Stock Ownership Is a Bad Strategy for Social Change

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Stock Ownership Is a Bad Strategy for Social Change

Many people attend the opening weekend of a movie to support the cause that the movie represents. Some investors treat their stock choices the same way, purchasing stock in a company as a way of helping the company.

You cannot help a company by buying its stock.

First, just because you are a partial owner does not mean you have any sway in the company. When you buy a stock, you are purchasing your share of the company’s earnings and dividend distributions. For most individual investors, their ownership is negligible. As a result, they have little or no ability to steer the direction and vision of the corporation.

If you want to incite change, then try to get on the corporation’s board of directors. The board has the authority and responsibility to articulate the mission of the organization.

The average board has 9 members, although it can range from 3 to 31 members. The board is supposed to represent shareholders, so most board members are not employees. Nor do they do business with the company. Board members free of these conflicts are called independent directors and represent about 72% of the board members of the companies in the S&P 500. Forbes columnist Dorie Clark has written a guide, “How to Become a Corporate Board Member,” that may help if joining a board is your goal.

With enough stock ownership, you could simply vote yourself on the board of a company. The average stock ownership of shareholder board members is 5.6%. That could get very costly. You would have to buy $15 billion of Walmart’s stock but only $35 million of Zoe’s Kitchen to command enough ownership to become a board member. As a result, only the ultra-rich or those who have pooled their investments can realistically take this route onto corporate boards.

Second, a company does not profit from your purchase of its stock. Although you become a partial owner of the company, the company is not involved in the transaction. Nor do they even need to know that the exchange has occurred. When you buy shares of a company’s stock, you are buying them from another investor who is selling. If you didn’t buy those shares, someone else or a third-party market maker would buy them.

Buying shares of a company you like does not make that company richer. If you want to support a company monetarily, you must purchase the company’s goods and services.

Third, a company is not hurt when you sell or ignore their stock. In the same way that purchasing shares does not help a company, selling shares of a company that has fallen out of your favor does not make the company poorer.

A philosophy called socially responsible investing (SRI) claims that your investments should reflect your values. The most common implementation of SRI is to refuse to invest in certain companies because you disagree with one or all of their practices.

Certain SRI mutual funds rank companies based on their values and then either include or exclude them from the fund accordingly. Like all mutual funds, SRI mutual funds then vote proxies on behalf of their shareholders. They apply their value system to these votes, which is where SRI followers believe change may happen.

However, there are three problems with this belief.

First, the companies that really need help being socially responsible have already been weeded out of the possible investment pool via the SRI ranking system. The value they pretend to add from their voting is only occurring on the companies they have already decided are sufficiently socially responsible. Thus they are not really redirecting any irresponsible companies.

Second, even if the mutual fund has enough ownership in the stock to sway the vote toward more responsible activities than the company would have chosen otherwise, it is up to the board whether to consider those votes when they make their decisions. There is no guarantee that the results of the vote will make any difference. Real change in companies occurs via the board members.

Third and finally, you cannot help or hurt a company by buying, selling or ignoring its stock. The company is not involved in your transaction one way or the other.

SRI funds usually have higher than normal expense ratios to pay for the extra effort of ranking the companies. This puts a drain on their return, often making them a worse investment than comparable non-SRI mutual funds. With questionable results and worse returns, SRI is a nice dream but a bad investment philosophy.

In conclusion, invest in companies because they are good investments, and purchase goods or use services from companies you believe in. If you try to use your stock purchases to pursue your political or social agenda, only your own portfolio return will be affected.

If you have strong opinions or are passionate about helping bring about real change, consider stirring up support for or organizing boycotts against a company, pursuing a career in corporate governance and becoming a board member or pushing for legal reform that protects the free market from a company’s deceptive or fraudulent practices.

Photo used here under Flickr Creative Commons.

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David John Marotta is the Founder and President of Marotta Wealth Management. He played for the State Department chess team at age 11, graduated from Stanford, taught Computer and Information Science, and still loves math and strategy games. Favorite number: e (2.7182818...)

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