On May 4, 1994, the once unthinkable occurred. Nelson Mandela, after years of imprisonment, was democratically elected the president of South Africa, a country whose history was marked by the racist policies of apartheid. And one of the reasons apartheid ended was because of protest divestment.
Protest divestment is a form of dissent in which stockholders intentionally sell their assets from a corporation in order to enact social change. By selling off stocks, protesters hope to influence corporations against performing some aspect of their business. In this case, those opposed to apartheid wanted to keep companies from doing business in South Africa. In this article we will explore protest divestment in South Africa to show how the simple act of selling stock can effect real social change. (Learn how socially responsible investing allows you to express your political views in an unlikely way in Change The World One Investment At A Time.)
How Divestment Works
Anti-apartheid protests took hold in the 1960s, particularly on the campuses of American colleges and universities. Initially, protesters wanted to end apartheid. But there were not many ways to influence the South African government using the traditional forms of protest such as picketing or demonstrations. Eventually, members of the college-based anti-apartheid movement thought of a more practical way to enact change - by pressuring their universities to divest stocks of companies doing business in the country. Many students brought attention to their cause by building shanties on their own campuses to represent the living conditions many oppressed South Africans faced daily. (Find out how morals and ethics can bring you a surprising return in Go Green With Socially Responsible Investing and Green Investors Get Heard.)
Schools use a certain percentage of their endowment funds as an investment tool, and many schools have quite a large endowment fund: in 2007, over 60 North American schools had endowments of over $1 billion, giving them an incredible amount of purchasing power. Perhaps the most famous example of the university's importance in investing is David Swensen, the chief investment officer for Yale University, whose success in managing that school's money has brought him acclaim as one of the most successful money managers of his era.
It's easy to see the influence colleges and universities had on businesses operating in South Africa. While universities selling stocks of companies with business in South Africa may not have had a large impact on a firm's share price or market capitalization, they certainly were able to raise attention to corporate interests in South Africa. And no CEO in the world wants to suffer from bad public relations.
If enough corporations had stopped doing business in South Africa, its economy would have taken a turn for the worse, and that would have put the South African government in a major bind. Its choices became reforming its politics or risking complete and total economic isolation.
Problems With Divestment
Despite the myriad of political, racial and economic problems in South Africa, the nation was still home to between 30 and 40 million people and had a plethora of natural resources (including producing 33-50% of the world's gold during the 1980s) making it an attractive marketplace. At one point in the ‘80s, between one-half and one-third of the S&P 500 did business in South Africa, placing these companies among the best investments at the time. These were blue-chip stocks, steady earners that were key to the success of endowment funds. And when selling assets, universities have to pay the same fees and charges that any other investor faces. With huge amounts of money at stake, money used to continue and promote the operations of a school, it was understandably tough for college financial officers to sell those assets.
A valid argument was made that by putting pressure on companies to stop doing business in South Africa, the people protesters were trying to help would only be punished further. After all, corporations provide jobs and income, and in a country with high unemployment and low wages, any jobs help. Further, many American-owned companies had policies in place ensuring that South Africans of all races would work under fair employment conditions and receive equal pay. If these companies pulled out of the country, how could the poor and oppressed hope to improve their lives?
Additionally, many decision makers at colleges and universities felt that the purpose of a school was to educate students and not to take a stand on corporate responsibility or engage in political issues, even one as well-meaning as the abolishment of apartheid.
The Success of Divestment
But while there were strong arguments against divestment, many students continued their protests. And, eventually, college administrators saw it the students' way. The first school to agree to divest its portfolio of companies doing business in South Africa was Hampshire College. By 1988, a total of 155 colleges had at least partially divested.
While the roots of the divestment movement took hold in America's college campuses, other large entities also soon sold their stocks. By the end of the decade, 90 cities, 22 counties and 26 states had taken some form of economic stance against the South African government. As a result, many public pension funds were required to sell South African-related assets. Divestment movements were gaining ground in other countries as well.
The college-based divestment efforts may or may not have played a role in immediately affecting the South African economy. But they did raise awareness about the problem of apartheid. After the divestment movement gained worldwide notoriety, U.S. Congress was moved to pass a series of economic sanctions against the South African government.
From 1985 to 1990, over 200 U.S. companies cut all ties with South Africa, resulting in a loss of $1 billion in direct American investment. South Africa was ravaged by capital flight as businesses, investors and money left the country. The rand, South Africa's currency, was significantly devalued and inflation reached double digits. The economic situation, as well as the resistance efforts of those suffering under apartheid, meant South Africa's system had to come to an end.
First, the various apartheid codes that segregated the races were dropped. Then, blacks and other non-Caucasians were given the right to vote. And in 1994, the country elected Nelson Mandela as its new president. The divestment movement was not the only reason why apartheid ended, but it was definitely a major contributing factor. (Learn how to make your money work for you without putting it into ventures that don't support your values, read Extreme Socially Responsible Investing.)
Divestment Beyond South Africa
Since its success in ending South African apartheid, divestment has been used and suggested as a tool to effect change in other areas. A huge campaign was launched to have universities, investment groups, pension funds and various bodies of government divest any stocks that did business with Sudan, whose government is connected with brutal human rights violations in Darfur. Other groups have targeted nations such as Iran, Syria and Israel for divestment campaigns. And groups like the American Medical Association have called for a divestment campaign against the tobacco industry.
While these campaigns have had varying levels of success, it is certain that protest divestment has gained a foothold as a way for protesters to influence financial and economic situations to achieve their political goals.
Not concerned about being an ethical investor? Maybe "sinful stocks" have a place in your portfolio. To learn more, read Socially (Ir)responsible Mutual Funds.
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