EA - Shareholder activism by sbehmer

Link to original articleWelcome to The Nonlinear Library, where we use Text-to-Speech software to convert the best writing from the Rationalist and EA communities into audio. This is: Shareholder activism, published by sbehmer on August 3, 2022 on The Effective Altruism Forum. I'd like to thank John Mori and Mckay Jensen for their helpful feedback. Any errors are my own. Note: I am not an expert on this topic, and I have little background knowledge on corporate governance. Please be skeptical and point out mistakes. This post is about doing good by changing the behavior of for-profit companies. The main examples of this within EA are corporate animal welfare improvements. For popular EA causes, plenty of other possibilities exist, such as improving the labor standards of companies operating in poor countries or improving the safety standards of AI and biotechnology companies. One possible way to bring about corporate behavior change is through shareholder activism. Shareholder activism has been covered in a few recent EA articles. Relative to those articles, the contribution of this essay is to bring up a few new theoretical arguments in favor of shareholder activism, present some (weak) evidence on its costs, and present a rough cost-effectiveness analysis. In the end, I tentatively conclude that shareholder activism is a promising way to do good, and that further investigation would be valuable. The rest of the article proceeds as follows: I first argue that theoretically we should expect shareholder activism to be a cost-effective way to do good, even relative to other ways to cause corporate behavior change such as outside advocacy campaigns. I then review some empirical evidence on shareholder advocacy, and, based on that evidence, conduct a rough cost-effectiveness estimate. Finally, I address some possible objections and conclude with a few recommendations for future research. Main points: Shareholder advocacy is likely more effective than outside advocacy, at least in some cases. The empirical literature on shareholder advocacy is promising, but messy. There isn't evidence that it significantly reduces stock prices, and it seems to significantly change firm behavior. Simple cost effectiveness estimates suggest that shareholder activism on climate change has the potential to be as cost effective as top climate interventions recommended by EA organizations. (Climate change is used as a case study because that's where the evidence base on shareholder activism is strongest.) EAs should look more seriously into shareholder activism as a way of doing good. Brief overview of the shareholder engagement process First, this is my understanding of what shareholder activism looks like in practice: A shareholder (call them the “leading shareholder”) who wants a company to change their behavior first approaches company management and asks them to make the change. Note that you do not have to be the largest shareholder (or even close to that) to take on this role. See the “capital requirements” section below. If management refuses, the leading shareholder can choose whether to put a new topic or list of options on the ballot (often this includes adding their own candidates for board positions. Sometimes this involves adding resolutions which ask the company to adopt new rules or practices). The leading shareholder and management will campaign for their preferred choices in the election. Often this process, called a proxy fight, can be very costly for both sides (around $2 million for the shareholder and $4 million for the company). All shareholders vote in the election. From what I understand, most shareholder engagements (step 1) don't end up going to the ballot (steps 2 through 4). Because of the large cost of a proxy fight, management usually agrees to a behavior change beforehand, especially when they have a good chance of losing a potential election. I would also like to define different forms of shareholder activism: Leading shareholder activism is...