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Divestments: not a sensible way to influence corporate governance



The ever-thoughtful Stephen Bainbridge, a UCLA law professor from whom we look forward to hearing here when we have occasion to discuss corporate governance issues, has a very interesting post on his popular weblog, ProfessorBainbridge.com.

Professor Bainbridge notes that the General Assembly of the Presbyterian Church is divesting its funds from companies that do business in Israel. Glenn Reynolds calls the move antisemitic, and points out that the Presbyterian Church's website is named, ironically, pcusa.org.

Like Professor Reynolds (and formerly Professor Bainbridge), I'm a member of the Presbyterian Church USA, so I took considerable interest in this posting. I'm saddened, angered, and dismayed by the church's decision.

But for the purposes of this website discussion, I want to focus on the points Professor Bainbridge made about the inefficacy of divestiture campaigns. Professor Bainbridge cites to two studies, based on the South Africa boycotts, that show (a) that the divestment campaigns had no financial effect, and (b) that they on average hurt the "socially responsible" portfolios that divested.

Financial theory would suggest as much. Unlike a boycott in a traditional goods market, the sale of a stock or bond in a financial market in sufficient volume to affect its price makes it more attractive to a buyer who doesn't care about the divester's social cause. These buyers will bid the price back up to its equilibrium level, the risk-adjusted net present value of expected free cash flows from the instrument. So whereas a goods boycott can be effective under certain conditions, a stock divestiture never can unless there is insufficient liquidity on the other side, a highly dubious condition in our financial market. The Presbyterian Church may have $7 billion in financial assets, but that's hardly a sufficient sum to control financial market pricing.

As we consider shareholder governance issues, it's important to remember that investors in financial instruments aren't buying for consumption value in the manner of purchasers of food, clothing, or entertainment; they're buying solely to make money. One would have to discount market efficiency entirely to think that divestiture campaigns have a meaningful effect on share price.

Instead of playing Pontius Pilate, the Presbyterians would be better off holding their stock and offering those annoying shareholder resolutions that companies today must typically face. Or they could organize actual boycotts of the goods and services produced by Israeli companies.

Or, better yet, they could just keep their mouths shut.

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Rafael Mangual
Project Manager,
Legal Policy
rmangual@manhattan-institute.org

Katherine Lazarski
Manhattan Institute
klazarski@manhattan-institute.org

 

Published by the Manhattan Institute

The Manhattan Insitute's Center for Legal Policy.