How Does Positive Engagement Work?

Many fund managers now use positive engagement as their primary strategy to force a company to improve it's policies.

The main idea behind positive engagement is a simple one: upper levels of management, including chairmen and presidents of companies, have to take note to the opinions of their 'owners' - the shareholders. In normal terms, for a small shareholder to voice an opinion with a director of a FTSE or NASDAQ firm would be impossible - but if your fund ownes several percent of the company's issued stock they will listen!

In the past, such opportunities with directors were really only used for a regular update as to the trading conditions and performance of a company and market. However, as time has moved on, so has the power of a fund manager. These days, a high profile fund manager can make life very difficult for a director who opposes fund policies - and this includes ethical policies. Rather than exclude a company with a poor environmental or social record, many fund managers are now taking the unusual step of purchasing blocks of shares so that they may influence company policy from within. In reality, they are amongst the few people who really can influence these policies.

Therefore, these fund managers are trying to prevent problems from getting worse and force positive change. This differs significantly with how we would deal with such issues in the past. Previously, change would only be forced on a company after a significant event which shocked those involved - oil spills from ocean going tankers is an obvious example. Why should oil tankers only be improved for reasons of safety AFTER an accident and oil spill?

In ways like this, a fund manager can be a powerful ally of the ethical cause and is able to effect massive change if given time.