Silencing the Conscientious Investor?

In March 2015, eBAY announced a policy for gender and race diversity on its board of directors; hencefort, it will actively search for women and minorities when recruiting directors.

This policy is news at eBAY, whose boardroom has traditionally been homogenous. Last year, for example, eBAY’s board counted 10 men and 1 woman. In 2015, eBAY pried open the doors to its top floor and welcomed 2 additional women (as well as 4 more men).

Why these new female recruits? eBAY was feeling the heat from shareholders. In November 2014, the New York State Common Retirement Fund and Trillium Asset Management wrote a shareholder proposal targeting eBAY’s homogenous board. In this proposal, they requested that eBAY report on how it proceeds to make its board more diverse. They wanted to know how much effort eBAY invested into identifying women and minorities when it recruits directors.

eBAY’s story illustrates the role shareholders can play in heralding corporate shifts. Large investors, often institutions as in the case of eBAY, can pressure companies on issues that matter for society. In France, La Caisse des Dépôts, a public retirement fund, proclaimed in mid-May its committment to address climate change: it may shift its money out of companies that fail to spent sufficient effort on reducing pollution. Norway’s sovereign wealth fund, the largest in the world, announced it would exclude companies that make money from coal. In the U.S., the University of Hawai stated it would divest all fossil fuels from its endowment.

Firms increasingly listen to these conscientious investors, whose size makes it hard to do otherwise. The Norwegian sovereign wealth fund, all by itself, weights $900 billion, and owns 1.3% of all traded shares in the world. Pension funds invested  21.8 trillion U.S. dollars across OECD countries in 2012, about three times as much as the 7.5 trillion they invested in 1992. Altogether, pension funds and other institutions invested 78.2 trillion U.S. dollar in 2012.

The raising clout of conscientious investors suggests an alternative to one-size-fits-all regulation often used for making corporations aware of issues, like pollution or gender bias, that markets can be ill-equipped to deal with. Conscientious investors may be successful in helping firms experiment with different solutions to these issues. Whether this will actually happen is an open question. An article in the Wall Street Journal cautions that firms may take another route to placating investors: giving them cash, via dividends and share buybacks. The article reports that companies targeted by activist investors raise their dividends and share buybacks in the five years after activists purchased shares. Companies finance these cash handouts by cutting back on investments, such as capital expenditures and R&D. In other words, companies forego experimentation, innovation, and building their future. Does this foreshadow a future in which companies buy investor silence in an attempt to avoid their fury?

Your thoughts?

Photo from Mercedes Noriega

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