When investors lose trust, they can put stocks in the ‘penalty box’

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  • When investors lose faith in management teams after debacles or scandals, they may put stocks of these companies in the “penalty box.”
  • Boeing, Wells Fargo, Facebook and Equifax are cases in point.
  • Investors are increasingly using environmental, social and governance, or ESG, factors to measure corporate sustainability, which can hurt companies that don’t measure up.

A new client recently told us that he didn’t want to own Boeing.

He did not cite the two planes that crashed or Boeing’s enormous consumption of fossil fuels. His primary concern was the integrity of its management. We mentioned that a new management has taken over the company, but he responded that that there is not enough evidence that Boeing’s values had changed across the organization to alter his opinion. We might call this approach “penalty box” investing.

Since our inception, we have complied with both individual and institutional client requests to avoid certain stocks and industries, commonly fossil-fuel related. We chose not to purchase tobacco and gun stocks, because of our personal beliefs and because we heard frequent client objections to them.

A couple of years ago, the tone changed entirely with Facebook. What had previously been an aversion to owning shares of a company selling cigarettes, assault rifles, or even gambling experiences, shifted to a rejection of the way in which a company, about whose products or services you might have no objection, conducts itself.

If Boeing is now in the penalty box for its management behavior surrounding the 737-MAX, how long might that last, and how will they make their way back onto the ice? The answer, of course, is that it depends. Factors include how egregious investors view the infraction, the length of time in which new pieces of negative news emerge, the complexity of the solution, and the way in which the “guilty” management handles the crisis and changes its practices.

In recent years, we have, a range of examples, including Wells FargoFacebook and Equifax. All three failed to protect their customers’ privacy or capitalized on their access to client accounts without approval from them.



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