The Slippery Slope of Divestment Campaigns

Let’s say that a university decides to acquiesce to the demands of anti-Israel protestors and divest its endowment from companies with business ties to Israel. 
 

It’s a plausible scenario, despite the many political, economic, and legal reasons to reject the idea: its unfair singling-out and demonization of Israel; the likelihood of reduced endowment returns and lower donations from alumni; state measures discouraging boycotts of Israel; and potential legal risk from skirting fiduciary responsibilities, just to name a few. 
 

Nevertheless, some universities, including Brown, UC Riverside, The New School, and Johns Hopkins have agreed to consider and vote on measures to divest their endowments from Israel. It’s certainly possible that others will follow suit.
 

However, any school that goes this route can easily find that it’s a slippery slope. 
 

Certainly, no country is above critique, including Israel, just as no individual, company, or industry is perfect. But allowing political pressures to influence investment decisions for university endowments in the case of Israel invites similar pressure campaigns focused on any number of issues, and a wider array of investment vehicles, not just direct holdings. 
 

Potentially Widening Divestment Targets
 

Activists could demand divestment from a much wider range of companies, such as fast-food corporations that contribute to obesity through unhealthy products, technology firms accused of privacy violations or spreading misinformation, or clothing retailers that source from factories with substandard labor practices. Adopting divestment as a primary tool to address corporate imperfections risks leaving the endowment's equity portfolio with a significantly limited number of stocks, adversely impacting diversification, returns, and the institution's ability to support its goals.
 

Instead of full divestment, a university may decide to appease protestors’ demands in a way that would minimize impact on endowment returns: by divesting from Israel only its relatively minor direct holdings, rather than mutual funds or exchange-traded funds (ETFs). For example, only 4% of Brown’s endowment is directly invested, with 96% managed externally. However, this too is a slippery slope, since divesting from direct holdings will likely only satisfy activists temporarily. 
 

In fact, many divestment campaigns call for a review of "pooled investment vehicles, such as mutual funds and ETFs” for divestment. Any limited form of divestment is unlikely to appease activists for long and will inevitably lead to escalating demands.

Gary Sernowitz, managing director of Lime Rock Management, a private equity firm, argued in a New York Times essay that while endowments should not pursue returns at any cost they “can’t be in the moral adjudication business.” 
 

“Colleges should debate deep moral issues and discuss the hard compromises to solve the world’s ills,” Sernowitz wrote. “But we should move those efforts to the lecture halls, away from the investment offices.”
 

In addition to this suggestion to restrict political debate to academic settings, there is at least one other alternative to acquiescing to divestment demands. Universities and their endowment managers can engage as active shareholders to promote positive change at the companies in which they invest. That would allow them to represent the values and pursue the social ends to which they are committed while protecting their endowments from the slippery slope of successive divestment campaigns.   

ADL publishes this piece in partnership with JLens.