Katinka C. van Cranenburgh, secretary general of the International Interfaith Investment Group and researcher at ESADE’s Institute for Social Innovation.
When the Quaker based Joseph Rowntree Charitable Trust (UK) decided to divest from Reed Elsevier after having tried to convince the company to sell its arms fairs division, it couldn’t have imagined that its action would have such a significant impact.
The Quaker-based trust’s decision became not an end of the two-year shareholder engagement process but the tipping point. While all the letter writing and C-level meetings did not change the company’s standpoint that its business was legal, publicised divestment resulted in the public opinion turning against the company, and made Reed Elsevier switch from focusing on a strictly legal approach to more of a stakeholder approach.
While an exit – a shareholder selling all the shares in the company – might be perceived as an end to the engagement process with the management of the company, it seems that threatening divestment, or divesting itself, actually forms part of an ongoing process for socially engaged shareholders. Investors concerned about the social and environmental impact of companies are increasingly choosing to use voice – or advocacy – over exit as a strategy.
A recent publication in the Journal of Business Ethics by business schools ESADE and Audencia, and the International Interfaith Investment Group 3iG, argued that engagement with companies is a dynamic process during which the shareholder may switch between private and public action: private dialogue with company representatives combined with public statements around divesting. The active shareholder also remains active as an ex-shareholder, and may well reinvest if the company corrects the issue of concern.
Much engagement remains offline, according to the Church of England Ethical Investment Advisory Group, who explained that ‘‘most of what we do is confidential and goes on with a company with a very constructive relationship’’. Nevertheless, the Church of England saw divestment as the last line of attack in a dispute about the human rights stance of mining company Vedanta in India. ‘‘The impact of our disinvestment … was part of the process , it has prompted the company to start potentially changing its behaviour’’, the Church says. Since the divestment, Vendanta has made senior appointments in CSR and governance and its standards, and while it may not have gone as far as the church would have liked, it shows some positive outcome to shareholder engagement.
The chair of the Quaker Trust investment committee, referring to its divestment in Reed Elsevier said: ‘‘selling our shares was the most effective thing we’ve done because it brought this campaign into the headlines of the press and invigorated the other people like the doctors and the lawyers, and the NGOs’’.
Engagement does not happen in a vacuum. Three stages from the perspective of the shareholder are distinguished in the process of engagement: issue raising, information search and change seeking activities. Poor company response can lead to a public exit, which can trigger a new company response with the potential of reattracting the shareholders money if the response is satisfactory.
Interestingly, the number of shares held is not critical to the company’s response. The research showed that religious organisations can increase their impact when publically announcing divestment. Indeed, the divestment from the Quakers in the Reed Elsevier case was regarded by them as a successful engagement. The media attention led to more campaigning and, later that year, the arms division was sold and the Quakers reinvested in the company. The combination of public advocacy and exit led to the desired outcome and a satisfactory response.
While arms fairs continue to exist, the net slowly narrows around the potential suppliers. Engagement by social shareholders, such as the religious organisations, is increasingly challenging companies to think beyond the legal boundaries of their businesses. They have to set ethical values, be transparent and act on them.
But not only are the companies themselves confronted to define their ethical boundaries; also the investor groups, whether pension funds, religious organisations or financial services providers, can no longer hide behind ‘the client/member’ is king’ approach. They have to articulate their values and live up to them. Members or clients can choose to remain part of their organisation or not. They also can use the dynamics of voice and exit to influence their church, pension fund or bank.
Article published at The Guardian on Friday 1 November 2013.