GreenMoney Interviews: Jerry Dodson, Founder of the Parnassus Funds
By Cliff Feigenbaum
One of the enjoyable parts of the GreenMoney Journal is interviewing leaders in the socially responsible investing and business world.
Jerry Dodson is one of the more unique leaders of the SRI community. For well over 20 years Jerry
has run the Parnassus family of funds, which is the only major SRI fund family based in the Western
US, San Francisco to be exact. Jerry is known for his straightforward communication style,
especially in their quarterly and annual shareholder reports. As an investor I appreciate their
investment philosophy that states 'companies with ethical business practices make for good
Of course there is more to say about someone of his stature but let's see what he has sayâ€¦
CLIFF: What is the latest issue on your radar,
inside and outside SRI?
JERRY: Right now, the biggest issue for me is executive compensation. I think this is both an SRI and a more general issue. Some of the pay packages are outlandish. What angers me the most are the severance packages, where executives can receive millions of dollars when they're fired for poor performance. I'm also bothered by the enormous sums of money extracted from the economy by hedge fund managers and private equity people. I had to laugh the other day, when I read in The Wall Street Journal that Stephen Schwarzman of the private equity firm, Blackstone Group, made $400 million in one year, and that was much less than some hedge fund managers made that year. In my view, most of this money should stay with investors rather than go to the managers. To a remarkable degree, these shareholders are pension funds, foundations and middle class people who deserve the money much more than the Schwarzmans of this world. For me, these sums of money raise big issues about the equitable distribution of wealth in this country.
I know I sound like a socialist when I talk this way, but in reality, I'm a firm believer in the capitalist system. It's just that capitalism works best when there's a more equitable distribution of wealth. The problem of excessive compensation is a hard one to attack in a capitalist system. I think the way to handle it is through the tax system. One thing Congress could do would be to tax both the corporation and the executive, when a severance package exceeded more than, say, twice the executive's annual salary. Anything above that level would be taxed at much higher rates. For example, if a corporation paid $10 million in severance pay, the normal rate would be about 36 percent, but there would be a surcharge of another 36 percent, making an effective tax rate of 72 percent. In addition, the corporation would not be able to deduct the severance package for income tax purposes, so that would mean it would pay 36 percent on the $10 million pay package. If this came into play, it would do a lot to stop these ridiculous pay practices.
Excessive pay for hedge fund managers and private equity people would have to be handled differently. Right now, there's an idea floating around Congress to make these managers pay ordinary rates instead of capital gains rates on their "carried interest" (i.e. the 20 percent of the profits they collect on their invested capital). The capital gains rate is only 15 percent, while the ordinary rate would be 35 percent. Even though the return to the investors is capital gain, the carried interest is really earned income, so they should pay ordinary rates just like regular working people. This would not completely solve the problem of unequal distribution of wealth, but it would at least return some economic value to the society at large.
CLIFF: Tell us more about the new funds that Parnassus launched in 2005. Why did you decide to start these new funds?
JERRY: We thought about starting these new funds a long time ago, but it took us a while to actually get around to doing it. The idea for the Workplace Fund came from my old friend, Milton Moskowitz, who has been a Parnassus shareholder since we started out first fund almost 23 years ago. Milt has been a "corporation-watcher" for almost 40 years now and has been a strong advocate for social investing. He also was the co-author of the book The 100 Best Companies to Work for in America, and he continues to co-author the annual Fortune magazine article "The 100 Best Companies to Work For." A research organization came to Milt some years ago and told him that the stock market performance of the publicly traded "100 Best" companies had been excellent, far outpacing the S&P 500. We decided to see if this concept worked with real money and that was the basis for starting the
Fund. Milt works as a consultant to the Workplace Fund, helping us determine which companies are good places to work.
The other two funds, the Mid-Cap and the Small-Cap, filled out our product line in the Parnassus family of funds. The Parnassus Equity Income Fund is a large-cap fund and the Parnassus Fund is a multi-cap fund, but we didn't have a small-cap or a mid-cap fund. Now, we do, and we are able to offer investors socially responsible funds in all categories of market capitalization.
CLIFF: Where do you think most of the growth in SRI assets will come from in the future: small boutique SRI firms or large firms with small SRI groups?
JERRY: I think SRI assets will go to both groups. Vanguard is a huge organization and they now have a social index fund, and both Smith Barney and Neuberger Berman have social investment programs. However, I think the fund groups that focus exclusively on social mutual funds will do well. The five largest ones: Ariel, Calvert, Pax World, Domini and Parnassus will continue to attract funds. I also think that financial advisors that focus on SRI will continue to get new business. They provide a unique counseling service to their clients and I don't think the large non-SRI firms will drive them out of business. There are also good firms like Trillium and Walden that manage separate accounts, and they will continue to do well. Other well-established SRI firms will continue to do well like Progressive Asset Management, First Affirmative and Progressive Securities. I don't think the large financial juggernauts will drive us out of business. We provide important services to our clients and we'll be around for a long time. There's room for both the dedicated SRI firms and the larger organizations. I'm just happy that the social investment movement is growing and that we're having such a big impact on society and the economy.
CLIFF: You've had an interesting life. How did you come to be involved in SRI?
JERRY: As a child, I always remember being for the underdog. My social views were further shaped when I went to college at Berkeley in the '60s. After college, I went into the Foreign Service of the State Department and served with the American Embassy in Vietnam and later as the Principal Officer of the American Consulate in David, Panama. After I left the Foreign Service, I got my MBA at Harvard Business School and then worked for a non-profit that gave consulting and technical assistance to minority entrepreneurs. I also worked for a group that was starting a new bank in San Francisco and ended up as the president. At Continental Savings, I was able to put social investing into practice for the first time. We made loans in inner-city areas that had been red-lined. We also started a program that allowed depositors to put money into a special savings account, and the money was lent out exclusively for solar energy installations. It turned out to be a very popular program, and that's what convinced me that one could start a business based on social investing. I left Continental after six years to start the Working Assets Money Fund with six other people. In 1984, I started the Parnassus Fund.
CLIFF: What are the major trends that you see coming in SRI in the next 10 years?
JERRY: I think SRI will continue to be perceived as a reasonable way of investing. It's not seen as a fad or a fringe movement like it was 25 years ago, when I first became involved. I think SRI will have even a greater impact on society. I think economic justice will become more important and this will focus on executive compensation. I think shareholders will see that top executives are overpaid and that the compensation system is unfair. I think we're ready for some shareholder action on excessive executive compensation.