Introduction

This report examines the relative effectiveness of exit strategies—such as divestment and consumer boycotts—and voice strategies—such as shareholder engagement—in influencing corporate behaviour when firms generate environmental or social externalities. The analysis considers the role of socially responsible investors and stakeholders, defined as those who place a positive weight on others’ welfare when making decisions. The study finds that when a majority of investors are even slightly socially responsible, engagement achieves socially optimal outcomes. In contrast, exit strategies are only effective if all investors are highly socially responsible and can sometimes reduce social welfare.

Socially Responsible Investors and Consumers

The report outlines a theoretical framework in which investors and consumers are partly altruistic, placing weight (λ) on the well-being of others. Historical and contemporary evidence supports the existence of socially responsible behaviour, from religious prohibitions on slavery and harmful consumption to modern ethical investing. Unlike earlier “deontological” views, where investors avoid “sin” stocks for moral reasons, this paper models “consequentialist” investors who act based on the social impact of their actions. Empirical evidence shows individuals and institutions are often willing to forgo returns to achieve social benefits, consistent with altruistic preferences observed in charitable giving and sustainable investment.

The Economy

The authors develop a model in which firms can produce using either a “dirty” or “clean” technology. Becoming clean involves a fixed cost d, while operating dirty imposes a social harm h. It is socially optimal for firms to become clean if h exceeds d. In a purely selfish world, a free-rider problem prevents individuals from acting to reduce pollution, but when some agents are socially responsible, collective outcomes can change depending on whether they use exit or voice.

Voice

Shareholder voice refers to using voting or engagement to influence company decisions. The report finds that if most shareholders are at least slightly socially responsible, majority voting aligns with the outcome preferred by a benevolent planner—firms choose clean technologies when h > d. When most investors are purely self-interested, voice has no effect. The paper notes that in practice, shareholder engagement may be pursued through mutual funds or green funds that use activism as a marketing strategy. Empirical examples, such as the DuPont pollution case, demonstrate how even small degrees of social responsibility among diversified investors could lead to cleaner outcomes. Voice effectively internalises the externality since all shareholders bear the costs of collective decisions, resembling a public taxation mechanism.

Divestment

Divestment reduces a firm’s market value, potentially motivating change. However, the study shows that divestment’s effect is limited because selfish investors offset the sales of socially responsible ones, dampening price impacts. Only investors with sufficiently high λ values choose to divest, and equilibrium levels of divestment are often too low to achieve social optima. Quantitatively, if λmaxh < ¾d, no divestment occurs, and even when h > d, full divestment rarely results. In some cases, exit can lower welfare if it causes firms to adopt inefficiently clean technologies.

Boycotts

Consumer and worker boycotts operate similarly to divestment by reducing demand for dirty goods or firms. Their success depends on the elasticity of demand; they are more effective when demand for goods or labour is inelastic. For instance, workers in socially responsible firms often accept lower pay, indicating a trade-off between ethics and earnings. Nonetheless, as with divestment, full social optimisation through boycotts requires widespread social responsibility.

Discussion

The paper identifies conditions affecting the success of voice and exit. Voice requires mechanisms for engagement, such as voting rights or activism through intermediaries. Exit strategies depend heavily on visibility, credibility, and the ability of participants to commit to their decisions. Social media and institutional transparency enhance the effectiveness of public divestment or boycott campaigns. The report also highlights risks, including commitment failure and “amoral drift” from takeovers that can undermine social objectives. Empirical studies support the theoretical findings: divestment campaigns often fail to affect firm values, while shareholder engagement has led to measurable reductions in pollution and improved ESG performance.

Conclusions

The analysis concludes that engagement is a more effective and socially aligned strategy than divestment or boycotts. Voice mechanisms enable socially responsible investors to influence corporate behaviour even with modest altruistic preferences. Exit, by contrast, often fails to achieve or can even harm social outcomes. Policy and institutional frameworks that facilitate shareholder engagement and responsible voting are therefore likely to yield greater environmental and social benefits.