CHAPTER 7
Shareholder Activism: Keeping Corporations on Their Ethical Toes IT IS BETTER TO LIGHT A CANDLE – ANCIENT CHINESE PROVERB
THAN CURSE THE DARK.
in one of the world’s major corporations, it used to be a case of love it or leave it. Shareholders of all stripes who didn’t like the deal corporate management set up, or objected to an investment in a country where human rights were routinely violated, or simply were offended by the way a company treated its employees, had a single option. They had to follow what some have called the first “Wall Street Rule”: when disenchanted with management, sell your holdings.
WHEN IT CAME TO HOLDING STOCK
Developing Ethical and Financial Responsibility Today, the relationship is very different. Investors from the United States to Europe (and even Japan) are attempting to make corporations more ethically and financially responsible through shareholder activism. This often confrontational attitude by shareholders in the governance of companies is a relatively recent development. In the past, walking away often meant selling big chunks of a company’s stock, which could drive the share price down. Virtue had a price. Depending on the size of the investment, it may actually be more expensive to walk away from corporate stock than to work with company management to change corporate behavior. In some cases, even walking away wasn’t really an option. Large institutional investors (such as pension funds, trusts, mutual funds and endowments) all have only one thing in common: they manage assets on behalf of someone else. They also frequently hold indexed portfolios, which preclude the sale of a specific stock, regardless of its performance indicators or its underlying corporate ethics. The only route for change left was from within. Public opinion has begun calling for boards of directors to exercise their powers in the interests of the many people who can be affected, rather than solely in the interests of shareholders and the bottom line. Shareholders now have much more information with which to challenge the board on both financial and ethical issues. The premise behind shareholder activism is that organizations can use their investment strength to bring about social justice through social change. Shareholder activism (or advocacy) describes the actions many socially aware investors take in their role as owners of corporations. These efforts include discussions with companies on issues of concern and submitting
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