Divestment as a tool for social change should be limited. Scott Wisor argues shareholders can’t provide the effective reform we’re looking for.
Divestment is now seen as a popular tool for social change. Divestment campaigns have targeted companies involved in tobacco, arms trading, apartheid, fossil fuels, and offshore detention. This makes sense, as shareholders do not want to be complicit in the moral wrongdoings of companies they invest in, even if the investment choice was made by a third party fund manager such a superannuation body.
However, despite being well-motivated, the use of divestment is likely to be justified in a limited number of situations. Because of the various duties facing corporations, there should be a general presumption against institutional shareholder divestment to prevent well-intended but ultimately ill-fated campaigns.
A general presumption against shareholder divestment
There are three reasons we should limit divestment as a tool for social change.
First, most corporations will be guilty of violating moral principles or human rights at some time. Imagine a system where companies face shareholder divestment for every moral violation. Investors would face a limited universe of companies to invest in. This would lead to weaker and more risky returns. Companies would face much higher capital costs, or would turn away from publicly traded markets and towards private investors.
Second, shareholders are neither the most effective nor legitimate institutions to address ethical problems. Governments are. Campaigners often point to successful divestment campaigns that have brought about reform. Yet it is usually regulatory action by governments rather than the behaviour of individual companies or actors that prompts change.
For example, smoking rates have not declined because of shareholder divestment from tobacco companies. They have declined because of higher taxes, plain packaging, public awareness campaigns, and limits on smoking in public places.
Third, when institutions sell their shares in a company, there may be a less scrupulous investor waiting to buy them. A well-organized divestment campaign could drive down share price for a time. In the long run though, other investors may buy the shares - perhaps at a discount. The company would then face fewer questions about unethical business practices.
When divestment is justified
There are two types of reasons that may justify institutional shareholder divestment. The first is when a company is involved in what you might call “evil” activities – for example, slavery. In that case, shareholders must divest themselves even if it will not affect the company’s activities.
The second reason for institutional shareholder divestment is where an orchestrated shareholder divestment campaign is both likely to succeed and is the best means for generating change. However, there are many more poorly-conceived divestment campaigns than well crafted ones that are likely to succeed.
A well-structured campaign
A well-structured and morally justified divestment campaign has several features. First, the target of the campaign is one a large majority of the relevant shareholders and stakeholders would share. Suppose a campaign called on an investor to sell its shares in a pharmaceutical company who manufactures abortion drugs. The university or pension funds could reject this demand because the moral aim is not widely shared by shareholders and stakeholders.
Second, target companies must be identified according to clear, consistent, and ethical criteria. It would be wrong to target one company for labour violations and not others guilty of the same violations.
Third, the campaign must specify reforms the target companies could plausibly undertake. The current fossil fuel divestment campaign calls for target companies to leave 80% of their reserves in the ground. This is not a request any corporate executive would meet.
Finally, campaigners must take efforts to promote reforms through other methods. Regulatory reform and consumer pressure are viable options campaigners should explore before divestment. This ‘last resort’ criterion protects institutional investors from being the first port-of-call for reform.
Scott Wisor is the Deputy Director of the Centre for the Study of Global Ethics at the University of Birmingham.