he Presbyterian Church (USA)'s General Assembly recently adopted a resolution calling for divestment of denominational funds from "multinational corporations operating in Israel." Predictably, the decision generated protests, including charges of anti-Semitism. The questions thus raised are legitimate and important. Yet, I wish to come at the problem from a different angle.
Let's start with a basic question: Will the PC(USA)'s decision "work"? In other words, do divestment campaigns tend to achieve their proponent's goals? The clear answer from the empirical literature is "no."
A London Business School Institute of Finance and Accounting working paper called "The Effect Of Socially Activist Investment Policies On The Financial Markets: Evidence From The South African Boycott concluded:
"We find that the announcement of legislative/shareholder pressure of voluntary divestment from South Africa had little discernible effect either on the valuation of banks and corporations with South African operations or on the South African financial markets. There is weak evidence that institutional shareholdings increased when corporations divested. In sum, despite the public significance of the boycott and the multitude of divesting companies, financial markets seem to have perceived the boycott to be merely a 'sideshow.'"
Another paper, "The Stock Market Impact of Social Pressure: The South African Divestment Case," from the Quarterly Review of Economics and Finance in fact found:
"Using the South African divestment case, this study tests the hypothesis that social pressure affects stock returns. Both short-run (3-, 11-, and 77-day periods) and long-run (13-month periods) tests of stock returns surrounding U.S. corporate announcements of decisions to stay or leave South Africa were performed. Tests of the impact of institutional portfolio managers to divest stocks of U.S. firms staying in South Africa were also performed. Results indicate there was a negative wealth impact of social pressure: stock prices of firms announcing plans to stay in South Africa fared better relative to stock prices of firms announcing plans to leave."
In sum, divestment may make activists feel all warm and fuzzy, but the evidence is that (1) it has no significant effect on the target of the divestment campaign but (2) likely does harm the activists' portfolios.
As the Manhattan Institute's James Copeland explained, these results are entirely consistent with financial theory:
"Unlike a boycott in a traditional goods market, the sale of a stock or bond in a financial market in sufficient volume to affect its price makes it more attractive to a buyer who doesn't care about the divester's social cause. These buyers will bid the price back up to its equilibrium level, the risk-adjusted net present value of expected free cash flows from the instrument. So whereas a goods boycott can be effective under certain conditions, a stock divestiture never can unless there is insufficient liquidity on the other side, a highly dubious condition in our financial market. The Presbyterian Church may have $7 billion in financial assets, but that's hardly a sufficient sum to control financial market pricing."
If the PC(USA) mavens who passed this proposal were simply dealing with their own investments, who could gainsay their right to shoot their portfolios in the foot? Apparently, however, the plan encompasses divesting the retirement funds of Presbyterian pastors and workers invested in denominational pension plans. As such, their decision illustrates a perennial problem of institutional investment; namely, Quis cusotdiet ipsos custodies.
Like the vast majority of large institutional investors, the PC(USA)'s pension plans manage the pooled savings of small individual investors. From a governance perspective, there is little to distinguish such institutions from corporations. Plan investors have no more control over the election of company trustees than do shareholders over the election of corporate directors. Nor do the holders of such shares have greater access to information about their holdings, or ability to monitor those who manage their holdings, than do corporate shareholders. Worse yet, although an individual investor can always abide by the Wall Street Rule with respect to corporate stock (it's easier to switch than fight), he cannot do so anywhere nearly as easily with respect to investments such as these denominational pension plans.
Managers of pension plans are fiduciaries of the beneficiaries of those plans. When they pursue a social agenda nearly certain to result in poorer performance, they are disserving their beneficiaries. The activists at the PC(USA) may have gotten a warm and fuzzy feeling from taking a slap at Israel, but in doing so they injured Jewish-Christian relations, besmirched the one functioning democracy in the Middle East, and stabbed their own people in the back. All for the sake of a gesture that experience teaches will be fruitless.
