Getting serious about using investment for social change

Divestment campaigns almost never work. Sometimes a campaign might actually get a fund to sell off and refuse to buy certain stocks, but rarely will it ever get enough funds to do so simultaneously, which is what’s necessary to actually exert any pressure. I suspect these kinds of campaigns are pursued in part because people don’t really understand what divestment means. They think that one entity “divesting” scores some sort of blow in and of itself. In reality, divesting just means swapping out owners: the entity divesting just sells of its ownership shares to some other party.

What does that accomplish? By itself absolutely nothing. Ownership shares swap hands every second of every day. That’s how markets work. However, if you can get enough actors to simultaneously sell off their shares (if they have any) and commit to not buying any in the future, then that can cause the share price to fall in at least two ways. First, by taking potential buyers out of the market, there are less actors competitively bidding for shares, which can reduce the price. Second, by taking potential buyers out of the market, the liquidity of any given share is reduced, exposing holders of those shares to greater risk. This risk should get priced into the share, which means the share price will fall.

From there, the theory goes, the management of the firm being targeted will cave to the demand in order to stop the divestment and boost its stock price. From the description alone, it should be clear how big of a long shot this strategy is. Getting a bunch of (usually very wealthy) managers of large funds on board with your politics enough to pass over a high-yielding investment is very unlikely. Not to mention that we have laws in this country that assign liability to fiduciaries of investment funds that do not act solely in the interest of the fund’s beneficiaries or participants (think pension funds for instance). So, passing over a good investment for political reasons could get you sued.

The long shot nature of divestment campaigns probably explains their general failure. But there are other ways. It astonishes me that there is so much focus in getting your money out of bad places. I guess it goes to the whole politics of personal purity the left in particular gets bogged down in. The most sensible thing, it seems, is not to pull your money out of bad places, but to plunge your money into them. If you want to get serious about using investment strategies to force companies to do something, collect money to buy out controlling shares in them.

Imagine, for instance, a donation-sponsored activist fund that was solely dedicated to buying out controlling shares in targeted companies, reforming the companies for purposes of social justice, and then selling their shares back out. With the money from the sale, the fund could then move on to the next targeted company, and so on. This would be a costly strategy: it would probably force the fund to absorb investment losses for each targeted strike. But if you could collect enough money and keep donations rolling into the thing, it could work. At the very least, it seems like a more plausible strategy than divestment for actually winning social change through these channels.