The embrace of shareholder activism as a tool to bring about broad social change is a welcome development. It reflects a trend of outsourcing public functions and values to private actors and stems in part from a frustration with interest group politics and existing democratic processes in the public context. However, overreliance on shareholder activism and similar private tactics may lead to an expectations gap; they are not an effective surrogate for persistent, organized, mobilized social movements that employ diverse tactics in traditional democratic venues. Lessons from the civil rights movement suggest broader systemic change will require sustained, combined pressure from other institutional, social, and public actors.

My forthcoming article, Chancery’s Greatest Decision: Historical Insights on Civil Rights and the Future of Shareholder Activism, offers a historical account of the Delaware Court of Chancery’s greatest decision, Belton v. Gebhart, a seminal civil rights decision. Belton, one of two consolidated Delaware Chancery Court cases, led to the desegregation of Delaware public schools and became part of the monumental Brown v. Board of Education decision. Notably, these Delaware cases were the only Brown-related cases where the NAACP won at the trial level. The protagonists in this rich historical narrative of minority education include the philanthropist Pierre S. du Pont, once President of E. I. du Pont Nemours and Company and General Motors; Louis Redding and Jack Greenberg, legendary NAACP lawyers; and Chancellor Collins Seitz, a distinguished jurist on the Delaware Court of Chancery. The circumstances surrounding the Belton case illuminate the limits and potential of shareholder activism to bolster civil rights in the modern context. They vividly illustrate how advancing civil rights requires a range of tactics that leverage public, private, and philanthropic resources. Shareholder activism works best as part of a multipronged activist strategy, not as a substitute for other types of activism. Examining a historical civil rights example is instructive for thinking about how shareholder activism might advance the modern civil rights agenda. Recognizing the complex challenges associated with advancing civil rights, the article raises key questions about the nascent environmental, social, and governance (ESG) framework with which scholars, practitioners, and other observers must contend.

What does civil rights activism look like in the modern era? How does the earlier Civil Rights Era compare with today’s ESG landscape? While civil rights fall under the umbrella of human rights, today’s ESG landscape is much more expansive, extending to economic rights, voting rights, housing, jobs, and healthcare and encompassing discrimination based on gender, sexual orientation, disabilities, and immigration status. Despite blurred lines between the public and private spheres, certain distinctions remain and should be considered when assessing the efficacy of shareholder activism in advancing civil rights. Below are key issues modern scholars, practitioners, stakeholders and observers should consider about shareholder activism and civil rights, particularly with respect to the ESG framework:

Top-Down Approach

Shareholder activism is largely a top-down, indirect approach, whereas Civil Rights Era activism reflected bottom-up tactics with persistent demands and protest to effectuate change throughout society. Tactics included litigation, education, direct protest, civil disobedience, shareholder activism, self-defense, and other spontaneous and planned individual and group initiatives. Activists executed a multipronged attack on all aspects of segregation in every aspect of life: public accommodations, education, housing, and employment. Civil rights advocacy organizations like the Congress of Racial Equality (CORE), Southern Christian Leadership Conference (SCLC), Student Nonviolent Coordinating Committee (SNCC), and the NAACP LDF developed ambitious long‑term strategies, coordinated efforts, and amplified the demands of marginalized minority groups. Such strategies and tactics have served as blueprints for advancing other movements. By contrast, the question remains whether impact-investor activism and the ESG emphasis will engender an enduring commitment to civil rights and inspire significant ground-level and broader public changes beyond the corporations themselves.

Enforcement

Who has the responsibility to ensure whether corporations implement social aims internally and externally? Who assesses the quality and effectiveness of execution? Who follows up over time? Should these tasks rest with the corporations themselves via private ordering, or is more robust outside oversight needed to achieve ESG aims? The systemic societal impacts of shareholder ESG activism are uncertain because the ESG framework operates largely within a paradigm that relies on the private market to right public wrongs. It tilts largely toward private autonomy versus public accountability. Some critics might argue that overemphasizing shareholder activism, within this context, actually weakens demands for government solutions and limits government accountability for correcting major social problems like civil rights injustices. At the extreme, it may decrease public spending on services and divert resources from vulnerable groups. Shareholder activism as a form of civil rights advocacy is perhaps a symptom of an illness – declining state support, political gridlock, and voter disenfranchisement. In an environment of deregulation, privatization, and political gridlock, people may look toward corporations for quicker answers and greater agency. Recognizing the influence of corporations, shareholder demands are a pragmatic strategy, yet without other, complementary approaches, they will have limited systemic impact on such meta-problems as civil rights.

Ownership and Representativeness

Roughly 50 percent of U.S. citizens do not own a single share in a company, directly or indirectly. Equity ownership may not reflect preferences of non-equity holders and the public. Activist investors, largely labor unions, mutual funds, individuals, pension funds, and hedge funds (in which pension funds are often invested), may reflect more affluent and elite preferences. The impact investor community is smaller and ostensibly acts as a proxy for broader interests, but its composition is overwhelmingly homogenous from a race and class perspective. The lack of representativeness and diversity inevitably creates blind‑spots. Planning for vulnerable groups is not the same as planning with them.

Majoritarian Politics Disfavors Vulnerable Minorities

Context matters, and the status of majoritarian politics can influence the success of shareholder activism in the civil rights arena. In theory, a highly polarized majoritarian politics that overwhelmingly disfavors minority rights may render shareholder civil rights activism less effective. Greyhound and other companies during the Civil Rights Era did not immediately change their policies in response to earlier shareholder activist efforts such as the Proxies Campaign.[1] Common excuses for certain businesses and municipalities’ acquiescence to segregation were economic; that is, lost revenues and alienation of their white customer base. They were effectively claiming that they were not racist, but a majority of their customers and constituents were.

Mixed-Motives

Impact investors still want financial returns along with their social influence. These mixed motives reflect conflicts. The basic formula – shareholder return on investment equals financial return plus social impact – hides complications. How much financial return do investors want and are they willing to tolerate: 1 percent, 5 percent, 10 percent? Should businesses prioritize social impact or financial concerns? An intertemporal perspective, allowing companies to prioritize financial concerns at one time and social concerns at another, may be prudent. The former may make the latter more effective.

Definitional and Measurement Challenges

Despite desiring a social impact, investors may have difficulty defining and measuring it. For example, what does social impact related to civil rights look like? Does it change representation at a specific company or industry-wide, including directors, the c‑suite, employees, suppliers, products, and advertising? Alternatively, is it about company financial support or sponsorship for advocacy organizations that work to advance minority rights? Methodologies for determining social impact and ESG ratings are emerging but without a consensus. Perhaps a preferred standard will emerge from proxy advisers like Institutional Shareholder Services (ISS) and Glass Lewis. However, advisory firm guidance and ratings have been criticized for their sometimes tenuous link to corporate performance, and these critiques are likely to intensify in the context of ESG questions.

Advancing civil rights requires a range of tactics that leverage public, private, and philanthropic resources. Shareholder activism will work best as part of a multipronged strategy, not as a substitute for other types of activism. It is certainly bold in the sense that it seeks a recalibration of corporate institutional arrangements and priorities. It is prudent in recognizing corporate power and its ability to influence society as well as the limitations of other advocacy venues. On the other hand, even if shareholder activists can help to advance the modern civil rights agenda, their willingness to do so remains uncertain. Future research on these important questions will deepen our understanding of ESG-related shareholder activism and its potential to advance civil rights in the contemporary context.

ENDNOTES

[1]   See Sarah Haan, Civil Rights and Shareholder Activism: SEC v. Medical Committee for Human Rights, Wash. & Lee L. Rev. (forthcoming 2019); Richard Marens, Inventing Corporate Governance: The Mid-Century Emergence of Shareholder Activism, 8 J. Bus. & Mgmt. 365, 371–72, 382 (2002) (chronicling and assessing shareholder activism from 1933 to 1953).

This post comes to us from Omari Scott Simmons, the Howard L. Oleck Professor of Business Law at Wake Forest University School of Law. It is based on his recent article, “Chancery’s Greatest Decision: Historical Insights on Civil Rights and the Future of Shareholder Activism,” available here.