The Ethics of Investment

The Crimson once reported that prior to 1972, the Harvard Treasurer's Office dealt with many shareholder resolutions before companies in the University portfolio by tossing them into the trashcan upon receipt. That was back when Treasurer George F. Bennet '33--once a member of the Ford Motor Company Board of Directors--was in charge. Under Bennet's direction. Harvard never voted against management in any of the "proxy fights" that occurred within companies in the University's portfolio.

They don't take such a passive role anymore.

Harvard's responsibility as a corporate shareholder has become a controversial campus issue over the past decade and has often been a source of student unrest. Harvard's investments in those companies with controversial dealings in Angola and South Africa, in those which produce infant formula and nuclear weapons, and in those which refuse to disclose information on safety or hiring practices have all interested many members of the University community.

Until the early 1970s, students and others were largely disinterested in the ethical implications of the University's investment policy IBM's practice of selling computers to the South African government was not a topic for debate. (Harvard presently has holdings in IBM worth over $50 million.) As former President Nathan M. Pusey '28 once commented. "Our purpose is just to invest in places that are selfishly good for Harvard. We so not use our money for social purposes."

But in the early 70s people took greater notice of the ethic. Implications of some of Harvard's investments Campaign GM, a Ralph Nader supported group of lawyers pushing the democratization of the auto industry, asked Harvard for support The Gulf Angola Project wanted the University to use its influence as a major investor in the Gulf Of Company to help get the firm to move investments out of Angola which was then an embattled Portuguese colony. Through the shareholder resolution process, these groups wanted to pressure these large corporations into being more socially aware.

1972 was a pivotal year for Harvard investment policy. It was President Bok's first full year in office and student protest was growing over investments. In April, two dozen Black students took over Massachusetts Hall for a week, demanding the Harvard divest from Gulf, which they said was using its wealth and influence to prop up the colonial government in Angola.

Harvard never divested from Gulf. But in May of that year, Harvard cast its first proxy votes against the management of a company in its portfolio. Much to the dismay of Bennet, the Corporation voted to back proposals asking both GM and Ford to disclose information about their business practices. And in the fall, Bok created the Advisory Committee on Shareholder Responsibility (ACSR) and the Corporation Committee on Shareholder Responsibility (CCSR), which have guided the the University's ethical investment policy ever since.

The committees offered a more orderly way to answer ethical questions attached to shareholder resolutions. Delegating responsibility also meant that Bok didn't continue spending the enormous amount of time considering investment questions that he had spent the spring before, when both Campaign GM and the anti-Gulf movement were in full swing.

The ACSR--originally a 15 member panel of students, faculty and alumni but later reduced to 12--was similar to committees established at other universities to examine ethical questions of shareholder responsibility. The ACSR has no actual power, it can only consider the dozens of resolutions facing the university each year and make recommendations to the CCSR which has total responsibility for casting Harvard's proxy votes.

Shareholder resolutions are the mechanism through which any stockholder can attempt to change the policies of a company. Any shareholder can offer before the other owners of a firm proposals to change certain policies in that form Such resolutions can range from a request that a company disclose its political contributors to a request to stop operating in a particular country Rarely, however, do such resolutions receive more than a few percent of shareholders proxy votes. The likelihood on changing any policy through shareholder resolutions is also reduced by the convention that any non returned ballot be counted as a vote for management. Harvard's influence is also limited because the University does not own more than a small part of any company.

Since 1972. Harvard's ethical consideration of its investments has largely been continued to voting shareholder resolutions. Many however have wanted the University to take a more active role in offering resolutions as well as voting on those that come in the mail. People have called for divestiture from companies with what they consider immoral business practices. Despite such appeals, however, the University does not initiate shareholder resolutions, nor does it follows any policy of divestment in a certain area, except for its celebrated 1978 decision not to invest in banks that make loans directly to the South African government.

But Harvard's lack of initiative remains an issue: some of the current ACSR members have indicate a desire to have the committee recommend that Harvard divest from companies not South Africa. One of these students. Patrick A Flaherty, who is also a member of the Southern Africa Solidarity Committee, says that shareholder resolutions are limited in impact because there is a natural "community of interests" between the University and the assorted resolutions, and also because while shareholder resolutions do help focus attention on an issue, unless they pass, they will not bring actual change.

Despite its limitations, many people associated with Harvard's shareholder process feel that its potential symbolic weight counter-balances the disadvantages. Resolutions may bring to a company's attention issues it has not considered before. Richard M. Valley, a government graduate student and former ACSR member, echoes the feelings of others in saying, "When Harvard casts its vote, corporate officials tend to feel bad or good, depending on the [outcome]."

Whether or not the ACSR will actually expand its role as some have wished is extremely uncertain. But one thing is clear: as long as there is both the advisory committee and the Corporation, there are going to be some disagreements. And these disagreements have often been interpreted to mean that the Corporation is not taking the committee's advice seriously.

Secretary to the ACSR from 1973-1981. Lawrence F. Stevens '65, who for eight years was perhaps the closed person on campus to the investment morality question, has some very definite views on the subject. As he stresses about the committee. "The sole product of the committee's deliberations is advice, and within this community, as we well know nobody has the market offered on advice."

"My general impression is that the Corporation takes very seriously the advice given it by the advisory committee," he says, adding. "They do not disregard they regard carefully and disagree. And their desk is the place where the buck stops on this issue."

And College Treasurer George Putnam '49, a Corporation member, says that the committee is "consistently helpful" to the Corporation, but he adds that the Corporation takes a wide number of factors into account in evaluating the ACSR's recommendation. He cites this year's high absenteeism at ACSR meetings and says the Corporation must ask itself. "Would the whole ACSR vote that way," on a particular issue? And he criticizes what he sees as the occasional politicization of the advisory committee--and tries to make sure the position of the committee always represents "intelligently achieved points of view."

Both Putnam and Walter M. Cabot, president of the Harvard Management Company which is responsible for the day to day handling of the University's investments, have said that they consider themselves ethical investors. For instance, they have said that they don't invest in companies which ignore environmental concerns. Such companies may be acceptable short term investments but eventually, Putnam and Cabot point out, such firms will have to pay for their excesses and are thus bad investments.

Indeed on a wide variety of issues--corporate governance, infant formula, and many other less publicized debates--the ACSR and the Corporation have generally agreed.

On all the shareholder resolutions before Harvard from the beginning of the ACSR through 1981, the Corporation and the Advisory Committee have agreed roughly 70-80 percent of the time.

Nonetheless, certain issues have caused conflict between the two bodies--like South Africa, or, this year's debate over whether to invest in companies which produce nuclear weapons. The nuclear arms question is a good example of the kind of logic used by the Corporation when it opposes the ACSR on a particular issue. This key to understanding the process is the word procedent.

Corporation members emphasize that they try to be consistent on issues over the years. But the ACSR which has five or six new members each year, it has been suggested, might be inclined to switch positions on a particular issue. But while the ACSR is able to change its recommendation on an issue, the Corporation, Putnam says, has got to have a "damn good reason" to switch positions. For instance, in 1981 the ACSR and the Corporation both opposed a resolution asking American Telephone and Telegraph (AT & T) to set up a review committee on a nuclear weapons laboratory. When the resolution was resubmitted this year--perhaps because of a new mood in the country or because of changing membership--the ACSR endorsed it. But the CCSR, not refused to follow the Advisory Committee's lead. The Corporation did not actually oppose the resolution but abstained. Not voting is usually interpreted by a company as a vote for management, but when it abstains. Harvard is careful to make save the company does not do this, and records their position as non-committed.

But the Corporation's expressed devotion to precedent can also be a double-edged sword. Students were baffled earlier this year when it seemed as if the Corporation was trying to go back on the University's ban on doing business with banks which lend money to the South African government after it had sold $50 millions worth of certificates in Citibank which had made an ostensibly humanitarian loan to the apartheid regime.

When the policy was first adopted in 1978 the reasoning was that although some loans might possibly be "beneficial" to South African Blacks, the aggregate effect of them would reinforce the apartheid system Activists asked what has changed since 1978' And they complained that the burden of proof was once again on them to show why the bank loans were bad, when--by precedent it should have been the Corporation showing new evidence in favor of changing the policy.

As Valelly notes. "The whole Citibank issue showed to me they had no respect for precedent Kenneth Propp. a third-year law student and, former member for the ACSR, adds that citing precedent is an"unjustifiable tactic" by the Corporation because it serves as a pretext for covering up serious disagreements with the ACSR.

Despite the outcry over bank loans, there is likely to be little change by the Corporation over the use of precedent. And there will continue to be sources of disagreement over what the direction of the ethical management of Harvard's portfolio should be.

Can the ACSR play a role in picking out what this direction should be? The University obviously thinks so, and as far as students are concerned the answer seems to be a qualified yes. Helping make direct decisions is not in the cards, but in a number of different ways, the ACSR has had and still has the potential to influence policy.

As Flaherty and others point out, the ACSR makes it impossible for the Corporation to ignore moral considerations in investment policy. This is especially crucial in times, such as now, of low student interest in investment issues. Propp says in addition that the advisory committee can serve as a "lighting rod" for student concerns. "The existence of the ACSR has prevented the Corporation from sweeping [moral issues] under the carpet" he says.

This seems to be the ACSR's most important function. For while the 300 or so people who showed up at the March ACSR open meeting on South Africa bank loans seemed like a lot, the crowd pales is comparison to the over 3000 people who stormed through. Cambridge in 1978 on a condlelight march to protest Bok's refusal to divest from companies operating in South Africa. The ACSR seems to serve a pivotal role in at least keeping the Corporation thinking about some of the issues involved in ethically managing Harvard's immense portfolio.