3/19/08

Shareholder Activism: Ethically Investing in "Evil" Companies

Ethical investors (e.g., those who support human rights, animal rights, environmental issues, and so on) almost by definition avoid stocks of companies that are engaged in unethical activities (e.g., animal testing, environmental degradation, human rights violations, etc). That is, ethical investors usually invest only in companies that meet their criteria for ethical behavior. For instance, ethical investors might avoid oil stocks in favor of clean energy stocks.

I'd like to talk about a more counterintuitive approach to ethical investing.

First, however, I'd like to draw a distinction between investing to make money and investing to make the world a better place. While these goals aren't mutually exclusive, they are different. Ethically investing to make money usually means finding companies that don't do anything unethical, whatever one's definition of that is, and from those selecting the ones whose share prices you think will go higher. The second goal, on the other hand, is more like supporting a company or the industry that one thinks is ethical. Making money here is a secondary objective. Investing, in this sense, is the benefit one derives from the companies or industries succeeding and making the world a better place.

The approach I'd like to talk about is more like the second goal, but it's not necessarily opposed to the first.

While ethical investors usually avoid the so-called vice stocks (oil, tobacco, weapons, gambling) as well as pharmaceuticals and environmental polluters, they don't have to.

When you buy stock, you become an owner of a corporation. Those who hold a company's stock have several rights and privileges which include:

attending shareholder meetings and asking management questions ("So, Mr. CEO, why is it that you do business with the repressive regime in country x?"), writing to the company and receiving a response, and, if you hold $2,000 worth of stock for over a year, filing shareholder resolutions. Shareholders vote on proposals at annual meetings, and ethical investors can use these to try to steer companies away from certain activities.

While most shareholder resolutions are defeated, especially when management opposes them, they still have an effect. For example, it brings the issue front and center. In other words, it gets management's attention. Moreover, sometimes management can be won over, whether from an economic or purely moral standpoint. Additionally, if a resolution makes it to a shareholder meeting, the media can pick it up, and this further attention can stop a corporation's unethical behavior.

If owning $2,000 worth of shares seems too small to affect anything, consider what happens when you band with other similarly minded people, whether in an investing club, a public interest organization, or a church group. For example, Amnesty International has successfully engaged in shareholder activism at such companies as ALLTEL, Carlisle, and Exxon Mobile. PETA has been filing shareholder resolutions at Pfizer.

So, how is this investing? If shareholder activism changes unethical corporate actions for the better, everyone wins. Changes in corporate behavior may also help the bottom line, as when positive news may attract more customers. Even if shareholder activism appears not to change anything, you're still trying. While you're at it, you're collecting dividends or riding the stock as it's increasing in price. You're earnings are derived ethically, even if they come from an unethical company. (The share price can also go down and dividends are sometimes cut, but that's something to consider before you investing--the risks, potential gains, and your other reasons for buying the stock.)

While a majority of one's ethical investments should probably be socially responsible companies, they don't all have to be.