Monday, February 3, 2014

Shareholder Impact - passive, active or divesting

I've gone on record saying that I don't think divestment is the way to address our reliance on fossil fuels. Someone will buy up those divested stocks and they may not be as conscientious as the people who sold them. I just don't see how this brings about change.  Still, large scale divestement could have value. There has been a flurry of news stories about seventeen foundations banding together to divest from fossil fuels. This action, combined with the continued effort of students pushing for universities to divest, may raise consciousness enough that public pressure will grow and we will finally see alternatives come to market.
 
With all this in mind, I've been mulling over just what happens when a shareholder divests or when they are activist. I've created the chart below to show what happens to the shareholder, the company, the economy and society. I expect there to be some debate -- and I look forward to discussing it.
 

 

 
Divesting Shareholder
Engaged shareholder
Passive Shareholder
Impact on Shareholder
 
 
 
 
 
 
  • Public impression that action has been taken;
  • Sense of empowerment
  • Makes political statement about issue;
  • May decrease value of portfolio because of forced sale.
  • Commitment of resources & reputation that involve costs & exposure;
  • Potential for adding value
  • Potential to establish accountability.
  • Enables management has to enrich themselves at shareholder expense & to operate without effective accountability;
  • Enables society-threatening conduct of corporations;
  • Enables unlimited diversity of investment.
 
Impact on focus company
 
 
 
 
 
 
 
 
 
  • Some potential p.r. issues; 
  • If a significant percentage of investors divest it could affect market price.
  •  Potential for adding value;
  • More accountability and responsibility to shareholders & to society as a whole;
  • Potential for oversight of CEO pay;
  • Potential for better adherence to law and taxation;
  • More transparency in political donations & lobbying;
  • Potential for fewer fines & settlements due to negligence and corporate crime;
 
  • Passive shareholders confirm entrenchment of management power;
  • Likely to see less accountability and growth in power of management.
Impact on Economy
 
 
 
 
 
 
  • Little to none
  • Involved owners will incline toward a new system of accounting whereby externalities are factored into the balance sheet;
  • Potential that risky behavior that caused the financial crisis would be curbed.
 
  • With no accountability, corporations are free to move jobs/money offshore and avoid taxes.
Impact on Society
 
 
 
 
 
 
 
 
  • Over time, divestment campaigns may serve to raise consciousness around an issue and even change behavior or policy; 
  • Little immediate impact except for some media coverage and use in marketing to the sector of consumers and investors interested in divestment.
  • With full accountability in place, corporate taxes would be paid bringing in money to support government programs and services;
  • Potential that less money and fewer job moved offshore;
  • Potential for less corporate crime and negligence resulting in personal and societal injury;
  • Potential for accountability and transparency regarding political donations would mean less corporate influence in government.
 
  • With no accountability, corporations are free to move jobs/money offshore, avoid taxes & influence the policies that oversee pollution, labor laws, political contributions, etc.
 
Glossary of terms as used in this chart:

Divesting Shareholder: stockholder proposing to sell shares for political reason.

Engaged Shareholder: stockholder who monitors corporate conduct and actively holds management and directors accountable.

Passive Shareholder: stockholder who willfully or otherwise ignores corporate conduct.

Focus Company: corporation that is the target of action – divestiture, activism, etc.
February 3, 2014 in shareholder activism , fossil fuels , Divest , institutional investors  |  2 comments  | 

Post a comment

Comments

Posted by Julian Poulter,AODP on Feb 13, 2014 at 1:09 AM
Hi Bob,
I completely agree - hedge funds and oil based sovereign wealth funds could be lining up for such opportunities. It is risk and emissions we are trying to divest from, not companies. However, leading asset owners who will continue to grow in bravery on climate engagement, may divest the smaller pure play fossil fuel and high emitting companies and engage heavily with the large companies who financially represent a bigger portfolio risk.
Divestment has been valuable in creating the stigma and the debate but the more balanced approach that AODP recommends is needed - immediate hedging at a portfolio level is critical and a diversified one at that. Ultimately, we need to educate pension funds members that non-diversifiable uninsurable risks like climate change are not well priced by markets and no-one will trade out profitably once re-pricing begins so passive pension funds should be driven to change or abandoned.
Posted by TokyoTom on Feb 5, 2014 at 9:32 PM
Bob, money invested in new and more accountable biz is what drives creative destruction, and dinosaurs that do not respond to such competition fail.

Marginal decisions matter.
Copyright 2019 by Robert A. G. Monks