Ethical Investing: Investor Activism and Shareholder Advocacy
AAA
  1. Ethical Investing: Introduction
  2. Ethical Investing: A Niche Style Gains Popularity
  3. Ethical Investing: Environmentally-Conscious Investing
  4. Ethical Investing: Socially Responsible Investing
  5. Ethical Investing: Workers' Rights and Human Rights
  6. Ethical Investing: Corporate Governance
  7. Ethical Investing: Investor Activism and Shareholder Advocacy
  8. Ethical Investing: Vehicles For Ethical Investing
  9. Ethical Investing: How To Research Ethical Investments
  10. Ethical Investing: Benefits And Drawbacks Of Ethical Investing
  11. Ethical Investing: Leaving An Ethical Legacy

Ethical Investing: Investor Activism and Shareholder Advocacy

By Amy Fontinelle



For some people, buying stocks in companies, whose actions they support, isn't enough. Activist investors seek to directly change the practices of targeted companies. As Amy Domini, founder and CEO of Domini Funds, states, "Socially responsible investing is not only a way to align your investments with your values - it is also a way to make corporations behave more responsibly." Here are the methods activist investors commonly use.

Voting
Proxies allow shareholders who cannot attend annual, or special, meetings to vote on the same issues that shareholders who do attend the meeting will vote on. Either electronically or by mail, shareholders cast their proxy ballots to make their opinions known. Typically, for every share an investor owns, he or she gets one vote. If a shareholder owns a stock class with special voting rights, he or she will get multiple votes per share.

Many investors toss out their proxy ballots because they are too busy to research the issues up for vote, and make an informed decision. Their abstention reduces the total number of ballots cast. For ethical investors, however, voting is an opportunity to be heard, and possibly to create change.

How do ethical investors know which way to vote on the issues? Often, they look to more experienced investors for guidance. For example, institutional investors might publish proxy voting guidelines on their websites, explaining how they chose to vote and why. Investors can decide to vote with the institution or against it, depending on whether they agree with the institution's position or not.

Institutional investors can have a great deal of influence on the outcome of elections, because their large size allows them to own large numbers of shares. Therefore, it may take a consolidated effort from large numbers of small-time investors to influence a vote's outcome. Ethical investors are most likely to have an impact if they join a coalition of like-minded investors.

Socially responsible mutual funds' published proxy voting policies are also a good source of information for individual shareholders. For example, the "Calvert Family of Funds' 2010 Global Proxy Voting Guidelines" states that Calvert espouses the following positions:

  • The Fund advisor will oppose non-independent directors candidates nominated to the audit, compensation and/or nominating committees.
  • The Fund advisor will oppose executive compensation proposals if we determine that the compensation does not reflect the financial, economic and social circumstances of the company (i.e., during times of financial strains or underperformance).
  • The Fund advisor will ordinarily support proposals requesting that companies avoid exploitative labor practices, including child labor and forced labor.
Shareholder Resolutions
To take things a step further, some investors introduce their own issues to vote on. These are called shareholder resolutions, and in order to propose one, you must have a meaningful stake in the company. The SEC defines this stake as 1% of all outstanding shares, or $2,000 worth of shares, held for at least one year prior to the resolution submission deadline.

The resolution itself must follow specific guidelines in order to be accepted (e.g., it can't be longer than 500 words). Also, the person or group (or their representative) who files the resolution, must attend the meeting to present the resolution. Companies don't have to accept resolutions, and even if they receive a majority vote, they don't have to implement them. However, shareholder resolutions give investors a chance to present their ideas to companies and to other shareholders. Also, shareholder resolutions may garner media attention that can pressure companies to make changes.

What kinds of changes do shareholder resolutions seek? Some ask corporations to disclose information about their impact on the environment. Others ask corporations to make a specific change, such as taking an action that would decrease the company's waste production. Shareholder resolutions allow investors to influence company policies, and bring to their attention to issues, that, if not addressed, could adversely affect shareholder value.

Electing New Directors
Ethical investors can try to get board members, whose views they disagree with, replaced by board members whose views they do agree with. The policies for nominating directors vary by company, but can be found in the company's proxy statement. However, a company may not even look at a nomination from an unknown shareholder, let alone take it seriously. Companies already have established procedures for locating prospective board members.

In recent years, activist investors have pushed for open nomination policies to get their suggestions put on the proxy ballot. Such a policy would publicize nominations and put them to a vote. However, in July 2011, the U.S. Court of Appeals ruled against a proposed SEC rule that would have allowed shareholders, owning at least 3% of outstanding shares for at least three years, to put their nominees on the proxy ballot.

Divestment
A single individual selling a few shares of a company to protest its practices is unlikely to have any effect. Getting a significant percentage of shareholders to do so, however, may put enough pressure on a company to convince it to change. To succeed in this strategy, it is usually necessary to win over institutional investors.

Divestment is considered a last resort, after other methods of shareholder advocacy have failed, and it is usually only used in extreme cases. The most famous example is that American students in the late 1980s convinced some universities, whose large endowments classified them as institutional investors, to sell their shares in companies tied to South African apartheid. Other large investors, including some city, county and state governments, followed suit. It's difficult to say whether divestment created enough economic pressure to force South Africa's rulers to change their ways, but it certainly brought increased attention to the human rights abuses occurring in the country. (To learn more, read Protest Divestment And The End Of Apartheid.)

Next, we'll learn about the choices ethical investors face when deciding where to put their money.

Ethical Investing: Vehicles For Ethical Investing

  1. Ethical Investing: Introduction
  2. Ethical Investing: A Niche Style Gains Popularity
  3. Ethical Investing: Environmentally-Conscious Investing
  4. Ethical Investing: Socially Responsible Investing
  5. Ethical Investing: Workers' Rights and Human Rights
  6. Ethical Investing: Corporate Governance
  7. Ethical Investing: Investor Activism and Shareholder Advocacy
  8. Ethical Investing: Vehicles For Ethical Investing
  9. Ethical Investing: How To Research Ethical Investments
  10. Ethical Investing: Benefits And Drawbacks Of Ethical Investing
  11. Ethical Investing: Leaving An Ethical Legacy
RELATED TERMS
  1. Discount Bond

    A bond that is issued for less than its par (or face) value, ...
  2. Internal Rate Of Return - IRR

    A metric used in capital budgeting measuring the profitability ...
  3. Financial Singularity

    A financial singularity is the point at which investment decisions ...
  4. Revenue-based Financing

    Revenue-based financing, also known as royalty based financing, ...
  5. Precedent Transaction Analysis

    A valuation method in which the prices paid for similar companies ...
  6. Bjerksund-Stensland Model

    A closed-form option pricing model used to calculate the price ...
RELATED FAQS
  1. What is the utility function and how is it calculated?

    In economics, utility function is an important concept that measures preferences over a set of goods and services. Utility ... Read Full Answer >>
  2. Which socially responsible retailers appeal most to ethical investors?

    Ethical investors have many reasons to consider companies in the retail sector. The sector is broad and features an abundance ... Read Full Answer >>
  3. How can I use a regression to see the correlation between prices and interest rates?

    In statistics, regression analysis is a widely used technique to uncover relationships among variables and determine whether ... Read Full Answer >>
  4. How do I calculate a modified duration using Matlab?

    The modified duration gauges the sensitivity of the fixed income securities to changes in interest rates. To calculate the ... Read Full Answer >>
  5. How do I calculate the rule of 72 using Matlab?

    In finance, the rule of 72 is a useful shortcut to assess how long it takes an investment to double given its annual growth ... Read Full Answer >>
  6. How do I calculate the standard error using Matlab?

    In statistics, the standard error is the standard deviation of the sampling statistical measure, usually the sample mean. ... Read Full Answer >>

You May Also Like

Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!