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rpmcruz9y-20

That is a good point. The stock market is probably more competitive than whatever market the company is in, so, for every one moral investor, there are infinite more that are amoral.

Again, that is a good point, and I already had it in mind when I posted my reply. The person I was replying to did not articulate it correctly.

Still, I do not think the original question should be dismissed outright. The fact is that not even the stock market is perfectly competitive. There are not infinite players in either side. For instance, if you look at Islamic countries, you can find countries where close to 100% are religious https://en.wikipedia.org/wiki/Islam_by_country. I can imagine how a religious figure could possibly bankrupt a company by talking to banks alone and draining the company out of capital (without ever talking to customers). My point is that even in highly competitive markets maybe activists can have an influence. I find it very unlikely. I still think dismissing that question outright is anti-scientific.

HungryHobo9y00

Sure, if you could coordinate with almost all players in a market and got them to agree to give up financial gain to achieve your goals without any defecting then it would work. Though that's a mighty big "if" in any large market.

See in context

1 Call for information, examples, case studies and analysis: votes and shareholder resolutions v.s. divestment for social and environmental outcomes

by [anonymous]

5th May 2016

2 min read

1

Typology: since not elsewhere disambiguated, divestment will be considered a form of shareholder activism in this article.

The aim of this call for information is to identify under what conditions shareholder activism or divestment is more appropriate. Shareholder activism referrers to the action and activities around proposing and rallying support for a resolution at a company AGM such as reinstatement or impeachment of a director, or a specific action like renouncing a strategic direction (like investment in coal). In contrast, divestment infers to withdrawal of an investment in a company by shareholders, such as a tobacco or fossil fuel company. By identifying the important variables that determine which strategy is most appropriate, activists and shareholders will be able to choose strategies that maximise social and environmental outcomes while companies will be able to maximise shareholder value.

Very little published academic literature exists on the consequences of divestment. Very little published academic literature exists on the social and environmental consequences of shareholder activism other than the impact on the financial performance of the firm, and conventional metrics of shareholder value.

Controversy (1)

One item of non academic literature, a manifestos on a socially responsible investing blog (http://www.socialfunds.com/media/index.cgi/activism.htm) weighs up the option of divestment against shareholder activism by suggesting that divestment is appropriate as a last resort, if considerable support is rallied, the firm is interested in its long term financial sustainability, and responds whereas voting on shareholder resolutions is appropriate when groups of investors are interested in having an impact. It’s unclear how these contexts are distinguished. DVDivest, a divestment activist group (dcdivest.org/faq/#Wouldn’t shareholder activism have more impact than divestment?) contends in their manifesto the shareholder activism is better suited to changing one aspect of a company's operation whereas divestment is appropriate when rejected a basic business model. This answer too is inadequate as a decision model since one companies can operate multiple simultaneous business models, own several businesses, and one element of their operation may not be easily distinguished from the whole system - the business. They also identify non-responsiveness of companies to shareholder action as a plausible reason to side with divestment.

Controversy (2)

Some have claimed that resolutions that are turned down have an impact. It’s unclear how to enumerate that impact and others. The enumeration of impacts is itself controversially and of course methodologically challenging.

Research Question(s)

Population: In publicly listed companies

Exposure: is shareholder activism in the form of proxy voting, submitting shareholder resolutions and rallying support for shareholder resolution

Comparator: compared to shareholder activism in the form of divestment

Outcome: associated with outcomes - shareholder resolutions (votes and resolutions) and/or indicators or eventuation of financial (non)sustainability (divestment) and/or media attention (both)

Potential EA application:

Activists could nudge corporations to do the rest of their activism for them. To illustrate: Telstra, Paypal UPS Disney, Coca Cola, Apple and plenty other corporations have objected to specific pieces of legislation and commanded political change in different instances, independently and in unison, in different places, as described [here](http://www.onlineopinion.com.au/view.asp?article=18183). This could be a way to leverage just a controlling share of influence in an organisation to leverage a whole organisations lobbying power and magnify impact.

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[-]James_Miller9y190

Very little published academic literature exists on the consequences of divestment.

This is because most people who study finance would put a very high probability on the consequences being zero. If my college refuses to buy from a firm it hurts that firm a little, but if it refuses to buy stock in a firm it does that firm zero harm. The best evidence is that while firms frequently advertise to get people to buy their products, they almost never advertise to get people to buy their stock. The value of a firm's stock is determined by what the big players in the market think are the long-term fundamentals of this stock.

[-][anonymous]9y10

I think it's a bit more complicated than that. However, my overall impression is that engagement with management, followed by resolutions/voting/proxy-battles, followed by divestment as a last option, is a dominant strategy than just blanket divestment.

Second, even if small companies did suffer through divestment there is nothing to stop the larger fossil fuel firms simply using their cash flow and borrowing capabilities to purchase their now cheaper and more vulnerable rivals. So rather than divestment hurting the large amoral multinational fossil fuel companies and its remaining investors, it provides an opportunity for them to control and consolidate the industry further, potentially reaping more dividends from the act of consolidation.

Ironically, it appears divestment creates perverse incentives for people to invest more in fossil fuels.

[-][anonymous]9y00

The best evidence is that while firms frequently advertise to get people to buy their products, they almost never advertise to get people to buy their stock.

I've seen adds that I suspect were actually targeting potential investors. Granted this was followed by the company in question exploding spectacularly a few years later with the executives being charged with fraud.

[-]rpmcruz9y00

"If my college refuses to buy from a firm it hurts that firm a little, but if it refuses to buy stock in a firm it does that firm zero harm."

If a lot of people refrain from buying stocks from a given firm, don't they have to raise dividends or capital gains in order to attract capital? Those dividends or capital gains must be financed by cutting costs, raising prices or whatever. Either way, it does harm a firm when capital is not as cheap.

[-]HungryHobo9y70

only if they do so in total secrecy.

If you're an analyst in a big trading firm you know that ,say, an oil company exists and is currently valued at a certain level by the market taking into account the available information about it's business and profits.

Later that company is targeted by divestment activists. A big university is pressured by economically illiterate students into selling all it's stock in the oil company.

The analyst's note this and know that the company is probably being slightly undervalued as a result and buy up some stock.

There are actually Sin Funds that target stock of companies like tobacco, fossil fuel companies etc and invest in them on the basis that they're likely slightly undervalued due to other "moral" investors avoiding them.

Thus the only effect of divestment is to transfer a moderate amount of money from yourself to people who are slightly less ethical. It doesn't hurt the company at all.

[-]gjm9y10

There are actually Sin Funds that target stock of companies like tobacco, fossil fuel companies etc and invest in them on the basis that they're likely slightly undervalued due to other "moral" investors avoiding them.

If they continue to be consistently undervalued because of that mechanism, then a Sin Fund should see no gain in growth as a result of it. What the Sin Fund needs is for morals to shift in the direction of those firms, or for investors to start caring less about morals.

My guess (which is no more than a guess) is that the reverse is likely to happen with tobacco (as smoking declines) and fossil fuels (as other sources of energy get lots of support and start taking away market share from fossil fuels), but other varieties of "sin" might go the other way (e.g., I think pornography is much less disapproved-of than 20 years ago and I would expect that trend to continue). But my guess is also that these things are pretty well priced in already.

[-]HungryHobo9y20

You seem to be implicitly assuming that the only value of a stock is it's potential future increase in price, for most their dividends and stability are largely what set their value. Unless the divestment activists control a really really massive fraction of the market then that's not going to matter in any way shape or form.

Losing actual customers as with tobacco and fossil fuels absolutely can hurt a company. Losing sales hurts, it's only divestment that's irrelevant.

[-]gjm9y30

I don't think I'm assuming what you say I seem to be assuming. Could you explain why you think I am?

(I should probably have said "investors and customers" at the end of my second paragraph; I was echoing your reference to "investors" when you wrote about sin funds.)

[-]Lumifer9y40

When you own equity, you can profit in two different ways. One way is to receive some of the cash that the company generates, traditionally in the form of dividends. That's known as the dividend yield. The other is price appreciation.

These two ways are interlinked, of course, in many ways. Price change depends on the company's cash flows. A popular nowadays way of distributing cash to shareholders is share buybacks (they are more tax efficient) which work through share price.

To get back to the original point, many "sin" companies (e.g. tobacco) pay dividends. If the price at which you can buy the stock is "cheap" (= "consistently undervalued"), your dividend yield is higher even without any price appreciation.

Let's take a stylized example. Company XYZ's shares are traded at $100 and the company pays $5/year dividend. The dividend yield is 5%. Now let's say it has been targeted for divestment and the share price dropped to $50. At this point if you buy the shares you will get the dividend yield of 10% without any need to hope for a price increase.

[-]gjm9y40

D'oh, of course. My apologies for being dim.

[-]HungryHobo9y00

Very clearly put.

Some companies (like up until recently Apple) didn't pay much in the way of dividends but instead pumped money back into company growth to try to increase the value of their shares. I think this may have been the kind of gain gjm was thinking of where you buy hoping the value will increase rather than banking on the company handing out good dividends.

[-]rpmcruz9y-20

That is a good point. The stock market is probably more competitive than whatever market the company is in, so, for every one moral investor, there are infinite more that are amoral.

Again, that is a good point, and I already had it in mind when I posted my reply. The person I was replying to did not articulate it correctly.

[-]HungryHobo9y00

[-]James_Miller9y00

No because if hedge funds think the value of a stock is $20, they will buy whenever the price falls below $20.

[-]Luke_A_Somers9y-10

Why is asking for information getting downvoted here? Is the question so silly, so stupid, so unspeakable, as to be worth downvoting?

Even if you know divestment is useless, it sure would be nice to know. And, that wasn't all Clarity was asking for. Failed shareholder resolutions seem like they could possibly have some influence. Just how much - including if it's zero - is important information.

[-]Dagon9y80

I suspect you and I have different voting standards. A post does not need to be stupid or unspeakable to downvote, merely uninteresting and unhelpful.

The underlying question (exit vs voice in ownership as compared to other kinds of membership) might be interesting, but the post doesn't bring that out very well.

And there's no way to go foward from this post. It doesn't say anything concrete enough to agree or disagree with, it doesn't ask narrow enough questions that people can help to suggest ways to behave or how to further the research and thought.

fundamentally, I downvoted because I didn't like it.

[-]rpmcruz9y10

I am being drained out of karma in this thread because of all the downvotes by defending the poster... :)

But the underlying question about whether not-joining and buying from competitors is also interesting. We all know consumer boycotts work. What he is asking is whether that can be transported into the investment world.

As others replied, there are many more investors than customers, and besides it is a largely anonymous operation, so it is much more difficult to affect a company by making it easier for their competitors to raise capital. I still think it is interesting whether things like Pope calls for people not to invest in arms and oil has had any impact.

[-]Lumifer9y-40

divestment will be considered a form of shareholder activism in this article.

That is silly. What, not owning stock of company XYZ makes me a shareholder activist? Oh boy, I'm an activist in SO MUCH of global equity...

divestment is appropriate as a last resort

That's called "We lost. RETREAT!"

[-]rpmcruz9y-10

"What, not owning stock of company XYZ makes me a shareholder activist?"

I don't think that is the point at all. If a lot of people buy stocks from one firm and refrain from buying from their competitors, they change the relative costs of raising capital and do benefit one firm instead of the other. It is like a lot of customers buying from one firm and not from others.

[-]Lumifer9y00

buy stocks from one firm

You are very confused about how stock markets work.

You buy stock "from the firm" in two rather uncommon situations. The first is an IPO (Initial Public Offering) which is a once-in-a-lifetime event for a company. The second is what's called a "secondary offering" which exist but tend to be rare, in part because SEC makes it a big pain in the butt compliance-wise.

Normally when you buy stock in the stock market you buy it not from the firm, but from some other investor. The firm sees no money from that transaction and, generally speaking, doesn't care about the price at which it happens (yes, that's an approximation, but it's good enough for the level we're at here).

[-]rpmcruz9y10

I know. But that discussion is largely irrelevant. Shareholders do care about the price of the stocks and dividends.

That is like saying that in my coffee shop I do not care about whether my customers enjoy their coffee. I already sold them the coffee afterall.

The point is that if you don't care about your shareholders and shootcrap your company, your competitors will find it much easier to raise capital. The original question is whether there are enough "activists" that can change the route of a company by selling their stocks or buying from expensive stock options from their companies.

[-]Lumifer9y00

That is like saying that in my coffee shop I do not care about whether my customers enjoy their coffee.

This is also like saying that in order to harm the coffee shop you will attack the customers. Attempts to punish the company by inflicting pain on the shareholders are unlikely to make you popular with those shareholders.

The point is that if you don't care about your shareholders and shootcrap your company, your competitors will find it much easier to raise capital.

Citation needed. Can I see some empirical data where activists' efforts at divestment actually, in real life, led to the rise in the cost of capital for a company?

[-][anonymous]9y-10

Look, it's inconsequential.

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