Effecting Change Indirectly

Eddie Robinson was head coach of the football team at Grambling State University. Recruiting for the team was always difficult because GSU had to compete with bigger and more successful football programs. To get the best players, Robinson wouldn't try to recruit them. He would recruit the parents! He knew that if he could sell GSU to the parents, he would get the player. There is a lesson here for socially responsible investing. If you want to influence a company, you can do so by influencing their suppliers. True, the company controls operations and production but suppliers control the means for conducting operations and production. Like parents providing the needed means for their children to operate in their defined spheres – school, the playing field – suppliers provide companies with what they need to do business. No suppliers, no business.

A company that is negatively impacting society can sometimes be difficult to influence. They've already demonstrated a certain level of disregard for consequences as they apply to people and perceptions. Public companies, such as Exxon Mobil or Raytheon are easier to sway because of their public stature and corporate structure. Smaller and/or private companies can be quite difficult if not impossible to influence directly because they're simply not subject to the same levels of scrutiny or stakeholder leverage. So what to do about such bad actors? The ones not seemingly subject to the concerned public's usual arm-twisting tactics and threats?

In a December 4th, 2020 column, the New York Times alleged that the site Pornhub, whose parent company is MindGeek, was knowingly hosting child pornography, videos of child abuse, so-called revenge porn, and other videos featuring nonconsensual sexual behavior. For socially responsible investors wishing to force Pornhub to address and correct these egregious violations of human and privacy rights, this would have presented a serious challenge, since Pornhub is privately owned. However, Mastercard; Visa; and Discover, all publicly traded companies serving as Pornhub payment vendors, decided to block customers from using their credit cards to make purchases on the site. Without having to influence Pornhub directly, a massive portion of their income stream was severed. In response, Pornhub removed almost 10 million videos from its website.

So what's the moral of this socially responsible story? Namely, that investors shouldn't just stop at the doorstep of companies negatively (or positively) affecting society. Understanding the linchpins in their operations and where pain points lie, is just as important and can be just as effective when pulling on levers to induce change.

About the Author

Ernesto Garcia brings many years of research experience at top academic institutions to his Quantitative Equity Analyst role at Humankind. Ernesto previously studied the liquidity commonalities in ETFs to determine the level of diversity they provide investors and to estimate the liquidity commonalities they drive in their underlying equities. He is ABD in Economics from The Graduate Center at City University of New York.