Divestment Wrong Answer

Author: DANIEL HUTNER '06

The atrocities of the Darfur region in the Sudan are indeed troubling, and only compounded by the frustration of inaction. The international community's hesitation has led advocacy groups to look to alternative methods to produce change, promoting the divestment, or selling, of stock held in companies doing business with the Sudan. This creativity and determination is admirable, and should be welcomed and encouraged. Divestment, however, may in fact be counter-productive to this worthy cause.

A campaign for divestment has been circulating among colleges and universities, as well as state and local governments. The argument is that the involvement of American firms in the Sudan is essentially funding the genocide, and "propping up" a brutal regime. Our endowments and retirement funds should not go to supporting genocide, the argument goes. We should punish all companies who continue to do business with the Sudan, encouraging them to withdraw from the region and starve the Sudanese regime of resources.

This argument is provocative, but flawed. It is a common misconception that holding shares of a stock, or even purchasing them, benefits the company. Think of shares as baseball cards. The card manufacturer sells them to you in a wrapper, and you pay them a few dollars for that package. But this is not how you "invest" in baseball cards. Certain cards grow in value. The majority of transactions are actually the trades of these cards between collectors, much as stocks are traded. But the maker of the cards doesn't benefit from this trading. If I decided to get rid of all my Nolan Ryan cards, does the manufacturer lose anything? True, if Vermont declared that all residents must sell their Nolan Ryan cards, the price would go down temporarily, because you'd have to sell your cards pretty cheap to convince other collectors to buy that many at once. If a card manufacturer executive's salary depended on the value of cards, that might hurt for a little while. But before long, people realize how cheap they can get a valuable card, and start bidding higher and higher. Nolan Ryan didn't become less valuable because Vermont doesn't approve of him.

In divesting themselves of these companies, what have colleges and universities, including such respectable institutions as Harvard, Yale, Dartmouth, and now Middlebury, and state governments (Vermont, California) done? Any dip in the stock price that would tug at the wallets of shareholders, and executives with stock options, would be minor, if noticeable, and short-lived. Some would argue the policy is a symbolic gesture, a moral imperative. They acknowledge the economic impotence of divestment in influencing companies financially, but instead argue that it is a moral stand that must be taken, that it will draw the attention of company management. Under intense shareholder pressure to perform and grow earnings, is such a demonstration really going to convince a company to change its policy of its own accord?

In truth, divestment does have a big impact. Policies of divestment dramatically shift the composition of the ownership of the companies in question. The reason is simple-when all the morally conscious investors sell their stake in a company, the purchasers, logically, must then be morally inferior. Where at one point supporters of withdrawal from Sudan may have owned a large proportion of the company, after a policy of divestment, none of them do. In effect, divestment is selling legal control over these companies. Selling shares equals selling shareholder votes. Divestment is abstention-a way to wash our hands of the matter and feel better, running from the problem.

In fact, if the goal is to influence companies through the stock market, we should be buying more stock, not selling what we have. Democracy is not limited to the political realm, and shareholders have votes and rights with respect to the company they own a stake in. Powerful Disney CEO Michael Eisner was recently ousted over shareholder discontent. The unification of a coalition of universities, many of which have already demonstrated commitment to the issue, along with the institutional advisers that serve them, would be a powerful force for change. An organized movement to exercise shareholder power would hold greater promise for success, and would at the same time make just as bold a statement.

I close with a final question, and that is the morality of operating in the Sudan. It is undeniable that American business presence in the Sudan benefits the country economically, and thus benefits the brutal regime that is in place. It is also clear that businesses vary in their friendliness toward and usefulness to the regime. But is the proposition of starving the country in the best interests of its people? Is economic devastation the path to a brighter future?