To Divest, Or Not To Divest

I was at the climate march in D.C. this past weekend, and have been thinking a lot about the effectiveness of different types of activism. There were 200,000 people at the march. I was there for 5 hours. ~1,0000,000 hours of collective effort. Could that have been harnessed more productively? Could those hours had been organized into 10 million calls to government representatives? 1 million hours towards planting community gardens? 200,000 pledges to avoid driving once a week? Perhaps these other activities are harder to organize than a march. Perhaps the effects of a march are great, but dispersed and difficult to measure.

In talking about effective strategies for activism over the weekend, the topic of divestment came up. It came to light that there is a lot of misunderstanding surrounding investment and divestment, and someone requested that I write out the explanation from the conversation. Here we go:

What Is Activist Divestment?

Activist divestment calls for an institution to sell their ownership in a company. For example, when I was getting my undergraduate degree, there was a student movement that demanded the university endowment sell an ownership stake in a coal company.

Why Do Activists Advocate For Divestment?

As I understand it, those who advocate for divestment view it as a symbol, but also believe that the company is being harmed through the divestment. These activists believe that the divestment will depress the stock price, making the company lose value. Classic supply and demand.

Why Is This Logic Faulty?

First of all, the stock market is a secondary market. Only when a company initially sells stock does the company receive proceeds. After that, the public buys and sells shares among themselves. Even if divestment lowered the stock price, the company would not receive less money.

Secondly, while an overabundance of stock sellers could depress the stock price in the very short term, in the long run, stock prices reflect the future earnings of the company. The future earnings of the company do not change when a university endowment, or anyone else, divests under moral grounds. The act of divestment doesn’t have anything to do with the workings of the company.

This is a simplification, but long story short, divestment does not do anything to the company.

So You Want To Be An Icahn?

The irony here is that being a shareholder in a company allows you, as an owner, to vote on company policy. There is a whole class of activist investors who work to influence management and policy. Divestment gives up the right to vote on such matters. While symbolism is important, if you really want to effect company policy, you need to be a shareholder.

Further, it doesn’t take all that much money to raise issues at shareholder meetings. You need to own $2000 worth of stock for at least a year to raise a resolution. Want to have a seat at the table? Invest!

I think the concept of having socially minded activist investors is super cool, especially if those activist investors can find ways to do good and do well. We have seen a bit of this, but could see much more.

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