Cerberus Divestment Is a Loss, Not a Win

Cerberus Capital's decision to sell its stake in the Freedom Group, maker of the gun used in the Newtown shootings, is being widely applauded.

Celebrities from Elliot Spitzer to Michael Moore urged divestment. After Cerberus's decision, Spitzer penned a piece for Slate entitled, "Cerberus' Exit From the Gun Industry Shows How Public Pressure Can Shame Companies To Do Right."

But divestment is exactly the wrong outcome: Running away from the problem doesn't solve it.

A foreign firm -- immune to U.S. scrutiny and more distant from the Connecticut tragedy -- may well step in and buy Cerberus's stake. There is no indication that gun manufacturers will fold: In fact, gun sales surged last weekend after the shooting. As long as there are profits to be made, there will be investors to take part.

Those investors have a responsibility for the companies they own. Individual shareholders, private equity firms, and large pension funds enable companies to do what they do, and reap whatever benefits accrue to them. For investors to wash their hands of the impacts of their capital is disingenuous at best.

Some investors recognize this duty and exercise it vigorously: by lobbying company management, filing shareholder resolutions, and working with peer institutions on initiatives that promote responsible investment.

While the California State Teachers' Retirement System (CalSTRS) prodded Cerberus to divest, the other big California pension fund, the California Public Employees' Retirement System (CalPERS), takes the opposite approach of constructive engagement, as does the New York City Comptroller in overseeing the city's five pension funds.

Granted, companies don't have to listen: Shareholder resolutions are non-binding. But no company wants its shares to get dumped; the threat of divestment can be a powerful tool.

But it is a card that can only be played once. Once investors sell their shares, they no longer have a seat at the table.

In 2002, under pressure from human rights groups, the Canadian energy firm Talisman exited an oil project in Sudan. ONGC, India's state oil and gas company, bought Talisman's stake -- and promptly stopped communications with activists concerned about the region, as well as the community programs that Talisman set up. Some activists declared victory with Talisman's departure, but the people of Sudan are no better off.

Divestment helped bring down South Africa's apartheid regime, but so did the companies who stayed and integrated their workplaces in defiance of local law, showing what was possible.

For all of the complexities and problems that companies can bring to a situation, they can bring leverage and scrutiny. As former Supreme Court Justice William Brandeis said, "Sunlight is the best disinfectant."

We want investors who take public sentiment seriously to make their companies better and more transparent -- not literally pass the buck to someone else.

What if Cerberus held onto its stake in the Freedom Group and made the company take on the challenge of ensuring their products don't end up in the hands of madmen? Or stop making the products that have been used in our nation's worst tragedies?

Now that would be a move worth celebrating.