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The Home of Evolutioneers

When buying stock, look beyond balance sheet

Research shows that it is important to look beyond strictly balance-sheet considerations when developing your portfolio. During the last 10 years, a number of studies have proven that certain corporate practices can impact long-term shareholder value.

One such area is corporate governance, which describes the manner in which a company's executive management group runs the company. Are executive compensation packages fair and reasonable, or riddled with excess? Is the board sufficiently independent?  Make sure you feel comfortable with the corporate practices of a company before you invest.

According to a study conducted by the Institutional Shareholder Service and Georgia State University, companies with weaker governance practices were less profitable and more volatile than those with stronger governance, with a difference in annualized returns of close to 12 percent over a five-year period. The Corporate Library, a Portland-based organization, evaluates companies' performance in these areas for investment and educational clients.

A new report issued by the Global Environmental Management Initiative has determined that between 50 percent and 90 percent of a company's market value is created by intangible assets such as environmental, health and safety performance.

A separate study by investment research and advisory firm Innovest determines that portfolios of companies with strong environmental practices had improved investment return. It's important to be aware of any potential environmental vulnerability before you choose to invest.

If the high-profile news coverage of corporate governance and environmental issues has raised your awareness about the impact of these nontraditional risk factors o­n your financial portfolio, you are not alone.

A recent Harris Interactive poll found that investors want to invest in companies they perceive as ethical: 71 percent think that companies that operate with higher levels of integrity carry less investment risk, and 67 percent believe that these companies deliver better investment returns.

According to the 2003 Report o­n Socially Responsible Investing Trends in the United States, a total of $2.16 trillion in assets was identified in professionally managed portfolios using o­ne or more of the three core socially responsible investing strategies: screening, shareholder advocacy and community investing. This represents more than o­ne out of every nine dollars under professional management today. Assets involved in social investing have grown 40 percent faster than all professionally managed investment assets in the United States.

How do you discover and evaluate investment opportunities? Most people rely o­n their financial adviser to provide guidance. The Harris Interactive survey found that 92 percent of investors who use a financial adviser expect that person to investigate the ethical performance of investments.

As you research investment options, make sure that you look beyond traditional financial factors prior to investing. Financial advisers increasingly are investing in software tools to review investments based o­n a number of factors, from corporate governance and environmental to other personal issues such as gambling, tobacco and religion.

When you buy stock, you are buying a piece of a company. No matter how many shares you are considering, it is a major purchase that you need to evaluate closely. Take the time to find an adviser who has the tools that enable you to look beyond the surface and find investments to develop a portfolio that matches your personal and financial values.

About the Author 
Sam Pierce is chief executive officer of IW Financial, a Portland firm that develops technology solutions for financial professionals to manage risk, differentiate their services and strengthen relationships with clients. For information, visit www.iwfinancial.com or e-mail spierce@iwfinancial.com.

Copyright © 2004 Blethen Maine Newspapers Inc.

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