Whole Foods Under Scrutiny

The following is a repost of an article by Nancy Levine first published on socialinvesting.com on January 15, 2016.

http://socialinvesting.about.com/od/Sustainable-Investing-Strategy/fl/Whole-Foods-Under-Scrutiny.htm?utm_source=facebook&utm_medium=social&utm_campaign=shareurlbuttons

NY Times Links CEO to Controversial Guru

In the wake of a New York Times story about Whole Foods Market (WFM) CEO John Mackey’s relationship with former rabbi and alleged sex offender Marc Gafni, the company has come under scrutiny.

On December 25th, 2015, The Times reported Gafni’s own description of one of his alleged victims:

“She was 14 going on 35.”

Also reported in the Times’ story, “A co-founder of Whole Foods, John Mackey…is a chairman of the executive board of Mr. Gafni’s center, and he hosts board meetings at his Texas ranch.”

James McRitchie, a California investor and shareholder activist emailed members of the Whole Foods Board of Directors on New Year’s Day:

“Mr. Mackey has a fiduciary duty to WFM shareholders. His affiliation with Gafni and the center certainly put the reputation and value of WFM at risk.”

A group of more than 100 rabbis has launched an online petition, demanding that Whole Foods sever ties with Gafni.

At the time of this writing, the petition has garnered more than 3000 online signatures.

A slew of follow-up stories have been published. Most noteworthy among them, The Daily Forward published a first-person account by the girl who was the “14 year-old” in the Times story. It was the first time she has come forward publicly in more than 35 years.

New York community newspaper The Jewish Week, which had originally broken the Gafni allegations story in 2004, reported, “Some critics contend that Mackey, in his capacity as an executive board member of Gafni’s nonprofit center, is violating his fiduciary responsibility to the ethical values of Whole Foods.”

So what does Whole Foods have to say about all this?

Michael Silverman, Whole Foods Market Global Corporate Communications representative emailed this statement:

“John Mackey’s involvement with Marc Gafni and the Center for Integral Wisdom is his personal business and does not represent an endorsement or support for either Mr. Gafni or the Center for Integral Wisdom by Whole Foods Market.”

A similar statement appears on John Mackey’s Whole Foods blog:

“My involvement with Marc Gafni and the Center for Integral Wisdom is conducted strictly in my personal life…”

However, the accuracy of Mackey’s and Whole Foods’ statements, characterizing the CEO’s relationship with Gafni as “personal” is questionable. They are more than just friends.

As a director on the board of Gafni’s Center for Integral Wisdom, a tax-exempt California nonprofit corporation, subject to state and IRS laws and regulations, Mr. Mackey has fiduciary duties to the nonprofit organization.

According to Gene Takagi, an attorney with the NEO Law Group in San Francisco, “All directors of a nonprofit corporation have fiduciary duties of care and loyalty to the corporation.”

The IRS prohibits tax-exempt organizations from engaging in commercial, for-profit business activities. A website for the CIW’s Success 3.0 Summit says, “Success 3.0 is an independent LLC generated by the Center for Integral Wisdom,“ and “John Mackey, (Board Chair CIW).”

The CIW’s Success 3.0 Summit appears to have grossed at least $1.7 million in 2014 (350 invited guests at $4995 each; $10,000 VIP upgrade available). By comparison, Gafni’s nonprofit CIW/CWS, grossed about $183K in 2013, according to public tax documents.

On the state level, the California Nonprofit Integrity Act of 2004 requires that nonprofits register with the Office of the Attorney General, Registry of Charitable Trusts. However, religious organizations are exempt from registering with the OAG.

On May 19, 2014, the Office of the California Attorney General issued a letter of exemption to the Center for Integral Wisdom/Center for World Spirituality, confirming that the organization “operated primarily as a religious organization.”

But on January 5, 2016, The Forward reported Gafni saying, “I’ve left the spiritual teaching world and am functioning as the president of an activist think tank.”

Complaints were submitted on January 11, 2016 to the IRS and California Office of the Attorney General, questioning federal tax and state nonprofit regulatory compliance by the Center for Integral Wisdom. John Mackey was named in both complaints, as board chair of the organization.

I spoke with public relations representatives from socially responsible fund managers Calvert, Domini, and Parnassus, all of which hold Whole Foods Market stock in their active equity portfolios. As of this writing, none of the firms have commented.

On the Whole Foods website, the company touts its laudatory standing in corporate social responsibility, noting that it placed at #25 on the list of best CSR reputations in the country, as ranked by the Reputation Institute.

From the Whole Foods site: “The top U.S. companies proactively manage their reputations by investing as much in corporate dimensions like governance, citizenship and workplace as they do in their products and services,” says Brad Hecht, Chief Research Officer at Reputation Institute.”

As of this writing, I exchanged emails with a public relations person at the Reputation Institute, but have not received a comment from them.

Professor Jo-Ellen Pozner from UC Berkeley, Haas School of Business, emailed:

“My take on this situation, in a nutshell, is that corporate leaders are showing a real lack of judgment in endorsing somebody with a tainted reputation of this particular sort. Not only does it show a disregard for important groups of stakeholders, it reveals a bit of hubris and tone-deafness. I think these sorts of associations are bad publicity, and reveal a blind spot which makes me question managerial judgment.”

Shane Yonston, a Principal Advisor with Impact Investors, a boutique advisory firm, emailed:

“Whole Foods positions itself as a socially responsible company, which is an important part of its brand. If these core values come into question by employees, consumers, partners, or investors, it can have long-term damaging effects on the company’s stock value. Reputational risk is real, and the way Mr. Mackey chooses to handle this conflict will certainly be watched by investors in the SRI community.”

Certainly, we are all watching.

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