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| Thought Leaders: Law |
Divestment Dilemma
Stuart Green
05/01/2007
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Imagine owning stock in a
successful company where employees have allegedly engaged in criminal conduct
such as violating financial reporting rules in connection with the backdating of
stock options or lying to federal investigators about the circumstances
surrounding a sale of stock. Is this the sort of company in which you would want
to own shares? Would you choose to divest, or would you hold on to your
lucrative investment?
If recent history is any indication, many investors have few
qualms about investing in firms tarred by allegations of corporate malfeasance.
Consider the experiences of Martha Stewart Living Omnimedia and Apple. Stewart,
the founder and public face of her eponymous company, served five months in
federal prison for obstruction of justice, conspiracy and making false
statements. More recently, the SEC and the U.S. Attorney’s Office in San
Francisco have investigated Apple on suspicion that it violated financial
reporting rules in connection with a scheme to backdate stock options, which
translated into millions of dollars in allegedly ill-gotten gains for company
officials.
News of these companies’ travails had little negative impact on their respective stock prices. |
News of these companies’ travails had little negative impact on
their respective stock prices. In fact, while Stewart did time in prison, the
value of her company’s stock more than quadrupled to a five-year high. As for
Apple, its stock price jumped 4.9 percent following the release of a report from
management containing "serious questions" about the acts of two former company
officials who were involved in the accounting and reporting of stock
options.
In light of these occurrences, one might assume that investors
do not care whether the companies in which they invest are engaged in criminal
activities. However, the reality is much more complex. In some cases, investors
might not fully understand the extent to which a company has engaged in criminal
violations. Other times, investors might believe that a company’s criminal past
is behind it, and that improved, more ethical behavior lies ahead.
When the criminal activity in question consists of fraudulently
misrepresenting the value of stock, investors are quick to dump their shares. As
evidence of Enron’s widespread fraud began coming to light in late 2001, its
share price dropped—practically overnight—from a high of $90 to less than $1.
Similarly, once WorldCom investors learned in spring 2002 that the company had
used fraudulent methods to inflate the value of its shares, its price dropped to
a low of $2.35, down more than 95 percent from its peak of $64.50 in 1999.
Ethical Quandaries
Yet investors are not as quick to act in the face of ongoing
and unambiguous criminal conduct that does not directly impair the company’s
bottom line—that may even, in some sense, be profitable. Opinion seems split
about what ethical duty investors have to divest from (or to refrain from
investing in) companies that pursue such a path.
The success of socially conscious investment funds like Pax
World Funds, Dreyfus Premier Third Century and Parnassus Investments suggests
that a significant number of individuals are interested in investing in firms
that are not only profitable, but also socially responsible. Social
responsibility is usually defined in terms of corporate conduct that protects
the environment, respects the rights of workers and produces beneficial products
and services for consumers. But there is another element of social
responsibility that deserves at least as much, if not more, attention:
compliance with criminal law. Even those investors who regard traditional
socially responsible investing as too effete for their tastes should think twice
about investing in companies where employees have participated in insider
trading, perjury or obstruction of justice.
Most agree, at least in principle, that white-collar crime is a
bad thing. The question is whether investors are willing to put their money
where their mouths are. Buying or owning stock is a way of expressing confidence
in a firm’s policies; divesting is a way of expressing disapproval. If companies
engage in criminal wrongdoing, and we (as investors) continue to invest in them,
then we have no one to blame for such wrongdoing but ourselves.
Stuart Green is the author of Lying, Cheating and Stealing: A Moral Theory of White-Collar Crime.
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