Indirectly Divesting

With the revelation two months ago that Harvard still holds stock—albeit indirectly—in companies from which it had allegedly divested because of their involvement in Sudan, the student divestment movement has been launched anew. Apparently, the Corporation’s April 2005 decision to divest from directly-held stock in PetroChina, one such company, did not translate into selling off “indirect holdings,” such as mutual funds, which hold stock in the company. While we agree with student activists that Harvard should drop more of this indirectly-held stock, we do not support the creation of a blanket, preemptive policy that would force Harvard to divest if certain criteria are met.

The latest student and faculty petition drive, led by the Harvard Darfur Action Group (HDAG), calls on Harvard to divest from both direct and indirect investments when “reasonable alternatives exist.” HDAG also wants Harvard to adopt a “targeted divestment model” in which it pledges to divest from companies meeting very specific criteria.

Today’s globalized and interconnected world, however, makes indirect investments a thorny issue. Firms invest in other firms, partner with other firms, and hold complex financial instruments that give them partial claims to ownership of yet other firms. Add to this the dynamic and quickly-changing nature of today’s business environment, and it becomes almost impossible for an institutional investor of Harvard’s size to completely separate itself from any segment of the global market. “Total divestment” is little more than a pipedream because there will always be some link to a questionable company, no matter how tenuous.

Given this reality, the best the University can do is to be as vigilant as possible in trying to avoid indirectly holding a critical mass of the stock of companies from which it has directly divested. In the present case, it is clear that Harvard holds such a critical mass. At the time that Harvard announced its divestment from PetroChina in 2005 and Sinopec, another oil company that does business in Sudan, one year later, it had $10.1 million directly invested in the two companies. According to its the latest federal filing, Harvard owned $15.7 million of the two companies as of the end of last year through mutual funds. If the original investment was enough to merit divestment, this surely is, so Harvard should drop this stock immediately.

We disagree, however, with the idea of a strict, preemptive policy rule. Harvard has only divested a few times in its history, and for good reason. As Interim President Derek C. Bok pointed out in a 1979 open letter that continues to guide Harvard’s policy on divestment today, Harvard’s academic mission puts constraints on how extensively Harvard can pursue ethical investing. As such, Harvard only divests in extremely rare and singularly egregious cases.

Harvard’s divestment from PetroChina and Sinopec occurred because, after an extensive inquiry, it was decided that Harvard was deliberately and directly profiting from immoral acts of the highest order. This conclusion was based on the explicit connection between oil revenues and genocide in Sudan. A company dealing with almost any other commodity in Sudan would not be worthy of the same treatment, and the particulars of PetroChina and Sinopec’s actions and involvement—which are nearly impossible to capture with a rule—mattered a great deal.

The adoption of a blanket policy would lower the legitimately high bar for divestment, a unique and powerful tool that should not be treated lightly. Though proponents argue that a policy rule would make Harvard proactive instead of reactive when it comes to divestment, the months of fact-finding research currently done before the Corporation makes a final decision cannot not be avoided. Even with a firm and detailed policy, no two situations are the same so similar fact finding would be necessary to determine if a company meets the criteria and little time would be gained.

To be fair, the criteria for targeted divestment outlined by HDAG would in practice limit divestment to particularly egregious oil companies operating in Sudan. There are several more such oil companies from which other universities including Princeton, Yale, and the University of California have divested. Harvard should follow suit, taking into account its indirect as well as direct holdings, without adopting a policy rule.