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HRIC Talks with Adam Kanzer of Domini Social Investments

July 16, 2010

HRIC: Can you please introduce Domini Social Investments, and explain more generally what a social investment fund is?

Adam Kanzer: Domini Social Investments is a mutual fund manager based in New York. We manage approximately $1 billion for individual and institutional investors. We focus exclusively on socially responsible investing, meaning that we use social and environmental factors in all of our investment decisions.

We believe that our global financial system should be building wealth for society. Instead, it has largely been building wealth for itself, and ignoring the consequences, including poverty, environmental degradation and human rights abuses. Investors have been a significant part of the problem. To be part of the solution, we believe it is necessary to actively consider the consequences of investment decision-making for society and the planet, and to act accordingly.

We subject all of our investments to a set of social and environmental standards, but we are not looking for perfection. There is no such thing as a perfect company. Therefore, when we do invest in a company, we also seek to use our leverage as shareholders to improve their behavior by writing letters, engaging in dialogue and filing shareholder proposals. Over the past 15 years, Domini has filed more than 200 proposals with more than 80 major companies on a wide range of social, environmental and governance issues. Our human rights proposal with Cisco Systems last year was our 200th proposal.

We also devote a portion of our investments to community economic development. These three strategies—using social and environmental standards to select holdings, direct engagement with companies, and community investing—are the three strategies that have come to define socially responsible investing in the United States.

HRIC: How do you decide what companies to invest in? What are your criteria for assessing investments?

Adam Kanzer: We use a comprehensive set of social, environmental and governance standards to develop an approved list of companies for our funds. Our Global Investment Standards are published on our website, domini.com.

Our standards are focused on two fundamental objectives: the promotion of a society that values human dignity and the enrichment of our natural environment. While working to advance these broader goals, our investment philosophy and approach can also help us to capture sources of risk and opportunity often overlooked by traditional financial analysis.

We seek to invest in companies that are responsibly addressing the key sustainability challenges they face. Our investment standards, therefore, are tailored to each industry. We first examine each company’s core business model, and evaluate its alignment with our standards. For example, a solar cell manufacturer would be considered “fundamentally aligned” with our standards and a tobacco manufacturer would be considered “fundamentally misaligned” and therefore ineligible for our portfolios. We then evaluate the quality of each company’s relationships with its key stakeholders. This evaluation is organized into 33 stakeholder themes based on a company’s relationship with ecosystems, employees, communities, suppliers, customers, and investors. We evaluate a company based on a qualitative assessment of their relationships with these stakeholders within the context of their industry.

This balance helps to ensure that our process is grounded in each company’s core business model, taking into account the key sustainability challenges it faces. It helps to ensure that our decisions are relevant to the company and focused on the company’s most significant impacts.

HRIC: What initially attracted Domini to invest in Cisco?

Adam Kanzer: Cisco’s products form the backbone of the Internet, which has produced significant benefits for individuals and communities around the world. The Internet has had—and continues to have—a transformative impact on society. Like many large companies, however, Cisco has a mixed social and environmental profile. For example, we are concerned about the negative environmental impacts from computer hardware manufacturing, and the general lack of recycling practices among these companies. Cisco, however, coordinates product take-back programs and in 2008 reportedly increased the amount of electronic materials it recycled by 44%. The company is also a member of the Electronics Industry Citizenship Coalition, working to protect labor rights in its manufacturing supply chain.

HRIC: Can you describe the shareholder proposal Domini and Boston Common Asset Management have submitted to Cisco? Specific concerns and issues regarding the impact of Cisco’s products and services on human rights? What steps are you asking for?

Adam Kanzer: Reporters Without Borders, the French NGO, first brought the issue of Internet censorship to our attention in 2005. Boston Common Asset Management, another social investment manager, approached Cisco that year to address allegations that the company had helped the Chinese government develop its sophisticated system of Internet censorship and surveillance. We quickly joined Boston Common, and then worked with them and Reporters Without Borders to draft a Joint Investor Statement on Freedom of Expression and the Internet. The statement, ultimately signed by investors managing more than $20 billion and referenced in a resolution of the European Parliament, expressed our deep concerns that censorship and surveillance was undermining the promise of the Internet and simultaneously harming the long-term business prospects of Internet sector companies.

That year, Domini and Boston Common worked together to file a shareholder proposal asking Cisco to adopt a human rights policy to guide company decision- making. We were concerned that Cisco appeared to be engaging in business with foreign governments without a thorough evaluation of the risk that their technology could be used to stifle fundamental human rights. We also engaged in dialogue with Microsoft, and participated in discussions that ultimately led to the founding of the Global Network Initiative, a multistakeholder group of companies, civil society organizations (including human rights and press freedom groups), investors and academics, working collaboratively to protect and advance freedom of expression and privacy in the ICT sector.

The “great firewall of China” is the world’s most prominent example of a trend we’re seeing in a number of countries around the world—through various censorship and surveillance technologies, governments are closing off, or fragmenting the Internet—creating a closed system to control and monitor the actions of their citizens. In 2006, Mark Chandler, Cisco’s general counsel, told a U.S. Congressional committee that “the liberating power of the Internet depends on its existence as one global Internet… Any policies in this area should, we believe, proceed from the realization that its very global nature provides a unique tool for the dissemination of ideas and cultivation of freedoms. We should do nothing to disturb its promise.”

We strongly agree with Mr. Chandler. Censorship and surveillance is a threat to human dignity, and for a company that is dedicated to the development of a free and open Internet, it is also bad for business. For the past several years, therefore, we’ve asked Cisco to publish an “Internet Fragmentation Report.” The report would list steps the company could reasonably take to ensure that its products and services are not used to violate human rights or encourage further fragmentation of the Internet. As investors, we’d like to see written policies and procedures and meaningful documentation that the company is living up to the high ideals Mr. Chandler elaborated in his congressional testimony.

Currently, there is very little information that we can use to reliably evaluate Cisco’s performance in this area. We know that in 1998, Cisco was selected as a key supplier for building China’s nationwide IP backbone. Cisco does not deny this, but has told us that they did not customize any technology for the Chinese government. They claim that the technology that is used for censorship is the same technology that is required to operate the Internet. In 2008, a Cisco document was publicly leaked that made clear that in 2002, Cisco engineers were aware of the Chinese government’s repressive censorship and surveillance agenda and may have regarded this as a business opportunity. The Company disputes this interpretation. It remains unclear whether Cisco actively helped to facilitate the Chinese government’s intrusions on its citizens’ rights to privacy and free expression.

We are not looking for the company to accept blame, or to explain what it may or may not have done in the past. We are looking for Cisco to adopt policies and procedures to guide its actions in the future, so that when it is approached by a government that may be hostile to human rights, it can take appropriate steps to ensure that its technology is not abused. We believe the company has an obligation—both to society and to its shareholders—to conduct human rights due diligence before accepting these contracts, and to actively respect the fundamental rights of freedom of expression and privacy.

HRIC: What do you think is the likelihood of success for the shareholder proposal that Domini and Boston Common will be filing with Cisco to request adoption of a company human rights policy?

Adam Kanzer: We’ve been very frustrated by our lack of progress with this company. We haven’t received the report we’ve requested, and we continue to have a hard time getting clear answers to our questions.

Quite often, it can take years of persistent engagement to get a company to change. Support for our proposals has steadily risen, exceeding 30% for several years now.

This is very strong support for a shareholder proposal addressing human rights issues. These proposals are non-binding, meaning that the company would not have to do what we ask even if the proposal received 100% support. For many companies, however, a 30% vote is hard to ignore.

HRIC: What do you think about the Asia Society’s decision to honor Cisco for corporate social responsibility or corporate leadership?1

Adam Kanzer: At Domini, we really don’t believe in “good” companies and “bad” companies. Most large companies have very mixed records, and companies change over time. We therefore generally don’t pay much attention to these types of awards. This particular award, however, is frustrating. Cisco Systems has not participated in the Global Network Initiative, and it has not engaged in meaningful dialogue with concerned shareholders about these issues.

The final chapter has not yet been written on the Internet in China. I know that many Chinese citizens greatly value the communication system that Cisco helped to build. But Cisco’s role in this important chapter in Chinese history has been controversial, and an award presented by the Asia Society without recognition of that controversy is cause for concern, particularly after Google’s high-profile battle with the Chinese government over this very issue. I am concerned that this award may send the wrong message to companies and governments around the world. 

Editor’s Note

1. On June 9, 2010, the Asia Society honored John Chambers as a Global Leader “in recognition of his role in propelling Cisco into a successful international firm that provides a comprehensive range of innovative technological services and communication solutions in the Asia-Pacific region, as well as its significant philanthropic activities in China and India, particularly in education and healthcare.” For more information, see: http://www.asiasociety.org/centers/washington-dc/asia-societywashington-awards-dinner. ^

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