Thank you very much Gabe and Max for the constructive feedback! I really appreciated it and have upvoted your post.
Having said that I disagree with your main arguments and conclusions – I largely agree with John’s response above (hence replying to his post).
Some more thoughts on this, which are mine and also not necessarily John’s.
On my judgment call of favoring theory over very noisy empirical evidence, I wanted to add that:
“Financial economists have found that a randomly chosen portfolio of as few as fifty stocks achieves 90% of the diversification benefits available from full diversification across the entire market. The reason is that once one owns shares of a few dozen of them, the diversification gains from ownership of shares in additional corporations are small.”
John Y. Campbell et al., Have Individual Stocks Become More Volatile? An Empirical Exploration of Idiosyncratic Risk, 56 Journal of Finance 1 (2001). As cited in Weyl’s Radical Markets.
So that means the effects of divestment are likely small and hard to pick up. But absence of evidence is not evidence of absence.
Generally, multi-objective optimization is harder than single-objective optimization, and it is usually probably better to optimize for financial returns without social impact constraints with investments that feed your charitable giving and then to optimize for social impact through non-profits without profit-making constraints. As one of the economists in the survey that John cited says: “Hard to believe that adding constraints on portfolio choice leads to higher returns”.
On shareholder advocacy:
Shareholder advocacy might very well have some impact. The question is how much effective than normal advocacy it is. Shareholder advocacy has costs and I don’t think there’s a free lunch here. For instance, it has time costs and socially motivated shareholder advocacy should theoretically reduce a corporation’s profits because it moves the corporation away from its goal to maximize profits.
I also wonder what the added value of being a shareholder for advocacy is. In other words, in theory, there should not be much reason for corporations to listen substantially more to minority stakeholders (or any shareholder for that matter) more so than non-shareholder advocacy, because their goal is to maximize shareholder value. I also worry that there might be displacement effects: one corporation that does not exploit socially harmful ways of making profits might bow under pressure and change their ways, but another purely financially motivated corporation might fill in.
The examples you cite might mostly be because of a corporation’s financial self-interest. Tyson investing in clean-meat is actually an example that I’ve cited in my mission hedging piece. Or it might just be good PR and trivially expensive for corporations. To take your example: “At $7 million in annual firearms sales, the category represents less than 1/175th of 1 percent of Kroger’s $123 billion in revenues.” https://eu.cincinnati.com/story/money/2018/03/19/kroger-assault-rifles-magazines/437241002/, given that the profits of this will be quite small it would be hard to see that normal advocacy might not have had the same effect. I feel like you imply that shareholder’s ‘might’ does substantial work here and makes it particularly effective, but there are costs and the effectiveness is unclear.
I think there can be some effective shareholder activism:
“Shareholder activism is an alternative middle ground approach in which investments are used to submit and vote on shareholder proposals that influence firms directly. Due to Securities and Exchange Commission rules, a foundation only has to own $2,000 in market value of the firm’s securities (continuously for one year) in order to submit a proposal to be voted on by all shareholders (U.S. Securities and Exchange Commission (1998)). Thus shareholder activism would be an additional benefit of investing in a firm but is not expected to motivate a sizable investment level.” https://www.federalreserve.gov/econres/feds/files/2017042pap.pdf
This is likely to be effective, but more a clever hack that can be exploited with a few 10s of million dollars and does not warrant SRI on this scale which also uses up a lot of philanthropic bandwidth.
Responding here to John’s and Hauke’s comments above. I hugely appreciate these comments. Especially the highlighting of the marginal impact of the individual, that’s exactly the framework of analysis needed.
I want to focus specifically on the added value of being a shareholder for advocacy.
Nonprofits are able to be more radical, and have the edge in reaching the attention of the mainstream public—which is likely most important in advocacy campaigns focused on consumer-facing brands.
As I see it, both shareholder and nonprofit advocates have the ability to build larger coalitions, influence policy, and generate media attention.
But shareholder advocates are likely to be more effective for some campaigns. Shareholders are more primary stakeholders, can more easily meet with corporate decision-makers, have more credibility in interactions, can promote and frame issues in a business sense (this, by the way, is one of the most effective factors in shareholder engagement).
Shareholders can take established issues and push them over a critical threshold. They can be more effective when dealing with issues that are less obvious to the general public but still present long-term risks to corporations, as well as working with companies that aren’t consumer facing.
It is also likely that shareholders hold a particular advantage over advocacy nonprofits in authoritarian countries that are becoming increasingly antagonistic to nonprofits, while welcoming foreign investment.
I would love to more thoroughly map out what scenarios are most effective for shareholders vs. nonprofits, could be a great guide for effective advocacy.
On marginal impact and what an individual can do:
For most individual investors, the decision is which mutual fund to invest in. By investing in a fund that does shareholder advocacy on one’s behalf, the individual increases the mutual fund’s earnings, which helps it expand advocacy operations. Now if the fund didn’t do advocacy, those fees could have gone to a nonprofit so it could expand its operations and conduct more advocacy. But as I explained above I think there are a sufficient number of scenarios where that tradeoff would be worth it (I don’t think that shareholder advocacy should replace nonprofit advocacy, but I do think that it is much more neglected, and there are a lot of easy opportunities for shareholder advocacy impact).
The potential of SRI at scale is to have more shareholder advocacy staff to run more and bigger campaigns. Not just to have more assets behind a request.
2. It makes sense for index investors to advocate for corporate policies that benefit their entire portfolio. They have incentives to encourage companies to minimize negative externalities (funny enough, some academics worry that index investors will discourage competition, and want to make them illegal). I’m not making any particular argument here, because if big investors explicitly acted on this line of reasoning it probably would become illegal, but I do find the thought interesting so I wanted to raise the point.
3. More people should be exploiting the clever hack! That’s actually how I got into this space :)
Thank you very much Gabe and Max for the constructive feedback! I really appreciated it and have upvoted your post.
Having said that I disagree with your main arguments and conclusions – I largely agree with John’s response above (hence replying to his post).
Some more thoughts on this, which are mine and also not necessarily John’s.
On my judgment call of favoring theory over very noisy empirical evidence, I wanted to add that:
“Financial economists have found that a randomly chosen portfolio of as few as fifty stocks achieves 90% of the diversification benefits available from full diversification across the entire market. The reason is that once one owns shares of a few dozen of them, the diversification gains from ownership of shares in additional corporations are small.”
John Y. Campbell et al., Have Individual Stocks Become More Volatile? An Empirical Exploration of Idiosyncratic Risk, 56 Journal of Finance 1 (2001). As cited in Weyl’s Radical Markets.
So that means the effects of divestment are likely small and hard to pick up. But absence of evidence is not evidence of absence.
Generally, multi-objective optimization is harder than single-objective optimization, and it is usually probably better to optimize for financial returns without social impact constraints with investments that feed your charitable giving and then to optimize for social impact through non-profits without profit-making constraints. As one of the economists in the survey that John cited says: “Hard to believe that adding constraints on portfolio choice leads to higher returns”.
On shareholder advocacy:
Shareholder advocacy might very well have some impact. The question is how much effective than normal advocacy it is. Shareholder advocacy has costs and I don’t think there’s a free lunch here. For instance, it has time costs and socially motivated shareholder advocacy should theoretically reduce a corporation’s profits because it moves the corporation away from its goal to maximize profits.
I also wonder what the added value of being a shareholder for advocacy is. In other words, in theory, there should not be much reason for corporations to listen substantially more to minority stakeholders (or any shareholder for that matter) more so than non-shareholder advocacy, because their goal is to maximize shareholder value. I also worry that there might be displacement effects: one corporation that does not exploit socially harmful ways of making profits might bow under pressure and change their ways, but another purely financially motivated corporation might fill in.
The examples you cite might mostly be because of a corporation’s financial self-interest. Tyson investing in clean-meat is actually an example that I’ve cited in my mission hedging piece. Or it might just be good PR and trivially expensive for corporations. To take your example: “At $7 million in annual firearms sales, the category represents less than 1/175th of 1 percent of Kroger’s $123 billion in revenues.” https://eu.cincinnati.com/story/money/2018/03/19/kroger-assault-rifles-magazines/437241002/, given that the profits of this will be quite small it would be hard to see that normal advocacy might not have had the same effect. I feel like you imply that shareholder’s ‘might’ does substantial work here and makes it particularly effective, but there are costs and the effectiveness is unclear.
I think there can be some effective shareholder activism:
“Shareholder activism is an alternative middle ground approach in which investments are used to submit and vote on shareholder proposals that influence firms directly. Due to Securities and Exchange Commission rules, a foundation only has to own $2,000 in market value of the firm’s securities (continuously for one year) in order to submit a proposal to be voted on by all shareholders (U.S. Securities and Exchange Commission (1998)). Thus shareholder activism would be an additional benefit of investing in a firm but is not expected to motivate a sizable investment level.” https://www.federalreserve.gov/econres/feds/files/2017042pap.pdf
This is likely to be effective, but more a clever hack that can be exploited with a few 10s of million dollars and does not warrant SRI on this scale which also uses up a lot of philanthropic bandwidth.
Responding here to John’s and Hauke’s comments above. I hugely appreciate these comments. Especially the highlighting of the marginal impact of the individual, that’s exactly the framework of analysis needed.
I want to focus specifically on the added value of being a shareholder for advocacy.
Nonprofits are able to be more radical, and have the edge in reaching the attention of the mainstream public—which is likely most important in advocacy campaigns focused on consumer-facing brands.
As I see it, both shareholder and nonprofit advocates have the ability to build larger coalitions, influence policy, and generate media attention.
But shareholder advocates are likely to be more effective for some campaigns. Shareholders are more primary stakeholders, can more easily meet with corporate decision-makers, have more credibility in interactions, can promote and frame issues in a business sense (this, by the way, is one of the most effective factors in shareholder engagement).
Shareholders can take established issues and push them over a critical threshold. They can be more effective when dealing with issues that are less obvious to the general public but still present long-term risks to corporations, as well as working with companies that aren’t consumer facing.
It is also likely that shareholders hold a particular advantage over advocacy nonprofits in authoritarian countries that are becoming increasingly antagonistic to nonprofits, while welcoming foreign investment.
I would love to more thoroughly map out what scenarios are most effective for shareholders vs. nonprofits, could be a great guide for effective advocacy.
On marginal impact and what an individual can do:
For most individual investors, the decision is which mutual fund to invest in. By investing in a fund that does shareholder advocacy on one’s behalf, the individual increases the mutual fund’s earnings, which helps it expand advocacy operations. Now if the fund didn’t do advocacy, those fees could have gone to a nonprofit so it could expand its operations and conduct more advocacy. But as I explained above I think there are a sufficient number of scenarios where that tradeoff would be worth it (I don’t think that shareholder advocacy should replace nonprofit advocacy, but I do think that it is much more neglected, and there are a lot of easy opportunities for shareholder advocacy impact).
The potential of SRI at scale is to have more shareholder advocacy staff to run more and bigger campaigns. Not just to have more assets behind a request.
I had a couple other thoughts but they weren’t that relevant and my comment was getting too long.
1. Shareholder advocacy often combats displacement effects because the campaigns often target entire industries (see Farm Animal Investment Risk and Return or Boston Common Asset Management’s Banks and Climate Change work as examples).
2. It makes sense for index investors to advocate for corporate policies that benefit their entire portfolio. They have incentives to encourage companies to minimize negative externalities (funny enough, some academics worry that index investors will discourage competition, and want to make them illegal). I’m not making any particular argument here, because if big investors explicitly acted on this line of reasoning it probably would become illegal, but I do find the thought interesting so I wanted to raise the point.
3. More people should be exploiting the clever hack! That’s actually how I got into this space :)