Your weapon is your voice

SBE professor Rob Bauer on ethical investing

According to Al Gore, researchers from the Maastricht University School of Business and Economics (SBE) “have found that sustainable businesses realize financial benefits such as lower cost of debt and lower capital constraints”.  Gore, an environmental activist and former US presidential nominee, made this announcement in a recent article co-authored for the Wall Street Journal.* But are you doing all you can to force the companies you invest in to ‘go green’? Probably not enough, according to Rob Bauer, SBE Professor of Finance and Institutional Investors.

In the Oxford Dictionary, one meaning of engagement is “a fight or battle between armed forces”. Bauer: “Imagine a battlefield in Middle Earth crowded with thousands of Orks dressed up as company managers … fighting against a few tiny Hobbits (the shareholders) whose major weapons are their voice”, Bauer said at recent conference in Sigtuna, Sweden. “Sadly, most of the time, these weapons are not even deployed by shareholders. It seems that shareholders collectively are waiting for a sudden appearance of Gandalf the wizard … In the meantime, the system of democratic capitalism breaks down.”

Voting is not enough

So what should shareholders do? “There are many ways to act”, Bauer says. One of these is to vote on shareholder proposals – but this, in Bauer’s view, is far from enough: “Just voting on proposals rather than making them is nothing to get a pat on the back for.” As an individual or institutional investor, filing proposals yourself allows you to exert more influence on the running of a company. Concerned about CO2 emissions or managerial bonuses? File a proposal with the company.

But shareholders make use of this option far too infrequently, it seems. In a recent study**, Bauer and two SBE colleagues (Frank Moers, professor of Accounting and Information Management, and PhD candidate Michael Viehs) examined all 12,000 proposals submitted by shareholders of the 1500 largest US companies between 1997 and 2009. They found that investors file proposals rarely, and those who do tend to be private individuals rather than institutional investors, which would arguably have a bigger impact.

Further, proposals that are submitted are all too often withdrawn. This happens when the company manages to negotiate an agreement with the shareholders. As it happens, proposals relating to corporate social responsibility (CSR) – community projects, for example – are withdrawn more often than those concerning corporate governance (CG) – such as executive bonuses.

“I have no proof for it,” says Bauer, “but I get the feeling that company management enters negotiation on CSR issues as a sort of a decoy. If they give in on this issue, shareholders might be less stringent on CG issues, like the management’s executive compensation. Well, it’s just a hunch, so this might be a great topic to study empirically or theoretically.”

Moral obligation

Being an engaged investor is not just an option, in Bauer’s view – it’s a responsibility. “Shareholders at least have a moral but probably also a legal obligation to engage with companies … In the middle of a financial crisis, I think this responsibility of institutional investors is even more important, as it is directly linked with the trust in financial markets.

“In its recent Green Paper, the EU has blamed the crisis on failure of shareholder involvement. ‘The corporate governance framework is built on the assumption that shareholders engage with companies and hold the management to account for its performance. However, there is evidence that the majority of shareholders are passive and often only focused on short-term profits …’ Well, this quote says it all.”

Investing responsibly

So what else can investors do, besides file proposals? One option is to make sure your investment is an ethical one from the outset. For example, you might choose to invest in companies with a good track record when it comes to the environment, human rights and consumer protection. And by the same token, to avoid those dealing in tobacco, gambling or weapons.

This is known as socially responsible investing (SRI), an approach that seeks to promote social good as well as financial returns. SRI took off in the late 1990s when pension funds and other institutional investors began questioning the ethics of, say, investing in a country that refuses to ratify an international treaty on landmines. In 2005, the rise of SRI culminated in the UN report ‘Principles for Responsible Investing’ which currently clusters together 1000 institutional investors worth about US$30 trillion.

Investing with impact

One branch of SRI is impact investing (II), which burst onto the scene no more than a few years ago, but has already made a major, er, impact. This is the research area of Harry Hummels, professor of Ethics, Organisations and Society at SBE.II, however, goes a step further than SRI.

In SRI, you might consider avoiding companies that cause harm to society. But in II, you actively seek to generate social and environmental impacts in addition to financial returns. Infrastructure projects, microfinancing, renewable energies – these are the sorts of investment opportunities of interest in II. These investments are usually classed as alternative assets, whereas SRI particularly focuses on listed equity, credits and sovereign bonds. What’s more, unlike in SRI, you also need to be able to measure the social or environmental impact, difficult though this may be.

Measuring local effects

The methodology ‘social return on investment’ is one way of measuring these effects, says Hummels. “In the coming 40 years the world’s population will increase from seven to nine billion people, so we’ll need to increase food production. So you see investors now buying up land in Africa. With this methodology, we can see whether this is being done responsibly. For example, what does the local community get in return – job opportunities, improved housing, better infrastructure and, of course, sufficient food to live on?

“So it’s not only about more profit for investors, but also whether the situation improves for the local population. You don’t want a foreign company extracting water from the ground, exporting all the vegetables and then leaving the locals with drought. But unfortunately, neither Chinese nor Western investors always ensure that the local population benefits from investment in their land. The recent example of ABP – one of the largest European pension funds – investing in forest assets in Mozambique speaks for itself. ABP wanted to invest in an ethical way but was ultimately accused of land grabbing.”

Ethical and profitable

At present, II is mainly limited to institutional investors and ‘high net worth individuals’ who have the means to spread their risk. In other words, the very rich, such as the Rockefellers, Bill and Melinda Gates or, in the Netherlands, the De Mol family.

For the rest of us, it’s about using the tools we have. Voice is one of them. Bauer reiterates the importance of filing shareholder proposals, either individually or – better yet – collectively: “Obviously, engagement makes more sense if it is orchestrated well. If ten hobbits scream, Orks are less impressed than if a thousand scream and shout!”

Failing that, shareholders can naturally vote with their feet. Hummels: “Ultimately, the investor decides whether there is a healthy balance between financial and social returns, by deciding where to invest the next time. And in fact, investors are increasingly seeing it as a risk if companies don’t take into account the social aspect – which is a risk that can lead to lower financial returns”. Socially responsible investing, then, is not just ethical – it can also be more profitable.


* Gore’s article, co-authored with David Blood, is entitled ‘A manifesto for sustainable capitalism:

How businesses can embrace environmental, social and governance metrics’. It appeared in the 14 December issue of the Wall Street Journal; click here to read the article.


** The study, by Michael Viehs, Frank Moers and Rob Bauer, was sponsored by the Sweden-based Foundation for Strategic Environmental Research (MISTRA). The report based on the study is called ‘The determinants of withdrawn shareholder proposals’. It was released in 2011 and is available here.


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