Fine Print - October 2010

Take on responsibility
By G.D. Gearino

In the business world, “socially responsible” is fast becoming what “low fat” is to potato chip makers: a suggestion of goodness, a whiff of virtue and a declaration of commitment to the values of its customers (who may not exactly go around preaching, or even living, those values but surely appreciate goodness by association). Casting a skeptical eye on such a socially responsible business as The Redwoods Group Inc. is akin to wondering out loud about Mother Teresa’s secret motives. What soulless creature even starts down that path? Naturally, I’ll take a whack at it.

I first heard of the Morrisville-based insurer a few years ago, while interviewing a teenage cancer patient who had founded a surprisingly successful charity focused on providing various diversions — coloring books, DVDs, phone cards, etc. — to sick children. When I remarked on the professionalism of the operation, the young philanthropist mentioned that “Kevin” had made his company’s office staff available for virtually all administrative chores. That company was Redwoods, which provides comprehensive insurance to YMCAs and Jewish Community Centers, and “Kevin” was its CEO, Kevin Trapani.

I began to notice Redwoods popping up occasionally in the news, almost always in relation to its carefully nurtured image as a do-gooder company. For instance, it requires employees to perform at least 40 hours of community service annually (while on the company clock) and limits Trapani’s pay to no more than 10 times that of its lowest-paid office grunt. It also invites representatives from Duke University’s and UNC Chapel Hill’s graduate business schools to conduct an annual “social audit” to ensure that Redwoods hews to its principles. It was amusing, then, to see these headlines both appear in my local paper within 14 days: The first said, “Social Responsibility Doesn’t Have to Hurt Profits”; the second, “Civic-Minded Redwoods Loses Money with Pride.” Together, they handily sum up the ethos of do-gooder capitalism: If you make money, you’re doing something right; and if you lose it, you’re still doing something right. It’s all gooder.

There is much to admire about companies that value their employees, contribute to the economy and sacrifice short-term profit for long-term stability. But practicing that style of capitalism with the fervor applied by Redwoods means decision-making becomes much more complicated, as an hour-long conversation with Trapani revealed. It’s one thing to be bound by law and regulation. It’s another to be subject to endless moral/social calculations, even if they are of your own making. You can be off the fairway and into the weeds almost before you know it.

Consider the agonizing over whether to keep Chartis Insurance as one of its primary reinsurers. Chartis is the new name for the property-and-casualty division of New York-based American International Group Inc. — better known as AIG, with which Redwoods had an existing relationship. How does a socially responsible company even consider continuing business with one whose greed and mismanagement helped bring the world’s economy to the precipice? Not to be snarky here, but Redwoods found a way. It decided that AIG’s insurance operators shouldn’t be made to pay for the sins of their corporate cousins and that sticking with AIG would be best for Redwoods’ customers. “Really, that was one of the hardest professional and moral decisions I’ve ever had to make,” Trapani says.

Still, there’s much parsing and little moral clarity behind that line of reasoning. Likewise for Redwoods’ choice last year to lose 50 customers rather than reduce rates to keep them. Lowering costs to customers, Trapani says, would have meant reducing his staff or trimming $700,000 in charitable donations Redwoods planned to give — and he was unwilling to make those trades. That’s admirable, if you’re a Redwoods employee or a local soup kitchen. To customers — which have the welfare of their own employees to consider — it’s an unmistakable indication of where they stand on the priority ladder: third place, at best.

I won’t second-guess these decisions and certainly wouldn’t pass judgment on them. Redwoods is privately held and gets to do what it wants. (That it conducts itself with as much transparency as a public company is admirable and remarkable.) What I will do is enjoy the irony that accompanies those choices. The complaint about most businesses, of course, is that all other considerations are secondary to the goal of maximizing return to shareholders. Profit-driven companies act in their own interests, first and foremost. But their primary interest is staying in business, and they’ll do whatever it takes to achieve that. Redwoods also puts its interests first and will do what it needs to — dance with the AIG devil and let customers slip away — to meet them. The only difference is found in the definition of “interests.”

It’s a mistake to think of Redwoods as anti- or even quasi-capitalist. To my eye, it’s ruthlessly capitalist. It leverages its capital, both economic and human, on behalf of its goals and does so without apology. Sure, Redwoods posted an operational loss of nearly $400,000 last year, but it can do that five more times with the cash it has on hand. And if it does, the truly tough moral choices don’t hit until 2015.