Divestment

To the Editors of The Crimson:

In the continuing debate over divestment, I have noticed an assumption which is, I believe, a significant oversight. Phrases such as "Harvard invests in apartheid" illustrate this misconception, namely that holding stock in a company is equivalent to injecting capital into that company.

As I understand it, the company sponsoring the stock issue only gains funds from the initial stock issue of that stock. That is, when the company prints the stock certificates and then issues them to primary investors, those investors transfer their funds to the company. Once the primary investor sells his stock in the secondary market (i.e. the New York Stock Exchange) to another individual, the transfer of funds is wholly between the two individuals. The company sees none of the proceeds or capital gains from this transaction. (In fact, the owner of stock draws capital from the company, which pays the stockholder a dividend.)

It should be noted that the secondary market responds to internal company developments, and not the other way around. The stock market is earnings oriented; a stock's price rises because the market anticipates higher earnings. The price goes down if the company's earnings drop and the stock is less valued by the market. It does not follow that a drop in the price of a stock directly hurts that company. Rather, a drop in the price of the stock is a reflection of company condition.

Therefore, unless the stock was bought in its initial public offering, the ownership of stock in a company has nothing to do with the finances of the company. Owning stock in a company which does business in South Africa is not the same as supplying that company with capital. The argument that "Harvard invests in apartheid" is unfounded if the stock in the portfolio was obtained in the secondary stock market. (Information on the extent to which this is the case would be enlightening.)

This being the case, what would happen if Harvard divested? One might argue that the price would go down. This is probably not the case. In the first place, it is doubtful that Harvard holds a large enough percentage of a company's stock involved to cause a decrease in price. Second, even if Harvard did hold a large enough take to drive down the stock priced, the stocks would not be sold in one transaction. Divestment would occur over time--the market would be not glutted, and the price would not be affected.

Let us suppose, for the sake of argument, that the stockprice of a given company would go down if Harvard were to sell its stock in that company. How would the price drop affect the company? As described above, it wouldn't. The company is completely aloof from any stock transactions in the secondary market. The stock would merely be bought by an investor who, noticing the low price of the stock compared to its earning potential, would snap it up as a bargain. This stockowner may well be less scrupulous than Harvard; he might not trouble to lobby at stockholder meetings fro reform of company practices in South Africa.

In conclusion, the owner of a stock has not supplied a company with capital unless he has purchased the stock in the initial public offering of that stock. Because the company gains nothing from secondary market trades, it is incorrect to believe that the sale of stock would hurt the sponsoring company, even if the price were to go down. The price of stock is an indication of company condition, not a primary cause of it.

Now the argument may be made that it is bad thing to receive dividends from companies that do business in South Africa or that divestment is a symbolic protest against apartheid. This is all well and good. On the other hand, is the goal of divestment to hurt the company financially and in so doing force it to cease business in South Africa? If so, the sale of stock has nothing to do with it.

If the goal of divestment is to "send a message" to the Board of Directors of a company and/or other stockholders, why use such an indirect means as the sale of stock, which has no impact on the company? Why not stand up at a stockholders meeting and directly tell the Board of Directors (within earshot of other stockholders) exactly what you think? Selling stock deprives one of this opportunity and has no effect on the company's conduct of business. Samuel O. Sheargren '86