Product integrity (marketing/advertising practices, consumer privacy and product quality) and product safety are issues that have the potential to affect all companies, regardless of industry. A company’s failure to comply with regulatory requirements and problems associated with product safety or product promotion can have far-reaching, negative consequences for consumers and therefore can result in reputational and financial damage to the company. Product recalls, in particular, can cause considerable harm to a company’s revenues, reputation, profitability, publicity and brand integrity.1 For instance, a 2001 study of meat and poultry recalls found significant shareholder losses when publicly traded food companies were implicated in a recall involving serious food safety hazards.2
Pax World generally seeks to invest in companies that disclose comprehensive product quality, product safety and marketing/advertising policies in addition to information on quality management systems. Pax believes that companies that implement and disclose policies or programs that address these issues can enhance their reputational value and brand image, create competitive opportunities and lower the risks resulting from regulatory violations, time-consuming product recalls or product liability lawsuits.
In general, Pax avoids investing in companies with a history of significant product incidents (such as product recalls, regulatory violations, regulatory settlements and product liability lawsuits), especially if they have no published product policies. When evaluating the product record of companies engaged in the manufacture of consumer, healthcare, food and beverage products, Pax considers each company’s record with the US Consumer Product Safety Commission (CPSC) and the US Food & Drug Administration (FDA), or comparable regulatory bodies in other countries, in terms of the frequency and type of product recalls. Companies’ regulatory compliance histories, which may include warning letters from regulators, government investigations or settlements and lawsuits, are also examined. Other forward-looking indicators are taken into account, including a company’s quality certifications – particularly the ISO 9000, an international quality management system.
Pax acknowledges that product-related issues can inevitably arise; in those cases, it views a company’s response to product problems as an indicator of management’s ability to effectively address unexpected events. For example, companies that respond slowly to product defects could potentially expose themselves to much greater litigation costs and long-run reputational damage3, so Pax generally favors those that respond quickly, effectively and transparently to product problems, take appropriate steps to inform consumers and implement corrective actions to avoid recurrences.
Pax avoids investing in companies that are significantly involved in the manufacture of weapons or weapons-related products, manufacture tobacco products or engage in unethical business practices.
The issues highlighted above are illustrative and do not necessarily reflect the full range of product safety and integrity issues Pax World may consider in analyzing a particular security for investment.
1Yaros and Wood, 1979
2Michael R. Thomsen and Andrew M. McKenzie. “Market Incents for Safe Foods: An Examination of Shareholder Losses from Meat & Poultry Recalls.” Agricultural & Applied Economics Association, 2001.
3Cheah, Chan, Chieng. “The Corporate Responsibility of Pharmaceutical Recalls: An Empirical Examination of U.S. and U.K. Markets.” Journal of Business Ethics, 2007.