard of care

igar will be dkessd in trD EyB - as it r€lat€ to tJ|e issues of lo1za1t1z to the

tnst benefieiaries, zd as it relates to firancial goartivity. Sigrrificantly,

tlte plaiatiffs ual, att€npt to stiprlate cr the finasial issues - that is, neke an

ryeGlt sith tbe &ferrlests ard tfE olrt tbat finasial lcs is rDt at is51e

ad that cnly tJte tednricar legaUty of the dirrcsffi, is in qstictr. All of tlte

abferderrt lE*ies rrnr1d, ft*ver, luvri to aglee to srclr a stiprlaticr. U9

lf,rile tle uriq=rss of this case rnlces it Bigdfi.caft, its qrlicability

-48 -

to Eqahitcr8 sit5tlsr fu ll.nitd in trp reepets. Eirst,, tj|e &rirrcrsity of

Gegcr ryatar s enlosrt firds are held iJr tnrst, ad it ts tne jrrterprertaticr of

tlre stsdard of carc rqufrg of tnrstees, ratber thm tJut of draritable orporati*r

dit*tca lctat is at issrr. Smd, tle stildad of care isar is beirg djdicatd

ilr tln Ccgcrr stat6 €rr.t syr3t€n, dd shite otfrer qrrts irc liJ<e]y to take rcie

of that6,er dlecisicn is edrd, it rdll rpt tsrre tfc atffi.ty of precedent ortsi.dle

ttE state of Cregdr.

-49-

IWTES

litlrrrtea of tlte lrby 14, 1982 Joirrt lGeting, Imres:tsrErt S$ccrmdtte ad Ocnnritteedr 8r,lstrgrt reseosSUfity (CFI$, thgtees of llapehire 611ege, p. 2.

2rgo rcc.r.a. (l9go p.p.t

3e sedtfary focr:s e*nild be elglained briefly. Diveslrent of tlpse seorities in aninstitrrtior's portfolio dridr are the isErres of opanies jrdiFat to be sciatlyirresgtsilte is orly cr of several pos8ible st€[rB t]at colld be tat<elr in tje- naneof sial !:espdtsibility. Because otr tie recent natioal carpaigr to persuadeinstiurtioar. irt\restor:s to aliv€st tngnserves of the seqEities of ocqarries withq-ratiols tl tlre Ep$lic of Sorth Africa, tulever, a 1ar9e part of tfn apficalfesorrc reterial deFrc Frrir€rily rdth tne dlivesusrt qr:eEtnm. dars ali\restrtnt, vierrcdas tJle first of, a ru&er of csible steps that qild be talcn irr the ingtitltisr ofcially rcspctsill.e fuuesffitt lrEtrLio€, is sqreLirres r,eferreil to j,n t[is t€pat.

lCqnprsatisr witjr Icrris E. H4LI, Ir., ttale & bET, Bctdr, JrrE 15, 1982. See alsonaviJtoff ald Grtzan, Seiaf espcrsibility iJr tjtlrestsErt, h]-icy ancl tle kldent ManRrle, 68 rlrrif. L. E\r. 518, 5I9 0980).

trfario:s antbrities have argud tiat in stE irstarFes even a subgtatial loes to aollege c tniwrsity's erdqmnt fud tlEu$r the Frsuit of sial rrespcrsibiliQg*ld (9r sfnildl le-Iegally tolentd. See e.g., i€viJ(off ard Orl:zan, asa rpte-3, nssin; Olscr, Ilriversity Efi,Estgrts with a Sqrttr lf,:rican euectlsrifnnferreDi.lrestit|lre hosi.ble?, ll N.y.U. J. Ert'I L. f Fol. 543, EE

5obar, Id. at 545.

4tUfm Uan ge|tEirt of Instituticnal nDda Act, (lnrreafter tl{IEA}, Ocrrrd.ssiqErs iFefatcy !bte. 7A ttrifon Lffi erlEtatd, ItEster Eitiqr {05 (f978). A oryy ofUE &tifoun Lats enrstatd terrt nry be fqrd at Ag4nndly B, infu.

825 rags. (9 Pi*.) ile, .61 ($30). Eanrard 6tte9e figurd in rtris srit as arseirderon of the IEy te€t@ltaq, trrlst. te sEit aid rct dlcern tne nanagsrEntof ianrcstrcnt fids by Eanrad 6llege.

'A histdc'r acortt of the cbrrelotrrurt of the irnesffi tirties ard porcrs of prirratetrustees ftm tleir origins in Brglish 1a'r can be fonal in f.an$eit ard Eosner, lrbrtet*. Elltds ad T:nrst-Inres@rt L:lr-, Lt76 em. Bar Frolrdaticr nesearO it. l, 3-6 (1976).

fOfan$eln ad Fsrer, Seial fnrEstirg aDat the !a of Tnr*s, 79 Mictrigan L. En.- 72,96 (1980) .

llf&tcrt, Dtvestitlre ksolulians: Ilrirnrsier Dir€ctor Liability fnder t}e nrergirry- @rpol:ate Stadard, 15 U.S.f. L. br. 26L, 265 (1980/I98f).

_ l2see Estat@rt (Seddl of Drrsts secs. 170(11 , 170 ffi g, and 18? Ocrnent, g (1957).

!trd. at s. ?zt.

-50 -

14'In aditjc.t to rEldrrg t-he trrrst PsoPerty proartirn thrq4.r lyoper fupestflE rts, atrust€ has a tirty to imrest 8o as to &tain tjte hidtest rehrrn gresible qrsistent witht}te saf€tl, of tne gircipaf. In order to assur€ high reblrr, qrrts tra\re requircdtnstees to stsider <liversiffirq fird irnleslrcnts .d have qlsicbred failure todf\renify trDre tltan tere tnistale h s:rcfnrgirg tlre t:r:stee fE :resultiJrg lcses. "tib&tdt, s|.Ga tde U at 266.

lfttr Artfrer elaboratian anil refereres cr tlre stardard of care lequfued of prirratettrulrtees, gee tibrtdl, gs:a rcte LL at 265.

l6sco,tt , frbridgarcntof t l relanof Thgts, secs. 198.1 (p.400),200 (p.401).

17l6rtcn, srnra rrte It, at 268.

18fn 39 ladcr, 104 litisc. 372, L7J- N.Y.S. 981 (Sp. Ct. 1918), affrd rsn., 175 N.y.S.9I6-(-sW. ct,. 19191 . rtds is a 1918 decisicn uv tte *rrogate'il@lttTf-trsr ycJ<,affinptl by tle lSpelfarc Divisian, in t*dch the orrt r4held a trusteets cbcisidl tofuvest ir 3*t nirslt Liberty loan Bdds cr patriotic arurds, irr spitE of the erglicitinstJrrticns of tfte tnrst instnnrnt, wtridt dtirected tjre t!.lstee to lnvest ard :einvestctly irr 4t lailrcd Hs. ltrc tlistirgdslreal inst sdrolar:Ustin W. Soott ergEFats,lmever, (ard tne FEes€rIt autlu @Eurs), that this decisicn flas an Fl€rEe'rt dlevtnse reascdng mr6t rdern orrts sqrld afnost oertaialy reject.

Ihm oourts ha\re held that Fi\rat€ t:r'rstees (anal draritable tlust€es and ctrarttable@rporatim direetcs) have a bload porrer (if rpt alrra]rs a ctrty) to avoial iUeglityc tJe qttravenLiqr of the 'lubiLlc iaterest" c lrblic poliqf, " arrl my be ercr:seatfror folloriry t$e htenticts of the tbrc wibr $cfi ddilids. Sore ant}oritles lraveargtied that this trnrer of t.he fiduciary, often tered tne "rrrle of illegaltty, " can beextenateil so tj|at a desisicr as to rfiat rrurldl or tflld rEt violate ule prblic futelresttsrldt be \rithiJl trhe fiahEiaries' di8e:reticn, ard that tlre fidriary 6ild aFply tlatdig@etidr to a fi[|drs tn{ragefEnt. 'Inves'tsrEnt ibcisidts based qr a tnrsteei s irfeeenaentassessrErt of the effEct, tnat qrtent jrrres@rt wilt have cr the prbl,ic telt*inglif qrsistent yit}r tJE tnrst Frg€e, seenEi to b belgrd tne pnria of jrdicial revienbecase tJre tnstee tras a Eod porer to avoid' itleqatity. " tbrtcn, sqra rpte l[,at 267. see ale J. sirn c. F#rs, e J. allnerrfrr{ de ntrricaf inrFtor, 144-156

ff,;fiii#-H.]rle sorth Af,rica qrstidr, see r6rtcn at rp. 257, 277-TI8l oLsrlrt,

Ztarr*.i" arrt hsner, sil4)ra rnte 10, at gg.

2lfff e. scott, fre Lar of Trr.rsts (3d ed., Sr'g). 1982).

22"Scdt jr:stifies tiis peiticn by reference to oorFrate ctraritable srtribrtims.He !!a,tes tltat orporaticrs nay mke gifts to durities 'wittrfui prc6nr limit-s. I lheratioale fc tJris prqositian is tlat by aiding scie{ry as a rdnle, the coryoa:atianfirrtlers its mt fdg teB irterests, Siflilarly, a trustee argtrably shrr:fd be able totrrqote cial cbjectirrcs tlulurgtr his 6 tcr fuvesffis cr the tlreory tlrat t}is airlssiety ard tnere{ stEngl*rens the fondtatiqr of t}re tnrse. S6tt, }u€v€r, notest$at he Erld plee '1rc1-r liuits I dr tnrstee dise=ticn. " Rarrikoff ard C\lzan, srwarDte 3, at 527-528-

23See Sott, srrr:a note 16, at secs. 368-37? (p. 563-6901 . S@tt infors us, for€tiattE'l€ tlat niJr an Eglish case tle qltt saitt tl|at a tnst to feed slEl::srs iufldt rFt,

"be dnritable,' nhile 'it lEs b€n held that e,[€re a beqest fc the errecticn of aarint<ing fo.ntain, with a provisiar tlat tiere stnrld b a lifesize statlE of tlet€tator c a stahE of his brse, the provisior ilial rEt prevelrt tl|e trlrst frcn beirg adnritable tn:st.'

_qr _

ztoltarr stu>rii rp'te ll, at 268.

25See Sdt, supra rde 16, at sec. lg7 (Fp. 3O-3G9).

26eeg s.w. zd 16r (!b. r9?ol

27!brEan, slr)ra rrrte L[, at 269.

28Soott, $tpr? rpte 16, at sec. 369.5 (p. 6671 .

29lortsr, silrpra rpte Ll, at 26g.

30lg.

3lrd. at 273.

32soo,tt, rRpria rste 16 at se. 391 (F. 697-69gl .

33tg. at p. 699

3419.

3Brd. at 699.

3Qrrtm, sq)tia rpte 11, at Z7g.

37nres-r, r'iability of Grpoate offiellB ad Directors, sec. l.o5 (d ear. 19731 .38Cary ard Ei*lt, Ste til ant tJre Iore of Erdrrcrerrt Et:ds, 26 p9691 .

_ 39rd. ar u.a

lQlEie, se-a r€te Z, at,l(8.

4 t arri,b[itcl, g4Eia rpte L!, at 272.

_ 1bt* stat€s v. r,l'rtt ltesr' lbrtgage 6q)., Ul8 f. Sm. 629 (D.D.C. 1954).

lt- pag 14 and a@{lilr}/tug t€(t, $rya. See also ltatts of Estate of @Ilins,_ 13e c'r. ry,tr. 644, zz c.i :6 oss irtfrF-44See 180 ILG.L.A. sec. 3; 1568 t{.c.L.A. sec. 13.

rtA qrPlete ogy of Bapshirers.lrticles of Gganizalicr ie ilEldeal at rFendlx A, infra.

* 46tgoA ll.G.L.A.

47gqgq, srrria note 7.

48se" rpte 40 and @ te*E, snr)ria.

_52_

49Oploloo of the Justtces, 306 A. 2d 55, 57 (N.8. 1973) .

50S"e1 €.g.1 Knepper, Eupra aote 37, at sec. 1.02.

5101"oo, -9gg, Dote 5, at 564.

52C"*7 and Brlgbt, The Developlng Law of Endowoeut Frrnds: tthe Law and theIcre" Revlslted, 37 (1974).

53Opfofon of the Justlecs, !gg3 note 40.

54tn[ra, supra Dote I , st 409.

55S"" Appendlx B, infra.

SfttlcFA, lgg Dote 7, sec. 6, at 421.

57t80e x.c.t.A. sec. 6. ttc flduciary staadard of cere requlred of llasgachusettgtruEtcc8 la lom as balng coqarltlvely Strlngeot. see scott, ggg note 16, at*c. 227.5 (pp. 437-438).

)dl80a H.G.L.A. gec. 8.

59ra.

60S"", ..g., lrtrttcd States v. l.douut VeraoD llortgagc Got7., IZE F. Supp. 629 (Lg54). -

6lggf F. Supp. l0O3 (D.D.c. lg l4r.

6b.. at 1008.

63ra.8 t lo l3 .

6fu.e, e.g., lfldstlatrtlc l{ational Beo} v. FraaL G. Thoqsoa Fouodatloa, 170 X.J.Super. 128, 405 A. 2d 866 (f979).

55scc, e.g., llalvelsity of lliasl y. ltllltatra, 184 So. 2d ?01 (FIa. Disr. Ct. App.1966); laach v. ceorte l{aahtagtoo Ualvereity, 370 A. 2d 1364 (D.D.C. 1976).

65!dortoa, ggE lotd lt, at 281.

57O1eon, supra Eote 5, at 562.

68soe cooeutators epproach thle questloa by disttogulshlng betreeu "retu!D-produciag" and 'rprograoatlc'r fuactl,oue of chaslteble corporatloo lDveatD€nta,argulng that oaly the fotur Le goveraed by traditlonal gtaadarde of care, thatthe seD LDvestDtt cao aeFye both frmctl.oos, eod thst varlous portlooa of thelaw, taeludlng the Interaal Bevenue Code, reeognlze and reepect thfu dlstltrctloD.Th18 ls a slgnLflcaat pol,nt, but doeJ uot reall,y extend the t.charter pulposea'.ar$E€ot beyood tbe pol,ats bctng tade 1a tbe presmt teat, ao lt has Dot beeDelaborated upoa bere. . See J. Sl,rn, C. Poecrs, aad J. Gruraeruann, -1E. uote 19,st l6(Fl5l; Olaoa, ggpgg oorc 5, at 564; I.R.C. .ec. 4944(e)..

69For a rcpreseatetlvc coateqorary atateuent of tbese vlens, see Bok, Beyond theIvory ToEr: Soctal lespoaalbllltles of the t{odern Uolverslty, 242-309 (f982).

7ost.t.*ot of Colrnbla frustces oa Ualverslty Irvestoents 1o Coqanles lnSoutb Afrlca, Jrme 5, 1978.

-53 -

,rsprlal v. Regeots of thc UDlv. of lliehlgan 1 43 lIlch. App. 178' f84 (1972)'aff 'd, 390 Dllch. 84' 210 N.W. 2d 322 (1973) .

T2tbrtoa r gpg Dotc ll, et 277.

73ra. et 2?6.

71rd.

75J. Slrco, C. Poera, ead J. Guuaeroaaq, 9gg, lote 19, at 162.

76t.p. Suttb llfg. co. v. Barlos, t3 If.J. 145, 16l, 98 A. 2d 581, 590 (f953).

77olgon, lgpg oote 5, at 575.

781s nrTehlrc t s legal cormcll has erltten:tbcpendlog o! thc tl.tie erd clrcunstatrees of a gift..., lt sould aot be suprlslngto flod a court deeidlng th.t thc uac of dooatcd firode by the college ea e DsaDBof .aprcsltrg . polnt of vle9 lay outsLdc tbe rGasoneble erpectltloue aad, there-forc, ogteldc the probrblc btcat of the donor.rlIputs l. Esoll, Jr., lale aod D,orr, to JohB ttetta, Vlce-Chalruan, EaDpshlreCollege loard of Trustees, liay 12, .1982, p.3.

79J. Sl*o, C. Powers, eod J. Gunnenaon, .9gg, aote 19, ac 155.

E(hiorton, g4g aotc ll, .t 273.

Ell.oole E. Eerll, Ja., to Joh tfatt3, gE oote 78, at 3-4.

82uortor, !g note lt, sG 274.

E3Sc., c.8., Coffce v. llcc llalvcrelty, 387 S.Il. 2d 132 (lex. Ctv. App. 1965).

8hc., e.8., Wllllaoa CoIIete v. Attorocy Gerrenl, 3?5 n.E. 2i! L225, f978 Adv. Si.1265 (1978).

EfuoUege rnd ltolvcrslty lusiaeee ldltDistratloo, scc. 4.t (3d ed. 1974).

86[1co L. torrey to IDvcstDDt Subcorittcc, Eaot'ehl,re College Board of Trustee.,''trlercrandrn - lfeceseaty IEveitEDt Dcclsioog,tt Jatuaty 9, 1982.

8726 u.s.c.l. sec. 501(c)(3).

SSnanpshlrete legal councll has rrltten:t'It ghould bc r.'rttoned..., chrt thcre ls en lratable bormdary betseea

eharlty aod govcrmeot t! r.tterr of publlc polley. Several grovielons of theIntetnal ReveBue Code, for era4l:, reflect a decp gwerucotal coacern that taxcaeqtt Lastltutlone rrlll abnrse thclr €rclpt 3tatus (rfitch ls aoo.tLoes cbarecter-lzcd as a publtc subaidy) by brlnttrg thelr poer lnd lafluence to bear ln tbcleglalatlvc' polltical' end dlploratlc flelda shtch goecrmcrrt guerds zcalouelyr3 ltt or!. The acparetloo of Church .!d State, lnd derlv.tlvcly the Pfust ADad-lot frccdona of Splccb od &redly, rttcb tn tut-a uoderllc tbc 3p€clsl tar endother prl,vl,lcgca accorded ly orr ler to cbulcbea ed other charltable orgsll.zatloos 'repreacDt e dlfflcult rod dellcste cqrodsc of co,qcttng clatDs to the rlth! toSoverD. Th. scasltlylty of tbc que8ttoa 1s ttluatrstcd by the Internel lcveaueGodc, ghcre rc3t!lccl@8 rre pleced o! tbe rlgbt of cl3c8pt charl.table organt zatlonB

OOItTII{T'ED ON TEXT PAGE-qa-

88 (comrNUD) to attcqt to lafluence leglslatlonr to partlclpatc to the po11tlcelprocc.a, or Co hgve c.rtala dcelfugs ulth goveanEcntal offl,elalg. Ftog g veryiencral pollcy -@g$g, therefoie, soe queatlons car be ralged Fto-tIfepproprlateocsa of thG uac of lsveetEnt porer by a taa eleDpt charitable ofgeol-'ltio! r. e DdluD of po11tic81 apeech.r' (Eryhasls d.ue.)Louls B. EeDll, Jr., to Joh6 Irtta, .ggE aote 78, at 2.Tbls Btatcent could aec! to be bcttffiderstood as advl.ce ol e phlloeophlcal.od polltlcd que3tloa than aB ao erplabatloD of thc present legal altuatlon.lte cese lar clearly LDdlcstcs thet even the Dst strlct flduciary relatl,oaahlpdoec not requtrc the flduclertrs to be t'seers" (see Oleoo, lgg oote 5, at 56)aod thus these cooalderetloDa do aot coDatl,tutc a legal l4ed!.uut to Eeqshlre I sadoptlng of a roclally reapoulble LDvestrrnt pollcy. See a13o J. SIDD, C.Porers, and J. Guanenann, .ggg. Dote 19, at 166-167.

Shor exaqlc ' oae reccnt case cltcd a 1895 declelou holdLog thet Deobere of thecouualty are ooly l.lcldeotally beaeflted by the'cducatl.oo of goe oeubcrg of thepubllc. llIller v. Alderholder, 288 ca. 65, 66. lE4 S.8. 2d 172, f74 (197I) (quottngIfblte v. Ifeff, 52 ohlo Sr. 375, 40 n.E. 720 (1895)).

SCooversatl,oa rlth louls E. Eeoil, Jr., -ggg. aote 4.

9lsce, c.g., Eolt v. College of oateopathic Phyelelaoe & Surgeoae, 6l Cal. 2d 750.394 P. 2A 932, 40 C.1. lptr. 244 (1964).

92See, e.g.' Goffee v. Rice Uaiverslty, 387 S.W. 2d 132 (Tex. Clr. App. 1965).Thla dcclstoaa Lsnolvcd eD .tterpt by uulveralty trustces to bavc lgl prcas appltedLn order to rlt[l.Date raclally dl.scrtuhatory provl.eione of !h€ trust fustruEentunder sblcb the acbool was cscated. nro opposlog groupe of aluo,l rcrc; hosever 'later elloned standbg to Llterireae ty a hlgher court. 403 S.tf. 2d 340 (Ter. f966). --

93t{orton, gli1 notc Il, et 2?4.

942u'x1ra v. UalveasLty of Southera Gallfonla, 24 Cal. App. 3d I' l0l Cal. Rpt!.499 (L972>.

95s.. oote 3,3 -ggg,.

96Horton, ggpg Dote ll, er 263.

97o1son, lgpg oote 5, 8t 545.

98fa. at 579. Justlce D,ouglas I stateoent appeara at S.E.c. v. lledlcal Coo. forEuoau RLghts, 404 U.S. 403, 409-410, 30L. Ed. 2d 560, 566 (1972, (Douglaa, J.,dlgsentl"Eg)

99ot" freqoentlt occurl,og exaryLe ls tbe r€t usoy opponents of aocially reeponsiblebv*tl"ng dsell on the rt.ndard of care required of flduclarlcs eho are subject totbe 1974 federal pensloa reforo ler (Eqloyec RctlreEut Iucore Securlty Act of1974, 29 U.S.C. rcc. 100f-138f (1976)). Baopeblre College'e Tnrteea, llke thedtrectors of laoy other collegeg and rmlversltlea, are not subj ect to E.R.I.S.A., asdcvco thoee kusteca rho do ran'ge peosioa firade uuder the Act are oot bouod to ltgrtrDdard of care ln oroagtag tbose portlols of thclr l,latltutlotrs etrdowut firndanhlch are lot coEnectGd to a pcnsioa systcr. Furtheture, the psoposltloD thattruatees subJect to thc E.B.I.S.A. staoderd of carc have Do grornda for Justlfytrgthe e4loyoeot of ooa-traditioEal irvest@t crlterla La Dot a uolveraally acccated '

-

one. See, e.g., Bavlloff aod Curzao, ggg [ote 4, at 52E-536.

-5 5 -

lO0t eogbeta rad Po$er, Egpgg note 10.

10lsc. oot.e 5 eod 6 ead aceo4anylog tert, 3g.

lo2L€ngbcts esd Poenerr lg4 Dote 10, at 73.

10316. s3 77-95. See slao Lengbeln rad Poaner, aupra uote 9. On uodcrn portfollotheiry, lee BLaea, lrodcro Portfollo Theory srd Invettoent Lar: Refln.rpat of LegalDoctrtrc, 76 Colu$la L.J. 72L, eod the ftnaacial sectlon of the Task Force report.Ifhea the preaent euthor eaplalDed thc fllaBclel theotT underpinal.ng Laagbela aodPosuerfg aatLcle, Loule Baoil, Eaqshlrers legal couacll ' atated: rh doubt tbata court routd hold to bc deDnatra.bly true.'l ConversetloD rrlth Loulg E. EaDil, Jr.!ggE aote 4.

l041sog53lrt aad Poaaer, ggg note lo, 8t lo7-t12.

l05ra. at r07.

10659g gse33 ' gE Bote 2l , at eec. 348. l.

1o71.6.

"Seyood

thclr pouers.

l0Eksg6gla and Posaer, glg Bote lO, at 108.

I09ra.

11016 . 13 111 .

1113". go*1.lnt Sult for Dcclaratory Judgoeat, p. 8, AeeocLated Studeatr of thettnlvcrBlty of Oregon y. Erst, Ifo. 78 7502 (Clr. Ct. Lane Co., fllcd tlov. 22' 1978, o(hereafter ASUO v. &nt).

I l2Ot.goo AttorDet Geocral OPl,alon No. 7616 (l{ay 2, f978).

lllfelephoae cowelaltlo! slth t{lchael B. Goldatela, Attoncy for Plctltlffs' ASUOv. Euot, Bugeoe, OregoD, July 23, 1982. r'

I l46o*1gt!i Sult for D,eelaratory Judgent, p. 5, ASln v. Euot' ggE aote llo.

ll5see Jaoeg t{. Ceqbell, rrstate DlvestDnt of Southern Afrlcan InvestEenta and theCoostl,tutlonrr (rmpubltshed paper wrl.tteo under contrsct wlth the Eugene' Oregonchepter, Netl,onal Laryer i Gulld, 1982), for a thorough refutetlo! of theee clalos.

ll5see Otegou AttorDey ceneral opLnlon, gE Dote 111, at 2O2E-2O31.

llTsee order for Partlal su@ary Judgeoert, Septeober 29, 1981, Asuc v. Buat' gglote I10.

I lETelephooe converaatloD slth lllchael E. Colatsteln, eupra Eote 112.

I1916.

- 56 -

BIEI.IGRAPSY

(lbte: ArIy bocks {d artic]€s are referenced hre. llE to tlre ccrstr:airrts, I tE\rerrt listd tJle merous fuucnts, statutes, cases, ad stardatd fegaf t:eaUsessrsurtd in t}le pregaraLicr of this tEpor:t. tt!6e that bear rEst <li.rec+ly cr t.treFirrts dkcrr$ed h the tel<t aJ€ refeEloed in tl|e rptes. )

Enes, Earvey E. "!6dlern hrtftlio SFory ard Drrestsrslt Lan: Refirremnt of Iegalbcttrjre." Oolubia ISLBg4CC 76 (Jure, L9761 , 72L-789.

Bayne, Darrid.C. n$le n ic -Raticrate of P:oper Subject.. " &rirrcrsitv of Detroit Iar

Elriew 34 (19 ), 575-514.

Beylard, t+illlan A. nE|ctamrt l\:nals - ollisicr.of Oorporate ard Ihlst Stadads.Brsirpss Lawt'er 28 Gtril 1963), 807-818.

F t, Derlelc. BE5gtd the I\rw.Jt IU€r: Soqial lesguts5.bitities of t}le lbdern Wdv€rsitlr.Carbrj.dge: Bar.ttad thi\r€rsity PIesiS, L982.

Cary, Ifilrian L., ardl Gaig B. Fidrt. [le De\relqfurg Iore of Erdougrt E\nds: lEreLaw dd tJE l.ore" Evis_l!€4. lH., Yod(

. Ihe Lat, e!4 ilg Iore of fficnnert l\lrds. Iilerd York: Ford Ftnrrdatiur,

Aollece,a4 thiyer-siFv BrsirEss lftinistratidt. (3td ed.) nashirgtdr, D.C.: t{aticrals Officers, L974.

'

REIIE!i, lvillian E. Liabiliql of orporate Officers ard DitEctorB. (3nd eA.)IndianaSnlis, Idiau cnt).

Iaqbein, itcllr 8., ard Ridtad A. 9o6ner. Start<et. Rlrtals ard T:nrsit I restsErt 16r. "lmqrican Ror EQr.gldatisr_eqelctr Jcurnal (1926) , L-34.

"Social Irntesting ad tne Lfl 6f Ttusts." $g+gq-!qjgdg! 79-ffiE 1980), 72-112.

-I

Ia,grtt *hr Eeuis, ad E. Ilrri.dl bs€nbl€n. @rmltate Seia1 EEglstbilitv ardthe Dlstitrrlioal Enrcstc: e EDrt to tfre , l9?3.

lbEtdr, eace lti:yienre. 'rDi\restiturc Fso}rtisrs: thi\rersitl, Dircctc LiabilityItI9qI

llp_ErErgd.ry Corlnrate Standard." tlriverEitv of San EYancisco Lavr Re rier,15 (FaIl 1980^$inter 1981), 261-282.

lirrdheim, Sert H. 'A Cmrent qr t}e Seial nesposibdlity of Life Insr.Il:arcCcnparries as trrrestm. r \tilqrilia Iar bris, 61 (1972) , J-247-1264.

Ol'gdl' lhlitba it. qftirtersity In\restrEnt-9 rrith a Scrrth Aff can @rrectiqr: Is I'lilabntDivestiture gossible?" XqfLIo*Folitics fL ,ftfinter 1979JI85S-C

1959.

gaslery' Sert s. TrEFkofit orpo!:atiqrs - Icanntability of Dircctds ard Offiers. n

hrth, lfilli:al C. 'Fersctal. Liabdjtity of Dnrstees of Elhratiqral Instituticrs. "Jounal of CoUeqe ard lliversiW Lar 1 (1923), g4-92.

-57 -

@r6[ r 'D

R*rikof:f, fUtafd B., {Id l.tlrlat R. Olzan. "Seia.l respotsdbility in Iruestncnt anitthe Hndent flhn Rfle.' Cafiforria Iarr Evis 68 Othy 1980), 518-546.

Eidtraar, Erald L. ilhranfrn: trre l€gaf lplicaticns of Eriversity InvestlErtBirl Oopanie bing BtsirEss iJr Solth Africa. " ,hrnal of Oolleqe ad &d\rersiw Ld7 (1980/1981), 164-173.

Fport of the Cctunittee qr Clraritable lltusts. "Drties of Craritable Trrst Snrsteesard Charitable Ooe"oltaddr Dinectors. i Fal @ 2(1957), 545-56{.

Safishry, DaIIas L", ed. Slnrld Fensian Assets Be For Sociaf/Folitical-PumFes?: An EStsI Folisv EbrtrnBenefit fsearch Institute, 1980.

6, 1979) . I'ihshingtor, D.C. 3

Sott, Arstin l{alcersr. Abrj.d€rsrt of ti}E law of ftusts. Bostcri: Little, Bsnrdd co., 1960.

-- Silrrr, tdlr G., Clrarl€ vf. hErs, afll itcn P. GffEl1r€rar. Itre Ethical lrrnestoE:

ttriversities anrl oormrate seial Fs@rsibiliw. tlsr Hanen-iiTi[6@ Rress,Lnz. Gsp. Ch. 5, rlegal Ispects of lrvestarnt ruspcrsibd.Iityn, 12F169.)

Spain, GLen. "Scially respcrsible Inrrcstnents: An Inrstated Bibliogm5*ry. "kactitidter 36 (fbll 1!)79), 97-L[3.

C,rild

-58 -

FTNANCIAI ISSUES REPORT

by

Debbie Knj-ghtMember of rask Force on rnvestment Responsibi l i ty

Oc tobee .1982

- 60 -

September 27, Lg82

FINAL REPORT - Financial Issues - Debbie Knight

One of the major financial guestions surrounding

the formation of a socially responsible investment policy

arises in looking for ttre cost of excluding certain types

of comPtrnies frour the possible pool of investments. There

have been d,ifferent theories as to the best way to make these

calculations. ft has been generally accepted that estimating

the cost of exclusion by comp€rring past performances of €x-

cluded and Dorl-€xcluded companies, has serious shorteomings.

Past history can not be a true indication of future perfor-

mance. This method also does not take risk into considera-

tion as an important eleurent in portfolio management. The

guestion of 'Eow much more risk will we need to accept in

order to naintain our rate of return?r' is a necessary con-

cgrn.

For a given portfolio, there is an alray of possible

returns because there are events that occur within the market

which are unpredictable and lead to different rates of return.

This unpredictability in the narket, or overall rnarket risk,

has been shoflr to be roughly 30* of an individual companyr sI

risk. lfottring can be done fronr an investment management point

of vies to mininize this aspect of risk.

- 61 -

Non-market risk (risk that is specific to a company)

is specif ied by ttre variance in the returns of that company's

securities that is not tied to movements in the market. Com-

panies are af fected by dif ferent stimuli and cycles. It is

possible to reduce this component of risk considerably by

holding certain securities that' tend to offset each other.

This is called diversification and will be dealt with in more

depth later"

Ittolern portfolio theory has been found invaluable

in estimatinE the added' risk due to exclusion. Measuring the

increase iJt risk, to the extent that this is theoretically2

Possible ' is the only reliable way of estimating the invest-

ment cost of impos'fi.ng €rn exclusion policy with social or any

otlrer criteria. "The techniques and tools of modern portfo-

lio theory provide the only me€rns of making optimal decisions

in cases suclr as this, where a radical change in ttre portfolio

environment leads the (traditional) portfolio managerts intui-3

tion astray. i

Risk is an integral part of the narket, anrd is

rneasurable to a certain extent. Thro studies have been conduct-

ed recently to try to determine the effect of exclusion and/or4

targeting oa risk" One was conducted using companies operating5

in South Africa as a basis for exclusion. The other, done by

the council on Economic priorities (cgp) (rrnder commission by

the State of California) used exclusions of companies with

judgenents against them for employnen! discriminatiorl r banks

rnaking loans to South Africa, and corqlanies with subsidiary

-62-

operations in South Africa. A very basic argument used in

opposition to the idea of socially responsible investing

assumes that in doing so r one would not be able to build a

financially sound portfolio from the remaining securities.

The conclusion of both of these studies however, rras' that

" (a) lthough the proportion of capitalization and the number

of contpanies excluded, were substantial, the increased risk

(relative to the Standard and Poorrs 500 lthe rnomal' port-

fo1ioJ ) was srnaII, due to the large nr:mber of acceptable

substitutes for ttre excluded companies. 'n 5

The studies of both Andrew Rudd and the CEP use

only calculations for equities in estimating risk. As

explained by Larry Litvakl co-?uthor of the CEP study, the.

effect of exclusionary criteria on bonds is considerably less.

The risk associated wittr individual bonds is a much smaller

ProPortion than with equities. There is more overall market

risk involvec (more stable ttran the equities market) and there-7

fore, less to diversify. In a real portfolior Ets opposed to

a ttreoretical. one, conmon stocks are not the only forrn of

investment represented. Among the numerous types of investments,

most institutional portfolios hold stocks, bonds, real estate,

and, cash equivalents. There are different schools of thought

concerning what the appropriate proportion of each should be.

Currently ' Eansphire' s portf olio contains 64 ..7 * common stocks ,

24* bondse and 11.3t cash equivalents. The model that Standish,

Ayer t lilood (Eanpshire's investment managrers ) reconrmends contains

70t cormon stocks , 25* bonds, and 5t cash eguivalents. These

- 63-

proportions are traditional yet Eot universally accepted. For

examPle, United. States TruEt Conpany's socialily.;aanslttne aeeountB

Iean more toualds 80t for cash equivalents and bonds with only

20t of the portfolio invested l,n conmon stockE. llhe rationale

behind this nethod is based on the feeling that there are other

forms of investments which are safer and nore profitable than

the stock narket, at least under present narket conditLons. The

question of appropriate asset rn:ix for Haqrshire is one warrant-

ing further iliscussion..

Diversification is iqrortant to proper nanagement of

a portfolio because of its capacity for reducing non-trErket

risk. Ilris principle has been relatively uncontroversial Eince

itE establishment in the nineteenth century. Briefly, by orn-

ing two coryanies in different industries that are impacted in

dlifferent says by outside events, the specific (non-narket) risk

of one tends to offset that of the other. Eolding stock in the

tr.o cotq)anies is therefore less ri.sky tban trning either indliv-

idlually. Sharply reducing the available investoent choices thus

reduces the ability of the investment manager to reduce risk

through diversification. South AfrLcan and weapon-producing

coryanries are heavily weightddl in certain industries and sectorE.

Ihe questl.on of proper diverEification (the goal of which is to

best replicate the narke t ana balance out cycles) is infirortant.

Eowever, all available quantitative studies have shorrn that by

choosing other industries that react similarly (usually within

tlre sam sector), the effect of excludj.ng a particular group of8

c.onpanies is not as large as intuition would predict. One palt

of Andretw Rudd's study looks specifically at this situatLon.

-64 -

Using the Investor Reaponsibility Research Centerrs (IRnC) list

of L77 publicly-traded conpanie s operating in South Africa as

the index, certain industrj.e B rere overhreightedt Euch as nsoaps,

coEr0etics, .' tretail, generalr'r and ntelephonei to coryensate for

the forced (by exclus.Lon ) undenreighting i.n 'international oil.,i

'buginegg rnachinesr' and nmiscellaneous, conglomerate" where

nany of tl€ companies tended to be concentrated.

Applying the principles of rnodern portfolio tbeory,

one ia forced to the conclusion that, yes, exclusion at Eoroe

point can severely danage a portfolio in terils of increased

risk anal reduced return. The operative phrase is "at sone point. i

Earqrshire I s endoment is relatively smal l in tems of the number

of coqranies represented. For exaqrle, the College cuffently

(as of April 30, 1982) holds the securities of three contrnnies9

in tlre capital goods sector whose n rrket capital represent ottly: .10

.39t of the I'licroscan 1400, {t of the lticroscanrs capital goods

aector, and 7.5t of Eampshire t s .incone fr@ cot@on stocks. If

the College rere to sell all three for .rny reason, there is no

question ttrat suitable subetitutione could be selected fron tlre

remaining 96t of the llicroscan t s capital goode even rith the most

stringent aocial reaponsibility criteria (capital goods represent

9.763 of the ltlicroscan 1400 market capital.ization) .

From the theoretical point of viewr. there is a stlongt

incentive to design a portfolio wbich closely replicates the

'market, " although in practice, the amount of funds available

to any single investor would never be enough to holcl a port-

folio identical to the rnarket' i-n size and proportion. Small

-65-

portfolioE e3pecially have a natural linit aE to the number

of securities tlcy can hold, creating a high level of natural

excluEion in any event. Ehere are nany tlpes of exclugion

under whiclr traditional investnEnt nanagers operate. Probably

first and forercst is in the formatj.on of a nanageably sized

pool of inveatnentE used for recoumendation to clients. Depend-

ing on the size of the fir:m, the size of gls fi.rm may vary.

EalErEhire I s investmen:! nanagers, Standish, Ayer & Wood, keep

qt-to-date orr a rotating pool of roughly 250-300 comlnnies.

Ottrer portf,olios operate under suctr exclusive criteria as div-

idend or guality requirernents. "Financiallyr lsocial responsi-

bilityl criteria are no different from rnany other exclueionary

and targeting criteria. . .whicb are imposed on inveEtnent nanage-

nent. There can be few nanagers who are able to purchase the11

asseta tbey rant LEespective of external or internal regulation. "

There hag been lfuuited practical exgrerience to date

involving exclusions under socl.ally responeible investnent

criteria. Many of the mjor churches have he ld socially re Epon-

sib!'e policies for a number of years, but nost have taken rnore

of a regponsible shareholder approach than an exclusion/targeting

approach.

The United States Trirst Company has compiled data

for 1980 and 1981, on their Socially Sensitive accounts which

represent 20$ of a1l their accounts. With nine areas of social

concern specified, these accounts ba\re done considerably better

than the Dow JoDes Industrial Average. There are rnany possible

explanations for thds result: nost of their portfolios are

-66 -

concentrated in cash eguivalents rather than equitiesi the

comp€rnies that have been avoided have not been in a period of

great profit, etc. But for whatever reason, there has stil l

been a marked prof it overall, warr€rnting further and closer

observation.

l{ichigan state university, with an endowment of

roughly $10 nill ion, fully divested itself of South African

securities in 1978. Since that time, their portfolio has p€r-

fomed well above its previous average. The securities that

were sold depreciated while those that'were bought as replace-

ments did very well. Again, there are other contributing fac-

tors, but ttre majof point to be made is that there was not a

marked decline in investment income.

The PAx l{orld Frrnd was organi zed, as a mutuar fund in

1970. They operate under very stringent criteria excluding

the Departurent of Defense I s 100 J.argest contractors, other corl-

panies contracting wittr the Department of Defense if 5t or more

of their gross sales utere derived from such contracts, anrd cortr-

panies engaged in liguor, tobacco and gambling industries. The

Fund also has positive criteria targeting companies wittr fair

emploYnent and pollution control policies and practices, and, it

invests in some international development. This organization is

well respected in its field and has been offering its investors

solid returng for over a decade.

There is ver-y little infor-mation on socialry respon-

sible ilvestnents from colleges and universities. euite a few

institutions have divested stocks ix corporations doing business

-6]'-

in Soutlr Africar but most of these actions are fairly recent.

Eowever, there is no evidence to date of any dramatic losses

being incurred.

Eampshire t s investment nanagers r standish, Ayer & l{ood

have e:lPressed' a deep conunitment to work closely with us in

implementing any new policy that is instituted. They are very

awa,re of the concerns surrounding the issue of social respon-

sibility in investing. They don I t want to see Harupshire losb

money on its investments and ,have pledged to telI us if ttrey

fe91 we are nearing the point at which they would be nncomfor-

table in managing the portfolio. 'To help our clients get a

psychic retrard from ttreir.. portf olios , not j ust a f inancial orr€ r nL2

is one of SA&Wrs main goaIs.

Another area that needs to be addressed concerns the

Possible effect of a new investment poficy on potential donors

to the Collegre. There is very little (if any) empirical data

on whictt to base an estimate of ttre effects on an institutionf s

suPPorters of its investment policy. This ie a question that

needs to be opened for broad discussion, because ttrere €rre many

issues involved.

Haqtshire is funded largely by enrollment (tuition)

with significant contributions from parents, alumni, friends

corporations. It is difficult to predict exactly what the

reaction night be, of tlre people involved with Hampshire, to

socially regPonsible investment policy. It is difficult to

,

and

judge what the effect on some of these constituencies (parents,

friends, futnre students, alums) might be. It is possible that

-6_8-

so[ne of this constituencfT may, for various reaaons feel alien-

ated. Sone rnay not agree that financial matters are political .

and subjeet to moral considerations, whi le others strongly

feel that capital is not neutral. It nay be,-tlre Fattiellar

political stand jJr questiotr that disturbs others. Either way,

there ig no ray of quantifying or acculately p',edicting ho!,

people are going to react. There are nany notj.ves directing

donors who gLve support and.tlrere is likely to be both agrree-

nent and disagreement as to the advisability of whatever action

the College takes. Sone of those disagreeing may react by

witbdrawing suppor!. others nbo disagree will clontinue to give

becauae HamE shiret s political philosophy is not the nptive

behind their donatiqrs. Anong.those agrreeing, the only change

that could be e:rpected mu].ct be that of increased support.

tfhere is an understandable concern about the possible

effect of, a Eocially responsible investnent policy on tbe

College's relatioaship with the.corporate worId. It could

prove to be danaging to our cor?orate firndraising effort if

tbe College were to alienate a substantial number of prospective

donors - gowever, cortrorate contlributiona at preaent repreEent -

only 0.65t of Eansphife t s revenue, and tbe cor?orate fundraising

effort has been relatively snall. On the other hand according

to Gerard Patriclc r tbere have been trc ingtances where Eanpshire

ras turned dowr for corporate support sith the iqrlication that

our south Afrlcan divestrent policy was the reason for the denial.

llhere are different schools of thought as to how a new

investnent policy should be publicly announced. Representing

-69*

one point of vieo was an alumnua who responded to our question-

naire i 'The quieter se 90 about fotmulating this policy, the

more restrictive re can be. Since no one really cares what

little Eaqrshire College thdnks, we can probably have cleaner '

hands and cleaner investsent s by keeping t$ese guidelines inter-13

nal." Iet this stlongly conflicts with the notion of naking

a political statenent ag tbe College tlid in the case of Souttr

Africa. In that case, by taking a slmbolic action in a groning

area of concern, the College he lped to clear the path for other

institutions. Despite tlre fact that Hampshire was fairly retLcent

over its South African divestment (there was not even a pregs

lelease) , it is likely that rnost nembers of tlre coruunity would

want to announce the pollq/ publicly ingtead of keeping it

secret. & tlre decision is 'nade not to share in a corpanyr s

investment profits, then their corporate donatidrs ought not be

sought. The noney is tlre sare shether it is pre- or post-tax

to tbe c@pany. .

We can suroarize our findings as followg. In those

areas shere tbeories and d.ata exist, i.e. portfolio theory,

thse is no evidence that a socially responsible investnent

policy rrculd subj ect the Collegers portfolio to any slgnificant

added risk. There is virtually no good evidence on which to base

a j uclgement cf the effect of such a policy on future donations,

rhetlrer corporate or othenrise. In thiE alea we have only intui-

tion and anecdotal evidence on rhich to base our asEessr0ent. It

does not Eeeu appropriate to allorr such tenuoua arguments to pre-

vent the College fron adopting a socially responaible investment

pol.icy.

-7 0 -

1.

2.

3.

4 .

5 .

6 .

7 .

FOOTNOTES

Standish, Ayer & Wood meeting, July L4, L982.

Critics of modern portfolio ttreory claim that it, as mostother analytic techniques, is not refttective cif .the sealworld. Wtrile this probably has sorre validity , tlre fact E€-mains that this is a fairly standard neans of evaluatinginvestment prudence bottr in financial and legal circles.

A. Rudd, 'Divestment of South African equities: How Risky?r"Journal of Portfolio Managemeng, Spritrg, L979.

Excluding and targeting are two investment operations ttratshould €to hand in handr excluding those companies that €rre'offensive' and targeting investments towards oproductive"or oless offensive' companies or industries.

A. Rudd, Spriog r L979 .

A. Rudd, nsocial Responsibility and Portfolio Perforrnanc€ r tr

Cafifornia tlanaq , Surnmer 1981.

Conunrrnity Econonics I Inc. 7 DivestPrudent Approach For Pension

8" A. Rudd, SpriDg r L979 .

f . ilhe market is broken down into sectors into which aLl thevarious industries f it. Stanrdish, Ayer & Wood use thefollowing sector list:

Basic fndustriesCapital GoodsConsumer DurablesConsumer NondurablesEnergy

Eealth CareTechnologyFinancial ServicesTransportationUtil it ies

10. The MicroscErn 1400 is an index of the market similar to theStandard and Poor's (Sep) 500 (wittr market capitalizations of$1r039283.1 mil l ion and 5773,712 ni l l ion respectively) butbroader - as it includes 1400 comp€rnies rather than just 500.We have chosen to use tttis broader index because a reasonablenumber of ttre companies appeErring on the lists of reapons-producing companies and of companies doing business in SouthAfrica are not part of the SeP 500. We wanted a readilyavailable index which contained most of the corE)anies (somea,re privately wned) to be excluded und,er present or proposeddivestment guidelines r so that the effect of the exclusioncould be fairly assessed.

11. A. Rudd, Suluner, 1981.

From Africa: A

- 7 L -

NOTES (cont. )

L2. Standish, Ayer & lfood, July 7, Lggz.

13. Letter from Brian James, ZrF, dated August s, 19g2.

_72_

AppendLx A

The rrsafestrr portfollo does not have lts lnvestments concentrated

Ln one sector of the narket. If souething were to change drastl.cally iu

that area of the market, the entire portfollo would be greatly affected.

Rather, lf the portfolio ls properly diversified, its chances of remaining

stable overall durlng perLods of changing cycles or swlngs are far greater.

By excludtng U.S, conpanies operating Ln South Afrl,ca and weapons-

produclng companles from the posstble pool of investments, just how nuch of

each of the naJor market sectors would be Lneltgible for Lnvesting? Wou1d

there be a sufflctent nuuber of conpanies renaLning wlth whlch to bulld and

ualntaln a sound portfollo? In an effort,to find out, I broke down lnto

sectors each of the two llsts: all companLes operating in South Afrtca, and

the top weapons producers from the ll.st of top contractors with the Department

of DefenEe. Ihere was some obvlous overlapr so the figures for the conbl,ned

total are sooewtrat less than the sum of the two, As stated Ln footnote /110,

the lH.crosc'n 1400 was uged as the base .lndex of coupanles. Not all of the

companles lnvolved appeared 1n thls lndex, though nany more than would have

been ln the Standard & Poorts Lndex, so rre can only tally those for which we

have luforuatlon.

Letts walk through an example. Rockwell lnternatlonal Ls a company

present on both li.sts. It ls found at nuuber 13 on the weapons producersr

lLst. Its ril 'rket value as of 6130182 vas $2403.4 ntllion. Roclnrell ts

elaselfled as a Mu1tl IndustrT and Other Industrlal Equipment conpany whlch

places lt tn the Capltal Goods sector.

The eoryanies wlthln the DficroscaD 1400 have been broken down into

industrles, and total narket capl.talizations nere found for each. I{l,thin each

-7 3 -

sector, the Lndustry totals were combined

ten sectors. These were the flgures used

eoupany represents wlthin tts own sector.

provlde totals ln each of the

fLnd the percentages that each

Seck to our elaople. Rockwell lEternatlodal accouuts fot 6.6g2

of ita bdustry (ftulti Ind.), 2.362 of 1ts secto! (Capltal Goods), and 0.232

of the eDtlre ulcroaca! 1400 capttallzatlon. The laet two flgures ale the

mst releveat for our orn purposea. At the bottortr of the second page of data

are the breakdosas for the weapoas list. Eere, the percent weightings of

eacb sector are totalled.

The go"'e laforoatlon speclfic to Roclxrell oay be found oE the fouath

page of the south Afrlca ltst (f24). Nore that Rockwell is a slgoatory to the

sulllvau Prlnciples. This dl,stlqctlotr is hportaot vhen looklng at page 12.

The. eare concept 18 follosed here aa vlth page 2 of the'weapona prod.ucere'

llst. The elgnatory co4aales ard the. oon-slgnatory compaaiea are totalled

eeparately fl,r8t sithln each sector, then added together for the totals of all

coqauiee operatlng l"n South Afrlca.

The laet page ahora the co'bi'ed totars of the two llsta, teklng the

overlap luto cotralderetlon. rbe percentageg of the coupaales appearl.ug on

both llsts sere aubtrscted fron the ueapons totals.

rhere are aouer tDtereating pohts r'oag the results wtlch should be

Eoted. The percentage of the ut1l1tLes sector represented by weapona-producing

coryaalea at fl,rat glaace eeens tather large. yet, by traclng back to the

chart ' ffud that ar&t contrl.butes to 2g.LL7 0f the entlre aector. fre lelalD-

lng 3.072 of the total utllltles aootrg the seapona producere stauda for only

oBe colpaay. so' shlle 32.182 of the utilltl,es sector would be inellglble

for lmreatlng, thls ouly ueaas tso coryan1es, one bel.ng AT&T, leaving the rest

of the tens of utlllty coq)ao,ies ea vtable itrvestDenta.

to

to

-7 4-

In a glven portfollo, there ls a relatlvely soall number of

coryanl.es wtrose stock rnay be held et a slngle tlne. Portfoll.os such as

Hanpehlrets hold norrnally around 20 dlfferent companyts stocks, whlch means

that out of the entlre posslble pool of Lnvestments, lnvestment nanagers

nrst be able to find at least. twenty at any glven tlne that are stable and

profltable. The comblned total of the ttro llsts represeots 35.312 of the

entlre llicroecan 1400. Out of roughly 642 of all the coupanies llsted ln

the llicroscan, tt mtrst be posslble to flnd the rlght numbers and type of

conpany (whether Large, small, growth-oriented, etc.) wtth which to invest.

Ia the analysis, shether you look posLttvely or negetively at these flgures

depends upon your outlook. You should look at the totals and thlnk about

the renal.ning 60Z of Baslc Industrteg, the renaining 642 of the entlre

Mlcroscan 1400, aud rerember that frou these hundreds of coupantes, we need

to flnd only twenty whl.ch are flnancl,ally secure. It can be done.

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Wagi ng Peace at Attoth.t L.n"l

by Chuck Collins w:ith Doug Tooley

One of the more laudable elenents of our proposal to divest fromcompanies that produce nuclear lreapons is that it aproaches the rootsof militarisn at a more fundanental level. The freeze campai.gn hasbrought the reality of nuclear war to the attentj-on of the najorityof Anerican citizens. But lt is evident that the freeze movement asit stands attacks only a synpton of the disease.

Several members of our comunity have been exploring, in detail,this question of tVhat are the roots of the arms race?tt ProfessorAl1an Krass taught a course by that name which exanined differenttheories; strategic, bureaucratic, econontc and ideological, ln anattempt to locate the doninant, driving force of the extermini.sttechnology. The genesis of the arnsi race becomes even more

' compllcated when we see that strategic interests (the quest fortechnological advantage and invulnerability) are actually shaped byeconomic needs, bureacratic structures and ideological assumptions.Richard Barnett in The Roots of hlar shows how the business creed andcorporate interests shape the di.rection of Anerican foreign policy(and therefore neapons appropriati.ons).

Seymour Melnan, author of The Permanent War Economy writes thatthe political decisions whj.ch support the war economy are ttrooted inthe ecomomic interest base of part of the economy, but are also givenpolitical support from the rest of society that has beenideologically trained to regard the war economy as necessary for thewell-belng of all. ft (Melman, p . 287)

Therefore people working to end the arms race must transform theideological gearworks of the arns race as well as challenge theactive agencies conducting foreign policy. One could argue that,waging peace on this level is no different from the novement for SRI.As Alexander Cockburn rrrites in the Vil-lage Voice nTo reverse themomentum of arms spending in the United States requires, in the end,a nelr social and political order perhaps one alien to manymustering to the freeze movement today. A broad movement nust, selfevidently renain broad, but the denands of consensus should notexti.ngui.sh political debate or seemingly uncomfortableproposistions. rr

The whole issue of corporate ties to the €rrms race is very touchy.It is one of the ideological assunptions of our socj.al order that oureconomic system functions for the benefit of hunan needs. But thereality of the nnarket is that it treats all goods and services sfunplyon their dollar va1ue. Ethical criteria for investment andproduction are outside the realm of narket considerations. Anexcellent example of this is the Gross National Product, how wemeasure econonic health. The GNP measurement makes no distinctionbetween soci.al util ity and excess.

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It is quite easy to show that there are nany corporations whichprofit from operating in oppressive countries, the cold rdar and warltself. Unfortunately w€r as benificiaries choose not to think aboutit and give our taciL consent.

A relevant question here ls whether those corporati-ons whichbenefit from the weapons build-up use their power to influence thedecision-making process of the U.S. government. This questi-on hasnot been answered conclusively but at the very least their politicalbeliefs, wtrich may be influenced by their profit-making, gi-veideological confiruation to the justificati,on for nuclear escalation.

If there is ever a large scale divestment fron nuclear weaponsproducers the profitability for the renaining investors should belowered by a large margin. Ttris would allow then to look at thelssue more cleanly.

Divestiture does not end nuclear weapons production unilaterallyas some opponents suggest. We do not advocate this nor believe thatSRI could ever bring iL about. The symbolic statement alone isextrenely strong. To divest says rire do not believe in war and will'not take its benefits.

One further value of divestment is that it spurs, by mediacoverage, the wide-spread movement for SRI.

This is a big step fon*ard for the freeze novement, whether itsucceeds or not is a big question " IrIe can say no to nuclear lrar butare we willing to pay the costs?

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Social Iniurv and the production of l,reaponrv

__ by Bram tevin, Beth Marcus, Chuck Collins, Matt Goodnan, Ton Stoner,and Barbara Mcqueen

I.4arch 13, 1992

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To understand why and how our arsenal continues Lo expandr w€ mustunderstand the nature of the.uil i tary industrial

"orpi"*...It is a

trenendous polltical and econoni.c nachine, upon whlch thousands ofbureaucrats and millions of workers are supported.

Conversion is not €rn idealistic solution to the arms race, but arealistic alternative for the hunan race. .

Brandon Fine, "Conversion and the Arns Racer" Social Science DivisionI Exam, Spri.ng L979.

What threatens our i.nteresSs-vfusf, causes us even mental unssss-isseen as outside ourselves, as the Other. We can ki11 thousandsbecause we have first learned to call then ttthe enemy.tt l.larscormence in our culture first of all, and we kill each other ineuphenisns and abstractions long before ttre first nissiles have beenlarrnched.

E.P. Thonpson, Letter to America

EXCERPT FROM TIAMPSHIRE INVESIT.{ET'IT'POLICT STAffiMMIT

Definition of Social fnjury

For the PurPose of these guidelines, SOCIAT II{JURY rri11 beinterpreted to mean: the injurious inpact which the activities of aconPany are' found to have on consrrmers, eurployees, or other persons,or the environnent, particularly including- activities which violateor frustrate the enforcement of rules of donestlc or internationallaw intended to protect individuals against deprivation of health,safetyr o! basic freedom.

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INTRODUCIION

CII0IR, a subcommittee of the Finance Connittee, was created inresponse to the grow'ing concern of students over the college t sinvestments in corporations operating in South Africa. What energedfrom this vigorous debate was the articulation of a collegeinvestment policy that sought to avoid corporations that furthersociaL injury. During the five years CH0IR has been j.n existence, theSouth Africa investnents have been the only ones that have beenconsidered as socially injurious. However, there has been soneliuited di.scussi.on about withdrawing investment, from companies inother human rights violating countries, and companies thatmanufacture nuclear power plants and nuclear vreapons.

In the last two years we have witnessed a Large nrrmber ofHanpshire students and faculty expressing concern about, andorganizi.ng around the i.ssue of U.S. nili.tarism and lreaponsproduction.

In Aprl1 of 1981, the college community participated in areferendun on the U.S.-U.S.S.R. Nuclear Weapons Freeze. Thestudents, faculty, and staff voted overwhelningly ln favor of thefreeze , 934 to 2L. The Hanpshire Coalition for Peace throughDisarnanent, a student group with broad based participation, hosted anational, inter-collegiate conference on the Nuclear Weapons Freezein the Fall of 1981. Over two hundred students, fron over 25different colleges, came together to discuss the arns race and therole of the U.S. weapons industry.

0n sampus there are also groups which have been active aroundi.ssues of Central Anerica, regi"strati.on and the Draft. Several dozenstudents are engaged in academic projects rel-ated to U.S, srilitarisnand the U.S" weapons industry.

A Large, well-inforned portion of the student body and facultybelieve that the U.S. weapons industry, and primarilly the top 75weapons producers, causes social injury donestj-cally and abroad.This report specifically addresses the injurious inpact the top 75have upon the United States economy and citizens, the ways in whichthe top 75 have vioLated donestic pol-icies and international 1aw, thei-mpact lreapons production has on our environment, and the threat thetop 75 have inposed on world peace. There are several reasons why wehave chosen the top 75 weapons nanufacturers as the concern of thisproposal.'

Most of the contracts awarded by the Departnent of Defense areconcentrated in a handful of corporations. Out of 231000 companiesrecei.ving defense contracts, the top 100 conpanies obtain two-thirdsof the dollar value of the awards granted by the Departnent ofDefense. fn this proposal, we have singled out the top 75corporations which recei.ve contracts solely for lreapons manufacture,rather than the broader issue of defense work per s€. For example,this proposal does not target companies involved in the production ofeither oil or uniforns for the Pentagon.

As members of the Hanpshire community, rde feel we have aresponsibllity to scrutinize what our own institution is doing topromote or retard fundamental hunan rights. Divestment of the top 75weapons producers would represent a significant step towards creating

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a socially responsible investment portfolio. Such a step wouldsignal to others Hanpshire College t s c,emmi gpsng to peace, progress,and social justice.

MILITARY SPENDING AND fiIE ECONOMY

Since lJorld I'Iar II, it has often been argued that nilitaryspending stlnulates the A[erican economy by generating increasedproductlvlty and eoploynent. During I'/orld War fT this process did infact hold true as the war econony helped Anerlca shake off the GreatDepresslon. Over the Long tern, hovever, nilitary spending has hadexactly the opposlte effect.

Since 1'945, the nllitary has consrned the greatest portlon ofcapital and vital resoulces, while yieldlng no product useful forconauoptlon or further productlou. Decades of h'igh Eilitary spendinghave helped to create lnflation aud uuenplolment, have drained scarceresources, and have decreased our cotspetltive edge in theinternatlonal narket. One does not have to look very far to see thedeterioration of the autonobile lndustry, the steel iodustry, nachinetoo1s, radlo and televlsion natrufacturing, rallroad equipnent,precisioo optics, and naoy nore.

Ihe military hae been reeponeible for dulling our coupetitiveedge in the world narket by lnvestlng huge suos of capital fornon-productive purpoaes. Our lndustrlal base has been drainedbecause public speuding has been dlrected touards producing soclallyand econouically useless products aod has not increased our capacityto leet huuan needs. As Iester Thurou points out, rnllItary spend:ingls a forn of consunptiotr. It does not lncrease our ability toproduce goode and servlces 1n tbe future.tt (#1)

As the result, the productlvity growth rate dropped to 2.lZ by1965 and to 1.82 by 1975. The UnLted States has had the loveet rateof productirity of ary hlestern fudustrial nation durlng the pestfifteen years. By L977, growth for every $100 spent on lacreasingproductivlty, $46 rras allotted to the Ellitary aector. By contrast,West Gernany allotted $18 out of every $100 to the Eilitary sector,and Japan gave $3. It is not a coLncidence that both Japan and l{estGernany's productivlty growth rate has been above 52 annually. (#21

Arother inevitable result of nllitary spending is inflatioa.firis is true for two reasona:

1. Payi:rg workers to bulld fleapons rrl11 increase donand for baeicgoods and gervices but doee not siEultaneously increase the supply ofbasic goods and services.

2. The funaelling of billions of tax dollara irto a handfuL oflarge corporatloae has created veritabLe nonopolies which are nolonger responsive to fluctuatl-one in the econony. Because thesecorporationa are so large, they can set pricea a.od through verticalnonopolization can prevent other companies fros entering themsrketplace. (#3) This Deans that durlng periods of receseion, thesecorPorations can reglst lowering prices to upgrade darnarld, and caneven raise then to neet their proflt ojectives.

Military spendlng, due to its capital-intensive nature, alsogenerates nore unenploynent thao other areas of econonic speuding. AU.S. Departnent of labor study found that a billion dollars spent on

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areas such as environmental control, alternative energy development,education, and nass transit, would yield on the average 201000 morejobs . (#+1

It is beconing clear that our increases in weapons expendituresare not increasi-ng our security or power in the world. They are, infact, havlng the opposite effect. As Richard Barnett writes:trExcessive rrilitary spending now produces some of the sameconsequenses as nilitary defeat; that it gi.ves foreign governmentsgreater control over the l i fe of Lhe country.tr (#5)

Excessive military spendi,ng creates a decrease in productivity.ft creates inflation. It creates unemploynent. The sum total ofthese statements is ttrat it, undermines our econon-lc strength. Forall these reasons, w€ conclude that the current 1evel of Americanweapons expenditures is injurj-ous to our economy and the Americanpeople as a whole.

MILITARY SPENDN'IG AND SOCIAL PROGRA},IS

There is a lot of talk about security these days, but it isunclear what exactly is neant by that when the sacrifices made forinternational securi.ty so obviously threaten domestic security. Theresources of this country, although vast, are not limitless. Theremust be a balance struCk betryeen spending for defense and noney spenton social services and hunan development.

Although it is difficult to separate the role of corporations inmatters of defense, the complicated relationstrip between them is morespecifically addressed elsewhere in this report. Tttis argument w:tllbe restricted to the rray defense spending in its present form, issocially injurious because or its negative effect on donesticspending.

The priorlties of the current Adninistration are heavily skewedin favor of defense spending. trtlhile cutbacks are being instituted inalnost every area of social services, the United States is sendingnilitary aid to repressive regimes and building redundant nuclearweapons, in the name of ttdefensett and security. Particularlyaffected by the cuts in social spending are women, children and theelderly, of aLl of us suffer the losses. Seynour Melman published anarticle i.n The New York Times (7 /26/82) ln which he discussed theways that this countryfs vital services have suffered at the expenseof the modern military budget. Included was a list of trade-offsthat the Reagan Adninistration riras making 3 a trading of conservationfor military. For exanple, the $34 billion that would be requiredfor the I'fi nisslle, first cost, could pay for a ttcomprehensive 10year enery-efficient effort to save 25 percent to 50 percent ofUnited States oil imports. rr The $100 billion which w'i11 be ttsevenpercent of the nilitary outlays from fiscal 1981 to 1986" wouldrehabilitate the U.S. steel industry, to naking it the most efficientj.n the world" And the list goes on.

Very sinply, because of the enormity of the defense budget,basic human needs are no longer being met by the government. Whilethe President assures us that he has preserved essential services forthe truly needy, more and more people are feeling the effects ofReaganomics and realizj-ng that they are paying the price of inflated

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defense spendi-ng.May 1981 sarr 100,000 people denonstrating in hlashington against

U.S. uilitary aid to El Salvador. Traditionally conservative groupssuch as church councils and college adninistrators are joining moreprogressive groups in voicing their oppositi-on to current levels ofdefense spending.

0n February L6, L982 The New York Times reported on the annualneeting of the executlve council of the AFL-CIO, Despite theAIL-CIO! s long standlng support for a strong national defense, thecouncil asserted: rrThe Presidentts L982 State of the Union Messageand his Budget message add up to a total disregard for human needsand for the economic and social costs of high unenployment andrecessioo. tf

Lane Kirkland, president of the AFL-CIO, criticized the Reaganprogran for proposing that, ftthose who have the least to give and whohave gained the least from the fruits of our denocratic societyttshould bear the brunt of the nation t s economic hardships. 0nFebruary 18, L982 in The Tines, Albert Shanker, presi-dent of theAnerican Federation of Teachers ttwho refers Lo hinself as at certified hawk t expressed concern about the amount, of money spent onthe military without proper investigation to see how nilitary moneyshould be spent and where waste natght be.tt

Also on February 15, L982, The New York Tines carrj.ed €rn articleabout the ways colleges and universiti.es will be struggling in theface of cuts equaling as much as $2.2 billion in Federal noney forstudent aid. These cuts in financial aid will prevent nany studentsfrom returni.ng to college, and schools will be even harder pressed tomeet their rising costs. Ilampshire is only one of the collegesnationwide where cutbacks in increasing the nunber of rrnemployedpersons, dnd virtually assuring ttrat educati.on wiLl become a bastionof the wealthy. In addition, the overall standard of education inthis country 1r:t11 be lowered.

It is a matter of fact that .there is noL enough noney toincrease defense spendlng rclthout cutting spending for human needsand vj.tal services. In light of the tremendous power that defensecorporations wield, and the linited power that individuals, includingwomen, children, the elderly and the poor hold, it seems mandatorythat we denonstrate that rre do not support the stockpiling of nucleararns or aid governments which repress their people while people inthis country are deprived of their basic human rights.

DOI'IESTIC INFT.,UENCE OF ITIE TOP 75

The top 75 weapons manufacturers have engaged in a wide varietyof activities to influence Congress. Their financi.al objectives areto get Congress to raise nilitary spending and to but the latest,most sophisti.cated weaponry. These activities include lobbying,supporting political action comnittees, and engaging in propagandacampaigns. The amount of noney these corporations spend on pursuingtheir own j.nterests far surpasses that of any public interest groups.

A study of the top five defense contractors (Boeing, Lockheed,Rockwell International, I"lcDonnell Douglass, and General Dynanics )

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shows that a total of $16.8 xnillion was spent by the companies tooperate their offices in hlashington, D.C. during L977 78, and Lhatthe companies! Political Action Connittees, the largest corporatePACs, averaged $811000 each per year in total disbursements duringthe same tine period. (#01

In reference to the influence of the large corporations doingbusiness with the Pentagon, Adniral Rickover, in his farewellstatement to the Congressional Joint Economlc Comittee said:'rPolitical and economic power is increasingly being concentratedamong a few large corporations and other officers-power they canaPply against society, Government, and individuals. Through theircontrol of vast resources these large corporations have become, ineffect, another branch of government. Ttrey often exercise the powerof government, but rclthout the checks and balances inherent in ourdemocratic system. tr (#11

Rickover goes on to document numerous contract violations andcost over-runs of the top defense contractors. Due to their size anddonestic influence, these corporations are able to underminedemocratic institutions and violate the basic laws of a narketeconomy "

E}IVIRONMEI{TAL EFFECTS

Conpanies engaged in activities which cause harm to theenvironment are suspect of violating Hanpshire College t s investmentguidelineS. The products of the top 75 weapons nanufacturers clearlyare guilt,y of this. The use and production of weapons not onlydrains economic resources, it poses a serious threat to ourenvironmental safety as well as our hunan and natural resources. fnorder to Prove the environmental injury of the nanufacturing ofweaponsr w€ have found it useful, .to divide different weapons systemsinto three catagories: nuclear, chemical-biological, andconventional.

The atonic bonbing of Hiroshina and Nagasaki in L945 has madethe destructive power of nuclear weapons knonn to the world. In thepast thirty years the increase in numbers and sophistication ofnuclear weaPons has increased the destructive power in the UnitedStates arsenal several nillion-fold.

A full scale nuclear exchange between the United States and theSoviet Union would result in the obliteration of all major cities inthe northern henisphere, and would ki1l the najority of the urbanpopulation. Most of the rural population would be ki11ed by blastand fire. Nuclear fallout resulting fron the nuclear blasts wouldseriously reduce the ozone layer, causing change i-n global climate.

The use of chenical and biological weapons would also haveserious environmental consequences. Chemj.cal weapons such asdefoliants, Agent Orange, napalm, and other incendiary weapons wereused by the United States to denobilize the guerrL11a forces in theVietnam War. Their use resulted in long the ecological inbalance ofSoutheast Asia. Even though there are international agreementsagainst the use of biological vreapons, the United Statesr BS well asnany other countri.es, is stockpiling chemical and biological weapons

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at unprecedented levelg.Biological neapons (1.e., 1etha1 l-lving organisns) are

relatively uacontrollable and indiscrininate. Their inpact wouldextend beyond the battlefield to innocent third parties. There is nouay to control the spread of the biological organisrns to Livestockand crops through winds and water currents. We do not know what thepotential iEpact chenical and biological weapons would have if thestockpiles of these weapons were actually used.Fina11y, one should not underestinate the environmental destructioncaused by conventional warfare. The bonbing of Dresden in lrlorld WarIf kiLled as tuany civilians aa the bonbing of Eiroshr rn.. It requirednillions of dollars to rebuild Europe I s industrial aud agr:iculturalbase after the destruction of World lrlar II. The hlar seriouslydepleted Europe I s foreats and, in sotle cases, caused severe soilerosioo.

Not only does the use of the above-nentioned reapona cauaeinjury to the environnent, but the construction of these fleapotrathreatena our safety and squanders our natural re8ources. ExtractiaguraniuE fron the earth for the production of nuclear explosi.vesexposes niners to toxlc radiation. Nuclear Eaterials Eust betratrsported fron extraction facilities to productiotr sites by railand roadway which iocreases the possibility of sabotage and radiationleaks.

During the 1950rs atrd 60's the testing of nucLear reaponsconta$iDated our ateoaphere and destroyed signiflcant areas of desertir Utah and Nevada. Ttre public an€reness of strontiun 90 in nilkduring the 1950rs brought about public resi.stance to the teeting ofnuclear weapona wtr{ch forced the United States government to make anagreeEent rith the soviet union to ban above the ground tests. Eventhough thiE agreenetrt exists (knoun as the Partial Test Ban treaty),undergrormd tests continue to release radioactive lsotopes into theatnosphere. Finally, the nuclear waste generated by the productionof nuclear ueapons nust be stored in isolation. As of yet nosatiafactory technological solution for its dispoeal bas beendeveloped.

The devel-opnent of chenical and biological neapons pose the sanedangers as nuclear weapons. The stockpiling of these weaponstrepresents the constant threat that soEe day they $i11 be used.Transportation, production, and storage of theee rreapons risk anaccidental release. Serious accidents of this kind have alreadyoccured. The 1950 release of a bacterial agent, Seratia, resulted inthe deaths of tvelve innocent people. (#9)

In the past century the potential destructive pover of rdeaponshas increased to the point where lt is nor possible to destroy therrorld. The obvious threats posed by the use of thege r{eapons and theserious environmental danage caused by accldente atrd testing leads usto believe that the productiotr and use of weapons today endangers usto the extent that there can be no question as to their sociallyinjurious nature.

TT{E TTIREAT TO PEACE

It is little more than a truism to assert that any

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weapon--whether conventi.onal, chenical, biological, or nuclear--isinherently a threat to peace. Ilowever, in our tine it is one forn ofhreaponry, the nuclear weapon, which clearly poses the most seriousthreat to peace, Erd which menaces a type of war that hunanity hasnever before experienced. Therefore hre r^ri11 generally confi.ne thissection to the questi.on of nuclear weapons. Simi-lar arguments, itnight be added, could be made for the three other forns of weaponry.

Nuclear weapons were first j.nvented and first used ix L945.This does not mean, though that the development of increasinglyaccurate and powerful nuclear weapons has stopped. We are all awarethat it has not. For the sake of brevity r w€ wlll only focus on onesrrch innovation here: the MIRV"

A MIRVed nisslle ls one ttrat contains several independentlytargetable warheads on it. Each rrarhead can strike a differenttarget. What this means is that one missile has the capability todestroy nany of the other side?s missj-les. For exanple, one Tridentsubnari.ne can carry about 400 warheads, but it would onl-y take onewarhead to destroy it. fn terms of the actual numbers, all 91000U.S. warheads could be destroyed by about Lr20O successful Sovietshots, while all 61000 Soviet nissiles could be knocked out by about1,500 well-ained Anerican warheads. (#tO) Therefore, the UnitedStates has about six times the number of warheads needed to destroythe Soviet deterrent, while the Soviet Union has about five times thenecessary number. .

Thi-s does not mean that there could be successful disarmi-ngfirst strike by either side. But what it does mean is that there isan advantage-an increasing advantage-between striking first andstriking second. When the issues are as great aE national securityand world peace, this situation certainly has ominous consequences.As Hernan Kahn describes the sltuation: trMost governments when askedto choose between war and peace are like1y to choose peace, becauseit looks safer. These same governments, if asked to choose betweengetting the first or ttre second sfrike wiLl very likely choose the \first strike. They wiLl do so for the very same reason they chose \

peace i-n the fi.rst choice; it is safer... As soon as either sidethinks that war is probable, it is under pressure to pre-enpt.. . Thei,nstability is caused by f the reciprocal fear of surprise attackt, inwhich each side feels a pressure to strlke nainly because it feelsthe other side has exactly the same pressure.tt (#ff)

We need only look as far as World War I for a historicalexanpLe of rrthe logic of weaponrytr l-eading nnwilling nations to wardue to the advantage of striking first. A.J.P. Taylor gives thisaccount, unnervingly similar to the situation we face today:ttNowhere was there conscious deternination to provoke a vrar.Statesnen nj.scalculated. They used the i.nstruments of bluff andthreat which had proved effective on previous occasions. This tinethings went r,Jrong. The deterrent on wh'ich they had relied failed todeter; the statesmen became the prisoners of their own weapons. Thegreat armi.es, accumulated to provide security and preserve the peace,carried the nations to war by their o!{n weight. tt (#tZ1

As a final noter we would like to mention that ttpeacetr does not9n1y refer to relationships anong nati,on-states. There is also thettpeacett that can only exist anong generations that can pi.cture afuture several generations down the road. Clearly, nuclear weapons

-L02-

have destroyed thJ.s peace. Dr. Joha Mack conducted a study of Bosto!hlgh schooL students between 1978 - 80. Thege are his concluslons:ttthe questioonalres showed that these adolescents are deeply' dleturbed by the threat of nuclear war, have doubts about the futureaud about their own survj.val. Ttrere is also cynicisn, sadnees,bitterness and a senae of helplessness. They feel unprotected. Sonehave doubts about planning fanri.15.ee or are unable to think ahead inany long-terB sense. tfe nay be seeing that grorring up in a worldd@lnated by the threat of im:nent nuclear destruction is having aniupact on the structure of personality itse1f...It seens that theseyoung people are growlng up rrithout the abllity to forn stable idealsor the sense of continuity upon whlch the developnent of stablepersooall,ty Etaucture and the fortnatlo! of servlcable ideals depend.We oay find we are raising generatione of young people rithout abasis for naklng long-tem couoltsents, who are given over, ofneceasity, to doctrlnes of iupulsiveless in thelr personalrelationshipa or cholce of behavlors and activities...tt (#13)

It iB thls ?rinpact o! the structure of personality itself, tt thiggrowth of cyniciso, apathy, porrerlessnegs-whlch is directly relatedto the steadily eecalating nuclear arDur race -that poses ln aonenays the greatest threat to the long-tern peace of the worLd itself.

Beyond a doubt, it is socially inJurious to ralse a generatioBof young people rmder the shadon of nuclear nar.

CONCLUSION

This paper has attenpted to show that our current, levels ofmilitary spending are in fact decreasing our security in the world. -Real national security comes from a stable economy with fullenploynent provisions for substantive hunan needs. ReaL securityrrill come from decreasing the exports of weapons and lowering theprospect of nuclear r{ar. Ttre present course of U.S. policy isgravely decreasing our national iecurity.

Furthermore, those i.n porrer all too often seek military solutionsto political problens. Vietnan, Afghani.stan, Guatemala, and ELSalvador are just, a few examples of the doctrine of force takingprecedence over the principle of negotiation. Demilitarization ofthe world must start now, before the endenic occurences of globalviolence becone epidenic and irreversable. The people of the UnitedStates are connitted to peaceful ideals, but the U.S.

'governnent is

also the leading proponent of arns sales to the Ttrird hrorld. TheU.S. as a world leader should put an end to this dangerous andparadoxical policy by developing a new policy of deniLitarization ofthe Third World and by pressing for an international agreenent onElrms traffic. With the U.S. Leading the way, other arms-exportingnati.ons would be hard-pressed not to follow suit. Such a policy hrillnot be adopted, though, until the people of the United States speakup and te1l those in power that nilitarisn is no longer acceptable.

The path to a more peaceful world is not an easy one. AsPresident John F. Kennedy sai.d, rrMankind must put an end to the armsrace or €rrms will put an end to the human race. tt It is j:r this veinthat this proposal is being made, in the hope that the HanpshireCollege conmunity on contribute to the struggle for a safer, more

-103-

peaceful world.

- 104 -

FOOTNOTES

1 Lester Thuro'nr, t 'How Reagan Can Wrecl< the Economyr"New Yorl< , May L4 , 1981 .

2 Selrmour Melmanr "Loot ing the Means of Product ion, "The lleLYorl<_ filqe_g, JuIy 25 , 1981 .

3 - "The Inflationary Impact of Unemplo]rynent, " a studyfor the ,Joint Economic Committee of the U.S. Congress, Waslr-ington, D.c. : covernmeri t Pr int ing of f ice, 1976.

4 - U.S. Department of Labor, "The Structure of the U.S.Economyr 1980-85r ' r washington, D.c. : Government Pr int ing Off icer1975 .

5 - Richard Barnet, Real Security (New York: Simon andSch .us te r , 1981) , p .98 .

6 - cordon Adams, The Iron Trianqle (Nev York: Council onEconomic P r io r j . t i es , 1981) .

7 - Admlral Hyman G. Rickover, 'tstatement Before the JointEconomic Committeer " ,January 28, 1982.

I - Arthur H. westing, The State of the Environment,published by the united lliii@ sz.

9 - .Arthur H. westinq, weapons of Mass Destruction andthe Environment (London: i;y

10 - Allan S. Krass, t'The Evolution of Military Tectmolog'yand Deterrence Strategyr'r SIPRI Yearbook ( Stockholm: StockholmInternat ional Peace Research Inst i tute, 1981).

11 - Herman Katrn, On Tfrermonuclear War (Princeton:Princeton university pffi

12 - A.,J.P. Taylor, The First World War (Nev York: Capri-corn Books , L972) , p . 16 .

13 - Dr. .fohn Mack, "Psychosocial Effects of the NuclearArms Racer" Bul let in of the Atomic Scientists, Apri l 1981,pp .19-20 .

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To : The Faculty; Students and the Board of Trustees

Students for Investment Re-From : Chucl< Co]. l ins f or thespons ibi l i t .y

Re: Response to Memo from Adele Simmons ' May 1 1 r LgBz

Da te : May 13 ' 1983

It is important for us to c lar i fy once again the mot ivesand concerns ref lected in the divestment proposal that wi l lbe voted on Friday in the Finance Commj-ttee of the Board ofTruste€s.

As President Simmons pointed out in her memor . there aretwo parts to this proposal. This memo wi l l address the con-cerns over the first part of the proposal which urges thedivestment of the CoJ.J.ege's holdings in the weapons producersof the top 100 defense cont rac tors .

The proposed investment policy is not meant to "implythat even a ra t iona l po l icy o f nat iona l se l f -defense issoc ia l ly in jur ious. " Our paper a tLempts to show how majorweapons producers, within the context of our present foreignpol icy and nat ionaL ob jec t ives, cont r ibute to soc ia l in juryas def ined by our Col lege t s investment guidel ines. We asser-ted this by showing the ways in which these major weaponsproducers violate international laws and treati€s r undermineour country 's democrat ic inst i tut ions, threaten world peace,cause environmental damage, and destabil ize our economy.

A second concern was that, 'rHampshire not become sostrongly ident i f ied wit t r a part icular pol i t ical v iew that f reeinquiry would be compromised." The Col le lge is making a pol i t -ical statement by its economic support of the weapons industry"ft is myopic to consider divestment as an action which mightcompromise " free inquiry" whi le not consider ing taci t consentand col lusion with major weapons producers a poJ. i t ical state-ment in i tse l f .

The third major concern over the proposed pol icyts impl i -cations f or the "healttr of the colJ-egerr is indeed ttre mostdi f f icul t . There is a legi t imate concern that the Col lege maylose money in the process of sell ing its stoclcs even thoughthe proposal urgies that the secur i t ies be sold,- .r rat such a rate and in such a manner as not to f inancial ly en-danger the Col leg€. rr I t , is al .so possible that the corporat ionswhich we choose not to invest in may talce offense anC refuse togive donat ions to the Col lege" This however, does not seem tohave been the case with the South Africa divestment. Our pre-sent guidel ines do not al . low investments in almost 4OO cor ior-at ions which operate in South Afr ica. The weapons proposaladdresses i tse l f to less than 70 corporat ions, 30 o f wh ich op-erate in South Afr icd r and hence are already excluded by ourpresent guidel ines " Wi l l choosing not to invest in these 40more corporat ions substant ively jeopardize corporate gi f t -giv ing?

Another f inancial concern is whether the Col lege I s

-106 -

options for investment wil]. be severely limited. Our researchand discussions vith members of U.S. Trust and other firmsspecializing in socially responsibte investing, has shown thatthe Col legers investment opt ions wi l l not be ser iously l imitedby not being able to invest in less than fifty major weaponsproducers. Very fev major weapons producers r,tould be desirableinvestments for the college for reasons of financial prudencea1one. Because of the nature of major defense contracts, thestabi l i ty of these major corporat ions tends to f luctuate.There are many other institutions, church groups and founda-tions which have much stricter ethical investment guidelinesland yet remain financj-ally stable.

whatever the ri.sks the College might experience should bemeasured against other forces which are endangering the healthof Hampshire College. It is true that members of the Collegecomrnunity have been doing important work to artraken the Americanpublic to the dangers of nuclear war and mj.litarism. But asmany of us have found in this work, the arms race is not anaberration. It is not an abatract phenomena rf,hich is totallyremoved from the foreign policy goals of the United States'fron the lifestyle we have as Americans, and from the w-ays inr'rhich we treat one another. The arms race is deepLy rooted inour cul ture, our nat ion's v iev towards the rest of the world,in our economy, and in our institutions.

As individuals we need to speak out against the arms race.We also must pressure our institutions and demand that they donot collude vith the arms race, not profit from the manufactureof veapons, and not condone with silence the polj.cies of ourgoverrunent. At this moment in history it is very easy to speakout against the arms race. What is difficult is to divestoneselfr one's inst i tut ionrs and oners country of the pr iv i -leges we derive from that which ve abhore. ft is one thing,as we did as a College commurlity last year to endorse over-vhelmingly the U.S.-U.S.S.R. nuclear l reapons freeze. I t isquite another statement, and one which has more lasting meaning,to make a choice not to profit fromr and condone, the arms race.

What is rea].Ly threatenj.ng the health of Hampshire College?Is it a group of students and faculty vho are pressing theCollege to face the contradictions between its professed idealsand its financial practice?

Or is it the threat coming from the possibility of ni:clearannihilation, a lJovernment which transfers money from studentloans to the Pentagon, and a society which has confused itspriorities with regards to education and milj-tarism?

It is the view of this student group that the moment hascome when we must clearly articulate what is really threateningthe health of the College, and act to challenge that threat.

We hope that you will support our efforts, understand oururgency, and join us at noon on Friday for a ra]-ly in front ofthe l ibrary and a march at 1:00 p.m. to Blair Hal l .

If you would like a copy of our report or have further ques-t ions, cal ] - Chuck Col l ins or Matthew Goodman at x273.

- L O 7 -

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DI\IESII|BTT BY I'BAR

1976 3Erqrhlrc Collcgc (rctovsrtcd 1o 1978)

1977 tliarrachusetts, Uotvcrrlty of (bcgao)Orcgoo State Schoolr ( Goqlcted 1978)Solth Collcgc

l97E:lnhergt Collcge (cqlctcd 1982)Anttoch Collcgerrnp3[13" Collcge (gccood protest)Bourd Ual,vereiESrllrsnchueettg, Univcrrlty of (copleted)tcr Yorlr, Strtc Uolvergtty of, at (booteIlar York Uolvcrrlty Studcnt Ber AsgoctettonOhlo Stete Ualverstty (cqlrtdd 1979)otrlo UnLvcral,tyVesgar9Lsconsln, Ualvcrglty of

1979 3Bostoo Untvcrritylrandclg Uatvcrrlty'Cellfornle, Uul,rrcrsl,ty of, et BerlclcyCerletoa CollcgeColrdta UalvcrsttyR--Fchlre Collcgc (redlvcrted)l{lchigaa, Uolvurrtty ofl{tchlgen Stete Ual,verrlty (cqlcted ln 1980)Tuftr UnLvcrrttyIrlc Ualvcrrlty

1980:GrllfonlerUolvurrlty of at loe Aageler, Assocl,etlon of StrdcotgColby CollcgeErstern ltl,ehlgeo Uol,vurtl,tyButgcrs UnivrrrltyXcrleyen Gollcgetltlllans GollegpUaioo fbeologlcrl Sru{ nerfl

1981:Eenrard' UntvtisttyLutheraa School' of lltrcologildount . Erilyoke CollcgcSngrtbore

1982:Erverford GollcgcIltoc, Uatltrrlcy ofItGlll Uolvcrrlty, .trooCr..ltrcr Bnrorrlc}' ltcologicrl Scolnrr5r

-109 -

1 976

0ctober1 977

Ivlarch1979

0ctober1981

January1982

Mareh1982

May1982

C}ACNOIOGY OF TIIE HAMPSHIRE COII,EGE INVESII"IENT POIICY

WITH REGARD TO SOCIAT ISSUXS

Hanprhlre College l l 'qulf ies sna1l portfol io overlssue of South Afr lca unti l i .nvestnent pol icy lsforned.

Trustees adopt l iampshire College Investment Pol icf.Includes creffi tT'iiloa

Investnent Responsibl l i f f .Also a pledge not to nake olnvestxaents whlch

support act iv i t ies whose inpaet is eontraryto fundanental rnoral and ethlcal principles. tr

Early deflnlt lon of nsocial lnjuryf? try comlaniesto be avolded ln the col lege port fo l lo .

Also states that , eonslstent wi th these cont ld:erat lotrer the rprlmary Lnveetnent objectlvels to optLnlze f lnanclal return to the Colleg€. f f

Flnance Connlttee rneetlng wtth CHOIR votes todlvest fron eertaln corporatlong dolng business. F | - .

InEotlth Africa. Investnent policy adoptedEEFE-tEFGIrege should nn6t puiehasb theseeurlt lee af any conpany havlng operatlong inSoutb Afr lea. n

CHOIR begins dj-gcusslon of col lege lnvestnents incompanles that produce weapons.

CHOIR dtscusses and defeats a proposal to divestfrom top 100 Departnent of Defense contractors.

CHOIR adopte a proposal to divest from top weopohs-naklng eonpanies after eonsiderable discusgion.

Finance Cornnittee receives reconnendatlon fromCH0IR to refuse investment in top weapons

producers (aef lned at t t re top- 75 c6ntractorswl th the Department of Defense. )

Proposal is voted down.Finance Commit tee votes to erea. te a specla l task

foree on investment pol lcy. fhe ta.ek foree isdlrected to ldentl fy types of lnvestnent tbatthe College should have as well a.a guldel lnes

- 1 1 0 -

Chronology of fnvestment Pol lcy

June1982

on soc la l in ju ry i ssues ,Ful l Board of [ rustees conf i rns bot t r Bosl t ions

taken by the Finance Comrni t t€€.cole sc lenee Bul ld lng is occupled, then vacated by

pro tes te rs .

IASK FORCE 0N INVESII',IENI RESPONSIBIIIIY constituted.Student , facul ty , and t rustee menbers f rom

CHOI.R and Investnent Cornnlttees .-

Vanessa Ganble Mary El len Schloss (other studentsilenry Morgan rotate offJohn Watts Kurt iss Gordon board. conm j-t teesCora Weiss A11an Krass and graduate)

JuneJulyAugust

0ctober1 982

Jim Matlack added as adrninlstratlve appointee.

On-campus nenbers of task foree rneet to def lne tasks.rntervlew candldates and seleet: Mlke current

Deborah Knightas gunner regeaxehers anc student rnembers.

-

task tr 'oree neets a dozen tlnes on canpus and onfleld trlpc for Lntervl,ews.Questtonaire rnade up and sent to all llanpshlre

gracluatgs, current parents, staff, faculty,and students.

consuliation wlth other institutlons and expertsi.n the flelb.. Gathering of relevant d.oeirnents .

written nateriars circulated among task foreeneab€rB.

tr'ull texts preBared for four-Fart report on summerregearch.--Introductlon and overview of Lssues.-- legal eontext for trustee votes in f iduciary

ro1e .--Posslble f lnanclal inpact of dj.vestnent o --- -Frocess lgsues and returns f rom quest lonaire.

Ful l lask Force spends weekend together ln Anherst .Extended dtseussion; sone s l ig f , t rev j .s lons of

text s .Prel i rn inary ef for t to def ine guidel ines.lask Force also wil l cal l- attention to need. for

Conf l ic t of Interest ru le for i larnpshire t rustees.

Extensive aet iv l ty over fo l lowing weeks leads tofu l1 proposal on investoent guiaet lnes.

- 111 -

Chronology of Investment Po1lcy

NovemberDecember

Task tr 'orce agree s that it is not yet ready tosubnit guiCellne proposals on vieapons and

weapons-f iakefS.Unable to formulate overal l al ternate approach

to nposi t ivef t investment of CoLlege funds.

October IRUSIEES MXEIINGFul I reports and guidel ine proBosals presented.Modlf lcat ion in cHorR nandate also advanced.No guldel ines on wea.pons-mskers o ffered at th is- tfune.

Trustee Execut ive connl t tee adopts st r lc t pol icyon conf l ic t of ln te: rest af fect ing a l l t iustees,

Finance commit tee and fu l l board. adopt nodl f led$]CIE mandate.

! ' inance conmlttee aad ful l board adopt mostproposed guldel lnes. Several deferred formore background work.Afflrrative and negatlve guidellnes in force 6n

ll*:iil{}'i#*i:},:,:::"::: ";i:",;"workplocs o--treatment of ninori t ies and wonen.--€DVlronnental protectlon and conservatloo.

0n-canpus task force menbers contlnue meetings wlthpart lc ipat lon of ln terested students.Progress on def ln lng posslb le guldel lnes on

renain ing toplcs.No task force eonsensus on text of guidel lnes that

address defense lndustr ies and w-apons pxo-duc t lon .

January TRUSIEES MEEIINCDraf t of proposed guldel lnes d lst r lbuted.

Al ternate texts on several guidel ine . ' toplcs.No aet ion asked a. t th is meet ing; t rustee s

comments sought .

On-eampus pro-cess cont inues to ref lne proposedtexts. Of f -eanpus task force mernbeis consul iedby mail and phone.

January1 98'

February

- t L2 -

I,lareh198,

Chronology of Investment Pol lcy

i{areh IRUSIEES MEEIINGSix addl t lonal guidel ines proposed :---$sglear warheads and del ivery systems.---p3sllferation of weaporur against law and

. t rea t les .---Q[srnical and Blologi.ca1 Weapons produc€rs.---lfsspons makers rrho engage ln ll legitinate

behavior.---Qs6panies eompllcit in severe hurnan rights

v lo lat ions,---$g11era1 weapong-Gokors.

Flnance Connlttee adopts Prol l ferat ion, tsi ,ologlealWeapons Producets (revlsed deflnlt l6n of

Y

Chemlcal Weapons in May), and llunan RightsVlo lators guldel lnes.

Nuclear and Genecal Weapons-l{akers proposalsvoted down.

FuII Board of lructees debates Nuclear Weapons, exelusion.la"rk Force and Flnance Connittee both rpllt' on:l ' lt. ': ' : ' ' .

Strongest convlct loas expregsed on tbls lsgue,Anendment deletas reference to rdellvety

systenc. i

FulI Board Adoffts, Suclear: lddrheads guLdellneas additionil factor toFffililFt6n of eonpany

fron Lnvestneat portfollo,Vote ls 9 ln favorl 6 agalnst, t abstentlong.

lagk Force on Investnent Responslblllty ls terrnlnatedwitb thanke for gerviee of l tg nenbers.

CHOfR resuxres lead role ln deallng wltlr lssuespertainlng to soclal recponslbl l l ty ln col legelnvegtnent pollcy.

FuI1 revlsed text of l lanpshLre College InveatnentPol lcy.-

- 113 -

r.

HAMPSHIRE COLLEGE INVESTMENT POLICY

Introduct ion

The Trustees of Hampshire Col lege recognj-ze their ownrespons ib i l i ty and the concern o f the Col lege communi tyfor the moral and social impl icat ions of the managementof the Col lege 's investments . They a lso recognLze thattheir pr imary investment object ive is to opt imize f inan-c ia l re turn to the Col lege. Hampshi re Col lege wi l l no tknowingly .make investments which support activit ies whoseimpact is contrary to fundamental moral and ethical pr in-c ip les . The purpose o f these gu ide l ines is to es tab l ishcr i ter ia in addi t ion to economic return which the Trusteeswil l consider when maklng investment decisions and whenexercis ing their r ights as shareholders. This statementalso provides for procedures for forwardlng these concernsto the Finance Committee of the Board of Trustees and tothe fu1 l Board i t se l f .

f I . P rocedures

A subcomnit tee of the Flnance Committee of the Boardof Trustees wi l l be es tab l ished and wi l l be ca l ledthe Commit tee on Investment Respons ib i l i ty . (CEOIR)

The Comni t tee wi l l :

1. Make recommendat ions to the Flnance Committee re-gard ing the main tenance and the modi f ica t ion o fsoc ia l respons ib l l i ty gu ide l ines.

2 . Make recontmendat i-ons to the Finance Cornmittee re-garding the vot ing of shares "

3. Revlew the way in which the Flnance Committee isin terpre t ing the gu ide l ines and rev iew the per for -mance o f the Col lege 's investment managers lncar ry ing out the investment gu ide l ines.

4. Keep the Hampshire community informed of i ts ac-t i v i t i e s .

5 . P rov ide a l l r e levan t i n fo rma t ion i n i t s possess ionto the F inance Commi t tee and the Co l l ege ' s i nves t -men t managers r espec ia l l y as concep ts and f i nd ingsthat bear on soc ia l in jury envo lve.

rn cases where the F inance Commit tee does not acceptthe recommendat ions of the Committee on InvestmentRespons ib i l i t y , t ha t commi t tee w111 have the r i gh t t o

A .

B.

c.

- 114 -

Eampsblre College fnvestment Policy Page 2 of 6

II . Procedures: continued

Ea&e tts views known dlrectly to tbe full Board ofTrustees.

D. The Connlttee wiII be composed of two people to rep-resent the Board of Trustees, at least one of whonnuat be i trustee, two faculty members, two studentmembers, an alnnnus/ a, aud the Treasuref r E officio.Tbe Tlustee. representatlves w111 b€ appolnted bytbe Executlve Comlttee of the Board. The lacultyleDreseBtatlvea vi1I include tbe faculty .reproselta.-tlve ou the Ft[ance Comlttee and ole nember of thef&culty elested at large by the feculty. The student

- represert&tl.vos stlI lnclude the studeot representa-tlve oa the Fhance Comittee and <ine studeat electedby the students at large. The Preeident of the Collegewlll seloct th6 alumaus/a. A trustee w111 servci aEcha,lrna! of the Comltte€.

E. The Comittee will have access to the lists of allboldlngs nenaged by tbe College, ard to all pertln-eat detir conplled by, or on behslf of, the College'wlth respect to coEpelles tn whlch an investnelt hasbeeu uede.

l. The Co@ittee E8y lEltlate ttE ora actloDs. ft alsomlst respoad approprlately to vrltten requeets fronatry D€nrber ol the College co@rul'ty for act loo orlaforma,tlon regardlug lly€atEert responsl.bllity.

G. In order to carry out lts fuweatlgatlo! ard aDalysls,. the College should sollait bforoation ald advl.cefron indlvlduals a,Ed gloupa ln a,ad out of the Collegecomunlty.

E. Betore tbe Co@lttee submlt s a recomendation foractio[, tbe Comlttee w111:

1. Glve full consideratlon to tbe facts a[d argu-ments advanced by all partles; -

2. Include ln its fi[dings an opinlon ou tbe fln-

. ancial lnpllcatlona to the College eadownent of' atry recomended ect lon i

3. Include in l ts f indiags on social inJury n6toaly lts own opitrion but also the oplnious ofotbers witbin the College co@unlty.

I. Tbe Comittee nust respond pronptly to requests foradvice from the Investment Comlttee and the FinanceComittee regarding tbe interpretat ion of these 'guidelines for soclal responslbillty ln itrvestment

- 115 -

Hampshire Col lege Investment Pol icv Page 3 of 6

I I . Procedures: cont inued

J. The Trustees wi l l make the f ina l dee is ions on a l lrequests for aetion f rom the Cornmittee.

K. The Trustees wiLl inform the Commlttee in wri t ingof the Trustee I s act i-on and a summary of the reasonsfor the aet ion.

L. The Committee may submit recommendat ions to theTrustees for amendments to the guidel ines or theTrustees may on their own ini t iat ive and after con-sul tat ion with the Committee amend these guldel i .nesf rom t ime to t i,me .

I I I . Guidel ines for_laggstment Responsibi l i ty

hese guidel ines , social in jurywi l l be interpreted to mean: the in jur ious impactwhich the aetivit ies of a company are found to haveon consumers r employees r or o ther persons, or the en-vironment , part icular ly including act iv l t ies whichviolate or f rustrate the enforcement of rules ofdom€st ic or internat ional law intended to protectind iv idua ls aga ins t depr iva t ion o f hea l th , sa fe ty ,or basic f reedom.

B. The Trustee's pr imary investment object ive is to seeka prudent f inancial return in l ine wlth the Col lege I sobject ives._ This pol icy does not preclude the Trus-tees from determining, f rom t ime to t ime, that invest-

H:3$,*t.T;'ftil':3'il3*'ii,:;"tl$:"1il:"i;'31{ ili un-return "

C. Cr i t e r i a f o r Soc ia l Bene f i t and Soc ia l I n ju ry

1" Hampshi re Col lege does not w ish to pro f i t f rom,nor appear to support or endorse by holdingequi ty secur i t ies in , corporat ions which causesoc ia l i n j u ry .

Therefore the Investment Comni t tee is d i rec tedto ins t ruc t the Col lege 's investment managerstha t , sub jec t t o any necessa ry donor res t r i c -t lons and wi th in the Col lege I s gu ide l ines f o rmaximizing expected return at a prudent leve1o f r i s k , t hey shou ld :

2 . FAVOR equi ty ho ld ings in corporat ions which aregood corporate c i t i zens, inc lud ing more spec i f -ical ly corporat ions which emphasLze one or moreo f t he fo l l ow ing cha rac te r i s t i cs

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Eampshire College fnvestment Policy Page 4 of 6

I I I . C. Criterla tor gocial Benefi t and Soclal InJuty:Coatinued

a. provide beneficial goods and services sucbas food, clothlng' bousing, health, educa-t lotr, transportat iou, atrd safe eEergy; pur-eue eoergetlc research and development pro-gra^ns that hold promlse for new products ofsoclal benefit and for increased enployne[tprospects i

b. Ealntaln fair labor practices lnc1udlng exem-F1ary nansgg6aat policles ln such areas asafflrnatlve action and worker participatloni

c. nalntelo a safe aad healthy sork eavllooEeutluc1udJ.ng. fuII disclosure to workers of potetr-

. tlal work hazards;

d. denonstrate exenp lary treatneot of nlnorltlesand wonen;

e. f lrDs that, ln relation to etrylrouDeutal pro-tectloE, are Enora to be innovetlve pltb re-spect to policies, organlzatlotal stluctutea,and/or product development i l r,rnE tbet gl.veevldeace of super lor pertoloalce wttb respectto wEst6 utlllzatlorl and pollutloo coBtrolsbould alEo be favored;

t. are see! to stretgtben local and regloaal assell ae the aational ecoaonles;

g. have a record of sustaiued support for hlgber. educatio!.

3. AVOID luvestlng ln or holding equities of corpora-E6iE whlch caise soclal iaJuryr- oore partlcuia,rly

. tbose corporatlons rhlch ---

a. have operatloEs in South Afr lce;

b. engage in the product lon or sale of coEponeDtsa,nd technologies for uuclear warheads;

c. engage in the production and/or export of gen-sit lve nuclear and nl l i tary techuologles whlcb

, contr lbute to tbe prol l ferat ion of weapous inviolat ion of restr ict ions embodied 1a UnitedStates laws or govertrnental regulat ions or laarns l ini tat ion treaties to whlch the UnitedStates ls a party;

d. direct ly contr ibute to the product ion of bio-loglcal weapons or to researcb and

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I I I . C .

Hampshire College Investment Policy Page 5 of 6

Cri ter ia for Socia1 Benef i t and Socia l In iury3Cont inued

e .

development associated with such weapons (seedef in it ions be low) ;

operate in countries engaged in serious humanr ights v io la t i .ons and funct ion to perpetuate ,promote, and f inance these condi t ionsr 4sident i f ied ' through a fac tua l case by CEOIR:

aetively pursue unfair and degrading laborpract ices ;

maintain pract ices which discr lminate on thebasis of sex, sexual preference , r :ace , color,nat iona l or e thn ic or ig inr or handicap;

engage in substant ial ly harmful , i r responsibleenvironmental pract ices ;

manufacture and lor market products which innormal use are unsafe or impure or sell prod-ucts outside the United States which competentU. S, governmental author i t ies have prohibi tedfrom sale or distribution on the grounds thatsuch products are harmful;

have markedly inferior records with respect tooccupat ional heal th and safety;

repeatedly refusg to cooperate with responsiblerequests f rom the publ ic for informat ion re-garding their performance in relat ion to anyof the above l is ted issues o f concern.

Exerc ise o f Vot ing R igh t :

1. The Trustees wi l l normal ly exerc ise thei r r ightsof ownership by voting i ts shares at meetings ofstockholders by proxy. The fol lowing guidel ineswil l be used in determining how to cast the Trus-tees I vo tes :

The Trustees wi l l normal ly be in f luenced bya propos i t ion which seeks to e l iminate orreduce the soc ia l in jury caused by a company 'sact iv i t j -es , and wi l l vo te aga ins t a . propos i -t ion which seeks to prevent such el iminat i -onor reduct ion, where a f ind ing had been madethat the ac t iv i t ies which are the sub jec t o fthe propos i t ion cause soc ia l in jury ;

The Trustees wi l l no t vo te the i r shares infavor of any resolut ion which advances a

f .

g .

h .

1 .

j .

k .

D.

L "

b ,

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Hampshire College Investment Po1icy Page 6 of 6

I I I . D . Exerc ise o f Vot ing R igh t :

posl t ion or a socia l or pol i t ica l quest ionunrelated to the conduct of a company's busi-ness (o r the d ispos i t ion o f i t s asse ts ) ;

c . The Trustees w111 vote for d isc losure of acompany's pol ic ies and pract i -ces in areas ofpubl lc lnterest (to the extent that suchdisclosures do not cause a company competi-t ive d isadvantage);

d. The Trustees wil l vote for elect ion to cor-porate boards of directors of qual i f ied p€r-sons who w111 not only contribute to good andethlcal" corporate management, but wi l l alsobring greater diversity of interest and coo-cern for the publ ic in terest .

o. Dlvestment:

A decis i .on to sel l for other than f inancia lreasons w111 be considered by the Trustees i fin tbe opinion of the Comnitteee on fnvestmentResponsibi l l ty tbe exerclse of shareholders'r ights by the College and other shareholderswll l not, withi,n a reasonable period of t ime,succeed in changing a. conpany's attltude towarda rcral or social problem.

Adopted: October 7, Lg77Revlsed: March 9, L979 ( f f l . C. 3. a. )Revlsed: March L2, ,1983

Def in l t i ,ons3

Biological weapons sha1l be ident i f ied as fo l lows:

(1) Microbia l or other b io logical agents, or tox inswhatever their origin or method of production, oftypes and in quant i t ies tbat have no just i f icat ionfor prophylact ic, protect ive or other peaceful pur-pos€s .

(2) Weaponsr equipment or means of del ivery designed touse such agents or tox ins for host i le purposes orin armed conf 1i.ct .

taken f roms "Convent ion on the Prohib i t ion of theDevelopment, Product ion and Stockpi l ingof Bacter io logical (Blo logical ) andToxi.n l{eapons and on their Destruct ion"

Treaty rat l f led by U.S. government iEn tered ln to fo rce on March 26 , 1973.

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