Published by the Wall Street Journal.
By DAVID WEIDNER
If there’s anything in life more important than money, it’s how we treat our fellow men and women in this world.Given the choice, we would reject profiting from criminal activity. We wouldn’t accept gains made by a murderer and we wouldn’t accept cash from a regime supporting genocide. It wouldn’t even be a choice — for most of us.That’s why it’s so repulsive that mutual-fund companies including Vanguard Group and Fidelity Investments continue to reject shareholder resolutions that would ban investing in companies that are profiting from what’s happening in Sudan.
Vanguard shareholders last week rejected a resolution sponsored by Investors Against Genocide, a Boston-based activist group, that would’ve required fund managers to follow strict guidelines about investing in companies linked to genocide around the globe. IAG had sought the resolution in 21 of Vanguard’s 157 mutual funds.
Vanguard fought the proposal, saying it had initiated its own policy in March. And when IAG Executive Director Eric Cohen read Vanguard’s response, he was impressed. “The statement was promising. We agreed with them. A casual reader would have found their statement to be pretty powerful. I did,” he said.
But a closer look revealed that Vanguard, despite promises to scrutinize its investments, didn’t do a thing once it identified problem holdings. The fund company continued to hold investments in companies such as Petrochina Co., Sinopec Shanghai, Petronas and Oil and Natural Gas Corp.
These companies explore and produce oil in Sudan and pay royalties to the country’s government. That government has ignored or supported ethnic fighting in the country that the United Nations estimates has killed 300,000 people and forced 2.7 million to flee their homes.
The companies represented less than 1% of holdings at targeted funds, but even at that level, Petrochina and CNPC alone, two oil companies operating in Sudan, represented $160 million in assets at the five Vanguard funds that held them on March 31.
‘A Higher Standard’
By saying that it would take action, Vanguard suggested to its customers the company was listening to the critics. If Mr. Cohen was fooled, you can imagine how Vanguard shareholders who bothered to open their proxy materials voted. The IAG resolution was crushed, earning no more than 17% support. Without Vanguard’s deceptive proposal on the table, the IAG resolution would almost certainly have gained more support at the ballot box — and put more pressure on Vanguard and the industry.
Vanguard spokesman Linda Wolohan said that the company made formal what was an informal process at the company. She said investors can look at their statements to find out if their funds invest in a company like Petrochina, but she said, it’s not company policy to announce any divestment action if it makes one.
“We don’t take these issues lightly,” she said. She added that singling out stocks would be problematic for Vanguard because of its investment strategy. Vanguard specializes in index funds that follow benchmarks that may include controversial issuers.
Not every big investor has been as insensitive as Vanguard. Pension funds in California and Vermont have adopted strict divestment policies for companies linked to the Sudan. In March, TIAA-CREF, a fund giant with $363 billion in assets under management, announced a sweeping divestment policy.
“We recognize that genocide and crimes against humanity, whether in Darfur or elsewhere, require a higher standard of response,” the company announced.
TIAA-CREF backed up its tough statement by naming five companies’ shares it planned to divest unless officials from those companies met with fund- company executives and promised changes. A nine-month deadline was set.
It was IAG’s most significant victory since the fall of 2007, when Warren Buffett’s Berkshire Hathaway Inc. dumped its stake in Petrochina. Berkshire had held 2.3 billion shares. When he sold, Mr. Buffett collected close to $3 billion in profit.
Mr. Buffett said the stake was bought and sold purely as an investment. He claims mounting pressure for him to divest, which began at Berkshire’s annual meeting in May 2007, never influenced his thinking. Mr. Buffett said he had “no disagreement” with Petrochina’s role in the Sudan and blamed the Chinese government.
Yet, despite his protests, Mr. Buffett and Berkshire — albeit both richer — were out of Petrochina less than six months later.
As Mr. Buffett’s experience shows, war and the abuse of human rights create opportunities. Despots and barbarians are lonely and only too glad to pay for friends.
It’s that truth that Fidelity shareholders are facing today. Like their counterparts at Vanguard, shareholders of 13 Fidelity funds are facing an anti-genocide resolution sponsored by IAG. The deadline to vote, or change a vote, is July 15.
Like Vanguard, Fidelity is urging shareholders to defeat the proposal. Fidelity won last year. The company argues that the resolution would be counter to its fiduciary duty to produce returns for its customers. Fidelity also argues that the U.S. government prohibits investing in “companies owned or controlled” by the government of Sudan.
Fidelity wouldn’t comment beyond information in the prospectus and a statement on their Web site.
Divestment opponents claim that shunning companies profiting from genocidal regimes somehow gives too much power to activists and people outside the fund managers. It’s the tired refrain that business should stay out of politics and that giving in to do-good activists somehow taints the purity of free markets.
That’s a bunch of baloney, of course. Agreeing not to support genocide isn’t giving in. And as for profits, there are plenty of oil companies and alternative investments out there. If Warren Buffett can move on, so can Fidelity.
If we accept the idea that business should always turn a blind eye to reality, then we accept that there’s nothing really more important than money, and if that’s the case, we’re not much better than the criminals of this world.
Write to David Weidner at email@example.com