A Financial Times story, in combination with a new post by Barnand economics professor Rajiv Sethi on student demands at Columbia regarding its investments in Israel-supporting companies, illustrate why investor boycotts, as in divestiture programs, seldom accomplish much directly. The exception to that general premise is when investor action calls attention to serious problems with the company that are not well reflected in the sale price, such as bad governance or, as with fossil fuel players, questionable future prospects (adverse regulatory environment, high prospect of stranded assets). Another exception is when dissident investors gain control of enough votes to pose a threat to the board and management (an activist group with 10% to 15% and a legitimate beef has the potential to get enough allies when it comes time to vote board resolutions and board members so as to force change).
Mind you, all of the above does not say that these campaigns don’t have PR value, as in forcing boards of universities, public pension funds, and endowments, to ‘splain why they are backing a genocidal regime. They help move the Overton window.
By contrast, consumer brands spend a lot of money on brand image, and many also maintain a large network of retail outlets that depend on having sufficient sales to be viable. So in some cases, as the Financial Times indicates today, buyer withdrawal can have meaningful effects. Admittedly, the case examples from the Financial Times are from Muslim countries, but they might be generalizable to areas with lots of students (outlets near campuses) and/or parts of the US with comparatively high Muslim populations.
Another example to watch regarding consumer boycotts is whether any air carriers who use Boeing equipment are seeing any meaningful traffic loss from the recent “If it’s Boeing, I ain’t going” flier preference. The big reason it probably won’t, at least in the US, is that airline consolidation has produced a few ginormous carriers, with Southwest an all-Boeing operation, while Delta and United fly both Boeing and Airbus planes. It’s not clear that consumers can shun Boeing, given that carriers sometimes change equipment at the last minute, unless they are willing to cancel their trip in that event. But the desire still bears monitoring.
Back to the investment side. Amar Bhide described the general problem of shareholder powerlessness in a Harvard Business Review classic, Efficient Markets, Deficient Governance. The germane sections of his 1994 article:
Shouldn’t the managers and stockholders of U.S. companies love the rules under which they operate? In theory, market liquidity makes it easy for investors to diversify their risks and thus reduces the costs of capital for companies. But there’s a catch: U.S. rules that protect investors don’t just sustain market liquidity, they also drive a wedge between shareholders and managers. Instead of yielding long-term shareholders who concentrate their holdings in a few companies, where they provide informed oversight and counsel, the laws promote diffused, arm’s-length stockholding.
Pension and mutual fund rules that require extensive diversification of holdings make close relationships with a few managers unlikely. ERISA further discourages pension managers from sitting on boards; if the investment goes bad, Labor Department regulators may make them prove they had adequate expertise about the company’s operations. Concerned about overly cozy relationships between unscrupulous fiduciaries and company managers, the regulators have effectively barred all but the most distant relationships…
Thus the rules make large investors resolute outsiders. In a free-for-all market, the same institutions would likely demand access to confidential information before they even considered investing.
Disclosure requirements also encourage arm’s length stockholding….
Market liquidity itself weakens incentives to play an inside role. All companies with more than one shareholder face what economists call a free-rider problem. The oversight and counsel of any one shareholder benefits all others, with the result that all may shirk their responsibilities. This issue is particularly relevant when a company faces a crisis. In illiquid markets, the shareholders cannot run away easily and are forced to pull together to solve any problem that arises. But a liquid market allows investors to sell out quickly…. In economist Albert Hirschman’s terms, investors prefer a cheap “exit” to an expensive “voice.”
Barnard professor of economics Rajiv Sethi looks at a current case study, the student campaign demanding Columbia divest holdings in companies that are Israel-backers. From his post The Question of Divestment:
The student protestors who have camped out on Columbia’s West Lawn for the past couple of weeks have repeatedly maintained that “that they will not move until they achieve divestment.” The divestment they seek—as spelled out in a proposal submitted to Columbia’s Advisory Committee on Socially Responsible Investing in December 2023—is from companies judged to be “complicit in Israeli apartheid, illegal occupation, and genocide.” These companies include Alphabet (formerly Google), Amazon, and Microsoft, with a combined market capitalization of more than seven trillion dollars.
The committee rejected the proposal in February, which I imagine was a driving force behind the establishment of the encampment.
I have thought quite a bit about the divestment question over the past few years, especially after being appointed in 2015 to a Presidential Task Force charged with examining “the issues surrounding divestment from fossil fuels.” Our deliberations considered the effects of divestment on the growth of the endowment and on the incentives faced by targeted companies. We argued that the effects would be minor on both counts, reasoning in the latter case as follows:
Divestment involves a transfer of ownership in the secondary market for securities. Since every sale also involves a purchase, the demand for such securities from other individuals and institutions will determine the extent to which divestment will have an impact on the share price of the affected firms. To a first approximation, the anticipated future earnings of firms determine the price of shares in the secondary market. If divestment does not affect earnings, its impact on the share price will be negligible. That is, even a small decline in price relative to anticipated earnings would make the shares attractive to buyers looking for value, and their demand to buy would prevent significant declines. If the affected companies do not experience any change in the cost of raising capital, then the extent of fossil fuel extraction and sale will also be largely unaffected.
As Adam Tooze has pointed out, Columbia’s portfolio has a very small share of direct investment in the specific companies targeted by the protestors. But even if this were not the case, divestment from publicly traded companies would have negligible impacts on their earnings, share prices, and costs of capital. This is especially the case with behemoths such as Alphabet, Amazon, and Microsoft, which have a combined market valuation exceeding a quarter of our annual Gross Domestic Product.
Divestment is therefore a largely symbolic gesture that does not directly create strong incentives for companies to change business practices. This is very different from product boycotts, which can be extremely potent. However, if the publicity surrounding divestment can bring attention to an issue and lead to changes in behavior, it can start to have incentive effects.
A new story in the Financial Times confirms Sethi’s aside, that consumer boycotts can have a real impact. The pink paper describes how customers in Malaysia and Indonesia are rejecting American food and drinks chains to a degree that it has stopped a planned private equity sale of a portfolio company holding stakes in some big names operating there. From the Financial Times:
General Atlantic and CVC have paused multimillion-dollar stake sales in companies operating US fast food brands in Indonesia and Malaysia as protests and boycott campaigns over the Israel-Hamas war disrupt business.
Consumers in Muslim-majority Indonesia and Malaysia have shunned US brands since the start of Israel’s assault on Gaza in October.
The brands, including Starbucks, KFC and Pizza Hut, are being targeted over Washington’s support for Israel, even though they have emphasised their neutrality on the conflict. The companies operating the brands under a franchise model have also stressed that the fast food businesses are domestically owned.
General Atlantic paused the sale of its 20 per cent stake in Starbucks operator Map Boga Adiperkasa in December, according to two people familiar with the situation. The stake in Map Boga Adiperkasa, which has a market capitalisation of $285mn and is one of Indonesia’s largest fast food franchise operators, is valued at about $54mn….
CVC Capital Partners, one of Europe’s biggest private equity firms, has also halted the sale of its 21 per cent stake in Malaysia’s QSR Brands, the country operator of KFC and Pizza Hut, due to the boycotts, according to two other people with knowledge of the decision.
One of the people said the sale was paused due to several factors, including not getting the desired valuation. Malaysia’s QSR is privately held and does not reveal financials. The stake was valued at more than RM1.2bn ($252mn) last year, according to local media reports.
The freeze on the stake sales by the global private equity groups underscores the severity of the boycotts in a region home to 250mn of the world’s Muslims.
“People are shifting from food and beverage brands to beauty brands. The boycott is much more substantial now as opposed to symbolic,” said Nirgunan Tiruchelvam, head of consumer and internet at Aletheia Capital, an advisory group focused on the Asia-Pacific region.
The Financial Times indicates that Muslim buyers are rejecting American brands because they are American. Mere professed neutrality on Israel does not cut it. And notice the Financial Times bleating that presumed locally owned franchisees are being hurt, presumably unfairly. Aside from the fact that some of the franchise owners may not at all be local, (sure there aren’t some Singaporean or Chinese in the mix), that excuse is a misdirection about how franchise economics works. The franchisor may indeed takes a not-large-seeing revenue skim, say 5% to 10%, and perhaps a profit share too. Some franchisors guarantee dependence by taking their cut through the sale of key inputs. Coca Cola requires its bottlers to buy its super secret syrup from them.
But those franchisor fees and payments are close to pure profit. And that mean the South-East Asian protestors are denting the parent, even if not as much as if they were targeting wholly-owner operations.
I am not quite as negative about divestment as Sethi is, since it forces influential people to justify why they don’t sell the targeted holdings. The counter-argument include that in very liquid markets, where these positions are only a small portion of the total portfolio, the investment team is seriously saying they can’t find reasonable substitutes? In other words, virtue here has effectively no cost to Columbia unless it staff choses to bungle the trades, so why not engage in some cheap image-bolstering?
Of course, that debate would also put the spotlight on the fact that the issue is not real world impact of divestiture or the lack thereof, but that the Israel backers will brook no criticism of the Zionist state and by extension, its fellow travelers.
Divestiture fans will argue that the South Africa divestiture movement proved to be effective. I am not close enough to the fine points of that campaign to think it was the divestiture movement per se, versus related boycotts (consumer/customer action!) and governments finally getting on board to pressure South Africa. I’ve told the tale of my Communist college roommates being very involved in the South Africa divestiture movement; one typed for the ANC over her summers.
I met them in 1976, and they’d clearly been active in the South Africa cause for a while.
The negotiations to end apartheid in South Africa didn’t start until 1990 and took nearly four years.
Now admittedly the spectacle of the slaughter is solidifying world opinion against Israel. That can and should accelerate the timetable for Israel’s position bcoming untenable. Israel is relying on no one being willing to take military action against the Zionist state, save the plucky Houthis, and that everyone will just forget about the bloodbath once Israel has killed or otherwise ethnically cleansed the Gazans. We and others have discussed the ongoing damage to the Israel economy, not just from the Houthis but also the corroding impact to the country of the many types of cost of the war. That is likely to create the biggest pressure on Israel’s leadership. But with most of the country seeing this fight as existential, and many even apocalyptic, even a bona fide depression taking hold may not move many minds.
In other words, while all measures to increase pressure on Israel are positive, none by itself looks likely to have much impact. And the clock is ticking for Palestinians in Israel.