Voice and exit: using engagement as a force for change

Investors often come under pressure to divest from companies. But engagement can be a more effective way to bring about positive change, argues Steve Waygood, Chief Responsible Investment Officer of Aviva Investors.

The economist Albert Hirschman once argued people have two different ways of responding to disappointment: they either stay put and complain or vote with their feet. Hirschman called these options ‘voice’ and ‘exit’. An oppressed citizen may start a protest or emigrate to another country. Unhappy customers may return their goods for a refund or simply start shopping elsewhere.

This dilemma also applies to ethically-minded investors. If shareholders in a company discover it is polluting the environment or mistreating its staff, should they voice their concerns or simply exit the investment?

Divesting from companies that break ethical rules is often the more convenient option and may even bring a useful reputational boost. But once investors sell out they are no longer able to apply pressure to company boards. They may be replaced by less conscientious shareholders who are more than happy to look the other way so long as the profits keep rolling in. As Hirschman observed, while exiting may be convenient and conscience-soothing, it tends to entrench the status quo.

Steve Waygood, chief responsible investment officer at Aviva Investors, argues investors should use their voices before heading to the exit door. In this Q&A, he explains how shareholders can engage with companies to improve their practices; sets out what investors can do to ensure their asset managers are applying the necessary pressure; and highlights examples of engagements that have delivered positive change.

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