Ethics, Energy, Banks & Shareholder Activism

Activism by its very spelling conjures feelings of nobility, and high levels of ethics and morality. It blows up pictures of a David and Goliath battle - a small powerless individual or group fighting against the big bad corporation. Activists exist in all fields but notably activism has gained popularity and respect in the relatively newer fields of environmental and shareholder activism. The digital age has added revolutionary fervor to it. However, there is an ethical dilemma related to shareholder activism that goes unreported and under-reported.

A sole ‘mum and dad’ investor shouting from the back benches in an AGM is most probably showing genuine frustration at the returns his savings have generated but a group dedicated to activism trying to shape corporation behavior may not be truly ethical and sacrosanct.

Recently environmental and shareholder activism has among others hit the energy and banking fraternity. The energy companies which run coal power plants are being nudged to close them earlier than their expiry dates. These nudges sometimes take the form of loud protests, wide media coverage and unwelcome interventions at company AGM’s. Though corporations have a battery of media and investor relations people geared to handle such activism but in most cases they can only be reactive.

Not going into the debate of whether coal plants have a right to exist, it’s better to looks at what's not visible easily and who gains through this activism? A closer scrutiny of organized activists shows they are well funded ‘Not for Profit’ organizations. Many have opaque funding sources. A quick looks at their websites (if they have one) tells that they receive funds from generous philanthropists, individuals and other like-minded groups. To do a close interrogation of these donations, one has to have access to the internal donations register which is usually out of bounds. Even if access is available the information presented may need further interrogation to flush out real intentions behind the funding.

It is entirely possible that there are philanthropists out there who genuinely care about the planet but then they may have other interests. A billionaire who has invested in clean energy technology would surely be interested in getting rid of cheap coal power and gas. So what stops him from funding activists who speak against coal mining and gas exploration? 

A power firm which provides stable but low returns and share price in the doldrums can have its own share of detractors. Investors waiting to exit, need to do it at a price (higher) which benefits them. So again, no harm in funding a vocal activist group with wide media coverage to pressure the CEO and Board into submission. The share markets are so emotional that even a small announcement to exit coal power and gas exploration is received well and may have a positive impact on share price and market capitalization. Even a negative impact can have good results for speculators who want to increase their presence on a share register which is ripe for picking by a private equity or competitor.

Thus, activist firms can be indirectly used to influence the course of a company or at least create a nagging demand for specific decisions to be made. Similarly, they can be used as an effective tool by competitors. 

Another one that catches the eye is an activist firm which is part of a global activist organization which in turn is part of a loose group which is funded by a private equity firm. Again such activist groups have opaque funding models and are prone to direct and indirect influence from parties whose intentions may not be strictly noble and ethical.

Banks too are now being forced to cut funding to owners of dirty coal power stations or prospectors who intend to build one. This again though an environment friendly act has an opportunity to be used by speculators and investors.

Thus, the jury is out there on the ethical notion around shareholder activism.