GREENmail: A New Approach to Ethical Investment

                GREENmail:  A New Approach to Ethical Investment

Do you want to dramatically reduce global warming?  Create a micro-lending facility within a global bank?  Distribute antiretroviral drugs by big pharma to developing countries in crisis - at their cost of production?  Curtail excessive CEO pay and broker bonuses?  End bid rigging on government contracts?  Start a carbon neutral airline?  Reduce the cost of the major desktop operating system?  Break the telephone monopoly in Mexico? Send medical aid to disaster victims in Ceylon?  Feed refugees in Darfur?    

How about controlling failing banks and insurance companies that are already supported by your tax dollars to insure accountability, transparency, regulation and ethics oversight are maintained going forward? (Keep in mind the U.S. gov't bought non-voting shares, passing over an opportunity to match control with investment).

You could do all these things if you owned and controlled certain major corporations. 

To date, ethical investing has focused on slowly accumulating positions in ethical companies while screening out unethical ones and passively holding out for change.  But today, shifts in social consciousness and advances in communication technology have enabled massive investing groups to form.  Ownership and control of major, public corporations are up for grabs by purposeful masses, making radical change truly possible.  

In this new landscape, problem companies are not to be avoided.  They are to be targeted for massive investment whereby social activists and persons of conscience with money unite to become corporate raiders.

In the past, Greenmail - a term used that combines the word green (to symbolize money) and blackmail - was a strategy that was confined to holding a public company financially hostage in order to extract a profit, oftentimes damaging the target company in the process, as the Greenmailer has no interest in improving the company.  Worse, corporate raiders often engage in asset stripping, a strategy where the productive assets of the aquired company are sold to pay of the debts of the corporate raider.  

A new form of “GREENmail” is proposed here that emphasizes achieving meaningful social change over short term profits.  In this scenario, GREENmailers are activist investors with a social agenda.  Ransom is extracted when the marked corporation concedes to the demands of the investor group.

                          Traditional Social Investment vs. GREENmail 

 

Traditional:  Investment funds buy stocks in companies that conform to certain ethical guidelines and exclude stocks that produce socially harmful products.  These products may include harmful chemicals, tobacco, alcohol, and firearms.   Additionally, these funds may also exclude companies with poor environmental records, employ contractors in sweat shops, paid fines for ethical violations, violate the rights of animals, and so on.   Investments are made in companies that pass positive screens, relating to human rights, corporate governance, environmental issues, and employee relations. 

Due to the wide range of views regarding social ethics and values, the nature of these criteria is not without controversy.  Additionally, many of these funds underperform the market, as businesses that ignore stakeholders often outperform the market and have no difficulty raising capital.  Typical investment strategies are used that include potential return on investment, risk of loss, suitability and diversification.  The funds may be referred to as Ethical Investment Funds or Socially Responsible Mutual Funds.  Either way, they typically carry larger fees than “agnostic” investment funds.

Role:  Passive

Results:  Weak to non-existent (limited mostly to psychological benefits to the investor).   Although Domino Social Funds has recorded some wins through proxy voting and shareholder activism.  Proctor and Gamble (Fair Trade Coffee), GAP (through contractor ratings and transparency), and JP Morgan (adopted a comprehensive environmental policy) are among their notable achievements.

GREENmail:  Combine with other socially conscious activists and investors with shared beliefs for the purposes of accumulating enough shares within a target company to influence (get a seat on the board, wage a proxy fight) or control (via majority ownership, leveraged buy-out or other means) companies to change them from within.  Individual activists and investors may align with public pensions, NGO’s, religious groups, and existing social funds.  Here a counterintuitive approach is maintained, either investing with corporations that agree to change the most or working with companies that need the most change, not the most ethical or socially responsible ones.   In contrast to the passive, traditional model that seeks to reward companies that pass positive screens by investing in them while avoiding companies that do not, GREENmail is an activist, confrontational model that seeks the maximize investment in one marked company at a time.  Return on investment, risk aversion, portfolio balance, and diversification are secondary considerations to the collective goal of achieving a large enough share position to achieve fundamental change within the target company. 

                                         Some Points to Consider

That said, the GREENmailer is not out to destroy corporations.  Only reform them, as every corporation is a composite of positive and negative attributes. 

But who is to say what is positive or negative?  The free market should be the ultimate decider.  Will activists put their money where their mouth is?  Will persons of conscience follow their heart? Will the socially conscience ultra-rich join in?  Will the media take sides?

Applications that reside within social networking platforms on the internet are preparing to make mass participation in investment a reality.   Social networks are transforming themselves into economic networks.   Bottom up hierarchies are already emerging, countering the accumulated strata of top down hierarchies that are collapsing before us.

In this new world where social activism, corporate responsibility, and populist rage meet high finance, GREENmail appears almost inevitable. 

                                                   Ready, Aim, Fire

By employing the same tactics as corporate raiders and private equity, “activist investors” may radically transform business practices of mega corporations such as Monsanto, KBR, Merck, GM, Goldman Sachs, UBS, AIG and Citibank.  Given the strength, breadth and power of global mega corporations, the results of change from within are likely to be much more effective than other forms of activism (boycotts, protest marches, picketing, writing congress and senate) and even charitable giving - since major corporations have the productive power and resources that dwarf most charitable organizations.

At this time, Wall Street desperately needs to find new reasons for people to invest.   Despite this approach being potentially hostile to the interests of small number of major Wall Street firms, smaller boutique investment firms whose governance is beyond reproach may decide to team with social activists, NGO’s, charitable foundations, money managers and wealthy individuals of conscience to promote specific GREENmail projects.  

With market capitalization for major corporations at historic lows and a sense of reform among the mass of workers and individual investors at record heights, potential GREENmail projects are as numerous as they are urgent.  Since charitable giving is already a 300 billion a year global market, it is possible that when just a portion of these funds are combined with other funds concentrated in social investment and are concentrated on a single GREENmail target,  control by of large cap corporation for social purposes may in fact be within reach.   

Stock prices may rise as GREENmailers accumulate large positions, but a concentration of investment well below controlling interest may prove enough to gain influence and effect change through proxy voting. 

Below is a chart that shows how large a position GREENmailers would need to gain controlling interest in specific corporations based on closing share prices of 3/05/09, priced in US dollars.

A quick look at potential targets:                 

Company	51% Market Cap	Per 100k Investors	Per 1 million	With 2 to 1 leverage
Monsanto	20 billion	200,000	20,000	10,000
KBR	1.92 billion	19,200	1,920	960
Merck	23.96 billion	244,392	24,439	12,220
GM	451.47 million	4,515	451.50	225.75
Goldman Sachs	17.814 billion	178,140	17,814	8,907
American Airlines	362.83 million	3,628	362.80	181.40
Boeing	10.71  billion	107,100	10,710	5,355
Alcoa	2.137 billion	21,269	2,127	1,063.50

 

                              GREENmailing companies under TARP

How about controlling failing banks that are already supported by your tax dollars?  Where the government has been ineffective at providing accountability and transparency due the United States taxpayer that is supporting these institutions, GREENmail provides a strategy that bypasses ineffective and compromised third party (in this case gov’t) representation.

Big Banks and AIG (Too big to Fail):  prices as of 3/09/2009

Bank of America	11.42 billion	114,200	11,420	5,710
Citibank	2.907 billion	20,907	2,097	1048.50
AIG	480.16 million	5,076	507.60	253.80

 

                                                          Microcaps

As a complement to the GREENmail strategy, many smaller corporations may be bought for relatively insignificant amounts of money.   For less than the cost of some beachfront Californian mansions, the companies below have significant operations and revenue, but are struggling in the current economy.   While they don’t offer the bounty many large corporations carry for social activists, they do have other attractions.  The purchase of a regional airline might prove compelling, as new owner groups might exert their control to extract benefits.  By providing discounts on unsold seats to the new owners and their families, one might effectively solve the age old empty seat problem.

Express Jet operates 214 aircraft under a capacity purchase agreement with Continental Airlines. They have been losing large amounts of money, but in recent months, due in part to lower fuel prices, Express CEO had this to say, “Our continued discipline and near perfect service allowed ExpressJet to produce positive cash flows from operations during the last two months of 2008.”   Ten thousand individual investors could own 50% of Express Jet for just a $967.50 per person.   

Phoenix-based Mesa Air Group with a fleet of more than 150 aircraft and flights to 39 states sells for less than $5 million, but it is saddled with more than $500 million in debt.    Investor groups could rescue Sunrise Senior Living.  Current price: $17 million. The company sleeps 54,000.  Sales this year should top $1.7 billion and debt totals at just over $600 million.  But it has no profits.

Company	51% market cap	Per 10,000 investors	Per 100,000	With 2 to 1 leverage
Express Jet	9.867 million	986.70	98.67	49.34
Mesa Airlines	2.52 million	252.00	25.20	12.60
Eddie Bauer	9.705 million	970.53	97.05	48.52
Pier One Imports	7.96 million	796.00	79.60	39.80
Sunrise Assisted Living	8.30 million	830.00	83.00	41.50

 

                              Social Networking and GREENmail

Social networking applications are now being built and distributed on Facebook, My Space, Linked In, and Bebo (among others) that enable large groups quickly and effectively organize online.  Recently, social networking sites surpassed email in popularity.  Facebook alone accounts for 175 million active users.

As the user demographic becomes increasingly older, wealthier, and more sophisticated, the conversion of social networks to economic networks may become a reality, enabling GREENmail to emerge as an effective response to corporate irresponsibility and socioeconomic hegemony.

   

 

 

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