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Voice and exit: using engagement as a force for change

Investors often come under pressure to divest from companies. But engagement can be a more effective way to bring about positive change, argues Steve Waygood.

The economist Albert Hirschman once argued people have two different ways of responding to disappointment: they either stay put and complain or vote with their feet.

Hirschman called these options ‘voice’ and ‘exit’. An oppressed citizen may start a protest or emigrate to another country. Unhappy customers may return their goods for a refund or simply start shopping elsewhere.

This dilemma also applies to ethically-minded investors. If shareholders in a company discover it is polluting the environment or mistreating its staff, should they voice their concerns or simply exit the investment?

Divesting from companies that break ethical rules is often the more convenient option and may even bring a useful reputational boost. But once investors sell out they are no longer able to apply pressure to company boards. They may be replaced by less conscientious shareholders who are more than happy to look the other way so long as the profits keep rolling in. As Hirschman observed, while exiting may be convenient and conscience-soothing, it tends to entrench the status quo.

Steve Waygood, chief responsible investment officer at Aviva Investors, argues investors should use their voices before heading to the exit door. In this Q&A, he explains how shareholders can engage with companies to improve their practices; sets out what investors can do to ensure their asset managers are applying the necessary pressure; and highlights examples of engagements that have delivered positive change.

“Exiting may be convenient but it tends to entrench the status quo”

Why is engagement a better approach than divestment?

Engagement is more than a buzzword; it can be traced back to the origins of company law, which positioned shareholders as the primary regulators of corporate behaviour. Modern investors should approach their responsibilities in this spirit. They have a moral duty to act where they have the power to enforce generally-accepted standards. Often this means staying put to establish a dialogue and exerting pressure where necessary. It can also help to protect long-term shareholder value.

Divestment may be a simpler solution in many cases. Selling out can ease an investor’s conscience and earn praise from divestment campaigners. But the real question is what is more likely to bring about change? Imagine you are an executive at a mining company where lax safety standards are leading to fatalities among staff. You are coming under heavy criticism from the company’s investors and could be voted off the board at the next annual general meeting. Would your life become easier or harder if those concerned investors walked away? I would say it becomes considerably easier.

How can investors make sure they are listened to?

Equity investors have a variety of tools at their disposal. They have the power to fire a company’s leadership at AGMs, and can use this to vote against strategies they disagree with. They can also vote against auditors if they are concerned the company’s report and accounts are not being properly scrutinised or do not truthfully represent the financial and reputational risks it faces due to unethical practices.