How And Why Does Positive Engagement Work?

Many fund managers now use positive engagement as their primary strategy to force a company to improve it's policies.

The main idea behind positive engagement is a simple one: upper levels of management, including chairmen and presidents of companies, have to take note to the opinions of their 'owners' - the shareholders. In normal terms, for a small shareholder to voice an opinion with a director of a FTSE or NASDAQ firm would be impossible - but if your fund ownes several percent of the company's issued stock they will listen!

In the past, such opportunities with directors were really only used for a regular update as to the trading conditions and performance of a company and market. However, as time has moved on, so has the power of a fund manager. These days, a high profile fund manager can make life very difficult for a director who opposes fund policies - and this includes ethical policies.

Rather than exclude a company with a poor environmental or social record, many fund managers are now taking the unusual step of purchasing blocks of shares so that they may influence company policy from within. In reality, they are amongst the few people who really can influence these policies.

Therefore, these fund managers are trying to prevent problems from getting worse and force positive change. This differs significantly with how we would deal with such issues in the past. Previously, change would only be forced on a company after a significant event which shocked those involved - oil spills from ocean going tankers is an obvious example. Why should oil tankers only be improved for reasons of safety AFTER an accident and oil spill?

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In ways like this, a fund manager can be a powerful ally of the ethical cause and is able to effect massive change if given time.

Traditionally, these 'activist' shareholders and fund managers have been interested in improving the business performance. This might mean selling the company to release capital to shareholders, selling an underperforming part of the business, removing the management team (often for alleged incomepetence) or as a part of hostile takeover.

A great example of the role of the activist owner can be seen in the role of Gordon Gekko in the movie Wall Street. Michael Douglas plays a corporate raider trying to break up a company to make millions in profits for himself. In the real world, a great modern example of the activist shareholder is Carl Icahn - a man that strikes fear into boardrooms across America.

It is simply this concept, but used for either environmental or ethical purposes, that positive engagement is built on. Ignoring a shareholder like Icahn is something that many boards might like to do and simply describe them as 'greedy' or a 'troublemaker'.

In contrast, it is very difficult to dismiss an activist charity or NGO whose main aim is protecting human rights or the planet without appearing to be cruel or uncaring. No President, Chairman or CEO wants to be portrayed as cruel or uncaring!

It is this psychological leverage that NGOs and charities use to lobby corporations to have more friendly policies, processes and procedures.

For other ethical investment related topics, please visit:

What Is Ethical Investment?

The Ethical Investment Dilemma

What Are The Main Ethical Investment Strategies?

Are Ethical Investment Funds Higher Risk Than Other Similar Funds?

What Activities Does Negative Screening Filter From Ethical Investment Funds?

What Is Positive Screening?

Should You Be Investing In Water?