A couple of months ago I argued here in opposition to the Wall Street Flooders who are calling for investors to sell their holdings in fossil fuel companies. The flooders hope to change the business practices of those most responsible for global warming. My response was simple. Selling your stake in a company eliminates your voice in its management thereby eliminating your ability to impact its practices.
The San Francisco Chronicle is now reporting that billionaire Tom Steyer and top California democrats are planning to introduce legislation “that would require the state’s public employee pensions to sell their coal-related investments.”
I have never understood arguments in favor of divestment. When I was an undergrad, there was a very active movement calling upon universities and colleges to sell their holdings in companies doing business in South Africa. While I wholeheartedly supported the movement’s ultimate goal of ending apartheid, I never understood why selling shares of, say, Citibank to protest its presence in South Africa would modify Citibank’s behavior. After all, the profitability of the bank’s underlying ventures would be wholly unaffected and any slight drop in Citibank’s stock price would only make it more appealing to less enlightened investors.
Those who support divestment as a strategy often point to South Africa, which began to dismantle apartheid in 1990, as a success. In fact Adele Simmons, the former President of Hampshire College, who led it to divest in 1977 wrote in support of the strategy in an op-ed for the Chicago Tribune last year.
Simmons claims that the collective withdrawal of billions of dollars invested in companies like General Motors and IBM caused them to reduce or eliminate their operations in South Africa in 1986-87. But a close reading of her editorial strongly suggests that the two behemoths and other large multinational corporations acted because of federal legislation banning new investments and increasing violence in South Africa not because of divestment campaigns. Simmons notes that “[d]oing business in South Africa became too expensive for American companies.” It seems quite a stretch to link the divestiture by American institutions of their ownership stake in multinationals to increased business costs in South Africa.
A report by the Nathan Cummings Foundation confirms my view on divestment. In Changing Corporate Behavior through Shareholder Activism, the foundation discusses, at pages 4-5, various ways progressive investors can seek to impact on a company’s behavior.
Investors, as the owners of a corporation, can choose one of several courses when confronted with corporate behavior they find counterproductive, whether it’s the unfettered emission of greenhouse gasses (GHGs), complicity in human rights abuses, or simply poor governance practices. They can choose to sell their stock, voice their objections to the practices in question or hold onto their stock and say nothing.
The Cummings Foundation investment managers concluded:
While selling the stock of a company with bad practices may feel ethically satisfying, it is unlikely to affect any type of significant change in corporate behavior, since when one investor sells a stock, there is, by definition, another willing to buy it.
Instead, since 2002, Cummings has engaged in active investing whereby it uses its voice as a relatively large investor in various companies:
to achieve concrete changes in corporate behavior. . . [T]he Foundation has pushed corporations to strengthen shareholder rights, improve governance practices, increase transparency and think more strategically about environmental and social issues. We’ve even been successful in prodding companies to begin reducing their GHG emissions. Our approach of engagement instead of screening, voice instead of exit, has promoted both long-term shareholder value and the issues that the Foundation focuses on in its grantmaking.
Only extremely wealthy individual have the financial wherewithal to buy large enough blocks of stock to impact a corporation’s direction. But many relatively progressive institutions have billions of dollars to invest. On their own, or even more powerfully, in concert with those of similar inclination, they can curb harmful business practices. But any opportunity to reform a bad corporate actor is lost if the investor sells.
If Steyer and California democrats want to reduce GHG emissions they should urge large pension funds to increase, rather than liquidate, their holdings in coal extractors. At some point, the funds may have enough leverage to push for at least some companies to transition away from production of the dirtiest of fossil fuels.