The standards for our stock funds focus on key themes that we believe best capture the strength of a corporation’s relationships with its partners and promote human dignity and a healthy natural environment.

 

These themes help identify companies that invest in and enrich their stakeholders, building strong partners who will in turn reward companies in ways that enhance their long-term financial vitality and productivity. We seek to invest in companies that cultivate the skills and talents of their employees, that earn the trust and respect of their customers, suppliers, and investors, that strengthen their local communities, and that enhance the ecosystems upon which we all depend for survival.

 

The word partners stresses the importance of what is, in our view, a necessarily cooperative and reciprocal relationship between corporations and their stakeholders. Legal contracts can specify many particulars in these relationships — and are useful in doing so — but their strength ultimately depends on mutual trust and respect. Fairness, honesty in dealings, commitment to quality, and regard for the public interest cannot always be legislated, regulated, or assured by contract. Without the spirit of cooperation and understanding of mutual benefit that is achieved in strong partnerships, the more intangible factors so important to long-term corporate success cannot be realized.

 

These themes also help us identify patterns of behavior that impose costs on the company’s partners — or, in the vocabulary of economics, externalize costs onto society. This kind of short-term profiteering undermines companies’ relationships with their stakeholders, incurring burdensome debts that destroy the long-term wealth-creating potential of both companies and the societies in which they operate.

 

Relationships with Stakeholders

 

It takes forward-looking, skilled managers to effectively manage their operations without imposing the costs of doing business onto their partners or onto the ecosystems within which they operate. Managers without imagination all too frequently see extracting value from their stakeholders or the environment as the fastest and simplest road to financial success. Our standards recognize the critical importance of reciprocity in these transactions. Relationships where one side only extracts value often do not last long. Our standards help to identify companies run by managers talented enough to operate profitably while enriching multiple stakeholders and the environment around them. These managers recognize the importance of networks of relationships where mutual support helps assure long-term survival.

 

Not all companies we hold score well on all our themes. Indeed, we don’t necessarily expect them to. We recognize that relationships with partners are complicated and even the best of companies often run into problems day to day. Mixed records to not necessarily mean that progress is not being made, that companies are not grappling with the important issues in their industries, or that long-term value is not being created. These mixed records mean, however, that it is not always easy for us to make our judgments and that we will invest in companies with a combination of controversies and praiseworthy initiatives when we feel that, on balance, progress is being made toward long-term benefits.

 

Exclusionary Standards

 

We seek to exclude from our funds companies with mixed records where negatives substantially outweigh the positives. There is a wide variety of companies that have mixed records. Some, for example, may have a range of relatively negligible negatives, but few countervailing positives. Others may have a variety of positive characteristics, but have been involved in controversies of substantial proportions. Still others may have a series of substantially negative characteristics relating to their core business. We evaluate these companies case-by-case, looking for signs of improvement and positive trends. Nevertheless, companies in our portfolios can have substantial controversies on issues as diverse as human rights, labor standards, diversity, accounting, or product quality.

 

We also exclude from our portfolios companies with significant involvement in the production of addictive products whose abuse results in substantial health, safety, or psychological harm: tobacco, alcohol, and gambling. The more successful such companies are, the more they can harm their customers and customers’ families and friends and the more costs they impose on society. This is not a business model we support.

 

Similarly, we also exclude corporations substantially involved in nuclear weapons production and military weapons production more generally, and owners and operators of nuclear power plants. The dangers of weapons of mass destruction and the international arms trade are among the greatest we face today, and we view the spread of nuclear power technology as tied to the proliferation of nuclear weapons. The responsibility for controlling these technologies belongs most appropriately with government, not with profit-driven private enterprises. The capital markets are highly effective mechanisms for delivering a wide variety of products and services, but we do not believe they are well suited to deliver products that have the potential to cause incalculable harm.

 

Our standards can lead us to eliminate substantial numbers of companies in certain industries where prevailing industry norms weight our evaluations toward the negative. For example, we have historically underweighted the energy and utilities sectors. Conversely, we have historically overweighted certain industries, such as information technology, where our evaluations generally tend toward the positive.

 

Effective December 1, 2006, all Domini equity funds are submanaged by Wellington Management LLC, which seeks to add value using a quantitative stock selection approach while seeking to manage risk through portfolio construction. Within this investment process, Wellington seeks to mitigate certain industry biases that may result from the application of Domini’s investment standards.

 

Laying a Foundation

 

The themes we use in assessing the strength of corporations’ stakeholder relations are ones for which we believe sufficient information is usually available to make judgments and are themes that represent goals we believe are reasonably achievable. Some may be achievable, but are not measurable at this time due to a lack of sufficient data. By assessing companies’ performances against these reasonably verifiable and achievable goals, we hope to create a forum for public discussion and debate that improves corporate performance and leads corporations to compete on the strength of their relationships with stakeholders, just as they already compete on efficiency.

 

We also tend to focus more than outcomes and results than on general corporate policies and procedures, although both policy and practice, and the interrelationship between them, are important. Today’s forward-looking policies lay the foundation for tomorrow’s improved practices.

 

Ultimately, we believe that corporations can play a positive role in our lives, but much depends on their specific actions. If they channel their tremendous energy and resources to the betterment of the full range of their stakeholders, they can create great value for the societies in which they operate, as well as for themselves and their investors. We therefore use our investments to raise standards and explore themes that we believe will benefit all parties in the long run, recognizing our obligations as owners in publicly traded corporations to help create a more just and sustainable economic system, built on principles of fairness and sustainability, that will last well into the future.