I recently had a letter to the editor published in the Washington Post. I submitted it for consideration as an Op Ed. You can read the version that I submitted here:
In the spring of 1986, students at Northwestern University were out protesting apartheid. I was out there, protesting and wearing a red armband, as was the style at the time. The weather was gorgeous, reggae bands played on the quads, and we believed that divesting the university’s endowment fund of companies that did business in South Africa would make a difference.
Northwestern trustees made token divestments. Apartheid fell five years later. That had far more to do with decades of work by South Africans, who risked their lives and liberty to regain their rights than with the protests of well-meaning college students.
In my post-graduation years, I have studied, worked in, and observed the financial services business. I am the author of Hedge Funds for Dummies, a book that explains the structure of the alternative business, and I currently serve on the board of trustees for a small foundation. I’ve talked to a lot of people who have concerns about how their investments fit into the state of the world. Politically, I lean progressive, so I have a lot of sympathy for their goals. But I don’t think divestment is all that easy or all that effective.
Divestment doesn’t work in a vacuum. It is effective in combination with more difficult work, if it causes economic harm to the businesses involved, and if it can be done without an expensive or extensive rejiggering of an investment portfolio.
In the case of South Africa, Black and Coloured citizens led the way. They fought hard against a well-funded, well-armed, and entrenched political system. They were looking for the straws that would finally break the back of the apartheid government. Archbishop Desmond Tutu came to the United States and asked for boycotts and divestment. It wasn’t the primary form of protest, but rather something else that would raise awareness of the decades-long struggle within South Africa.
In hindsight, we know that divestment generated a lot of noise but not a lot of economic harm. In 1999, researchers Siew Hong Teoh, Ivo Welch, C. Paul Wazzan published a paper on the South African divestment movement. They found no significant effect. All it did was transfer shares from a group of concerned investors to those who were indifferent.
Northwestern’s efforts didn’t hurt the cause, but we didn’t help it much, either.
The investment business has changed enormously since 1986. Financial theories that seemed esoteric, like the risk-adjusted, fee-adjusted supremacy of index funds, have become accepted wisdom. Large, commingled funds—essentially mutual funds for institutional investors—have reduced the costs of portfolio management. The largest endowments can afford custom portfolio management and thus can do at least some divestment, but it is nearly impossible for an endowment with less than a billion in assets to do it without increasing costs, harming investment returns, and placing the burden on the people who rely on its funds. You can’t call Vanguard and tell them that you would like only 499 of the companies in their 500 Index Fund.
Divestment doesn’t ask much of people calling for it. We could address climate change by installing solar panels, getting rid of our cars, and turning down thermostats in winter. However, fossil fuels make life easy! Oil companies are profitable because people like me, and probably like you, work from computers in air-conditioned rooms, store food in refrigerators, and hop on airplanes a few times a year. Divestment won’t make oil companies less profitable, and it won’t do anything to reduce fossil-fuel consumption.
In fact, there’s an argument for investment as activism: if you own shares, you have a say in corporate governance. A group of Catholic sisters has been buying shares in weapons manufacturers so that they can submit shareholder resolutions. They even sued Smith & Wesson, arguing that the company’s assault rifles business exposes the and even sue management, arguing that the potential liabilities of this product line put their investment at risk. They have a say because they are shareholders.
Last month, Northwestern students set up tents on campus. Among other things, they asked university officials to divest the endowment of companies that do business with the Israeli government. The university administration agreed to many student demands, including a review of the investment portfolio. I doubt it matters. The suffering of the people of Gaza and Israel is unimaginable. However, the region is a flashpoint in a major geopolitical struggle, with plenty of governments and oligarchs willing to fund Hamas and the Israeli government. Trading stocks among different ownership groups won’t replace difficult diplomatic work or support rebuilding efforts on the ground.
