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An open letter on South Africa and investments

(Editor's note: The following statement from President Paul E. Gray '54 was released by the MIT News Office yesterday.)

In recent weeks questions have arisen about the Institute's investments and South Africa. Several years have passed since there was extensive and broad discussion of these issues here, and many members of the community are thus unaware of the Institute's policies, the basis for them, and the facts about our investments.

Corporate Involvement with South Africa

The questions at hand center on the involvement of publicly owned US corporations in South Africa. Involvement takes a variety of forms:

1/3Operations in South Africa. This means that corporations own facilities in South Africa, have business operations there, and have South African employees. In other words, they have an equity investment there.

1/3Non-equity links with South Africa. Such links do not provide ownership or operations in South Africa, but may include licensing of products, distribution arrangements, franchise agreements, or trademark or technology agreements.

1/3Bank loans. This includes banks that have made loans either to the South African government or to South African corporations.

MIT's Policy

In general, MIT's investment decisions are made on the basis of what makes most sense for the long-term financial security of the Institute. A strong endowment, for example, helps MIT provide adequate salaries for faculty, meet the financial aid needs of our students, support first-rate teaching programs, and provide the support services necessary for this academic community.

We apply an additional criterion to our investment policy with US companies that have operations in South Africa. MIT policy opposes new loans, but does not prohibit investment in companies with non-equity links. Our policy with respect to companies in South Africa is predicated on the belief that:

1/3those companies in which MIT invests should foster equal opportunity in the conduct of their business in South Africa and that they should work to eliminate the laws and customs that impede social and political justice in that country, and

1/3those companies that are making demonstrable progress towards these goals represent a positive force in that nation.

Accordingly, MIT's policy is to invest only in corporations that are signatories to the Statement of Principles as put forth by the Reverend Leon Sullivan more than a decade ago, and that are making significant progress in the implementation of those principles. This policy was most recently reviewed by the Executive Committee of the MIT Corporation in May of 1989.

The Statement of Principles, which applies to US corporations with operations in South Africa, requires the following positive actions in that country:

1.Nonsegregation of the Races in All Eating, Comfort, Locker Rooms, and Work Facilities

2.Equal and Fair Employment Practices for All Employees

3.Equal Pay for All Employees Doing Equal or Comparable Work for the Same Period of Time

4.Initiation and Development of Training Programs That Will Prepare Blacks, Coloureds, and Asians in Substantial Numbers for Supervisory, Administrative, Clerical, and Technical Jobs

5.Increasing the Number of Blacks, Coloureds, and Asians in Management and Supervisory Positions

6.Improving the Quality of Employees' Lives Outside the Work Environment in Such Areas as Housing, Transportation, Schooling, Recreation, and Health Facilities

7.Working to Eliminate Laws and Customs that Impede Social, Economic, and Political Justice.

Citing South Africa's lack of progress toward ending apartheid, Reverend Sullivan repudiated this strategy in 1987, and urged the prompt departure of companies with operations there. Nonetheless, some 123 US companies operate in South Africa, with 59 of them being signatories to be monitored, with 42 ranked in Category I (Making Good Progress), and 10 ranked in category IIA (Making Progress and Filing Detailed Reports).

US corporations that practice these principles have set examples that cannot be ignored by South African corporations. They have provided leadership in the move toward economic and political justice in that country, and it is not at all clear that their departure would either benefit the majority of the population or hasten the end of apartheid. In the light of recent changes in South Africa, this is not the time to take a vote of no confidence in those very companies that can help support the fragile infrastructure of economic and political equity in this African nation.

Divestment as a Strategy for Change

Aside from the question of whether divesting in companies that follow the Statement of Principles is giving the right signal, there is the question of whether divestment (that is, the simple selling of shares for which there will always be a buyer) is an effective means to press for change.

I would argue that consumer boycotts and purchase restrictions are far more influential in persuading companies to disinvest -- that is, to cease operations in South Africa. And even in those cases where companies have ceased operations, the South African economy has not been greatly affected. Either South African organizations have purchased the companies and have continued operations, or non-US operators and suppliers have filled the gaps, and in many cases US companies have developed non-equity links to South Africa.

As can be seen in the table below (based on reports by the Investor Responsibility Research Center), many US corporations have ceased operations in South Africa in recent years -- some by liquidating their assets there, others by selling their assets to South African (or non-US) entities -- and there has been a simultaneous increase in companies with non-equity links.

MIT Investments in Companies with Operations in South Africa

As of March 23, 1990, MIT held investments in 13 US companies with operations in South Africa, six of which are pharmaceutical companies. Eleven of these companies are rated in Category I, and two are in Category IIA. One company had 1.2 percent of its total sales attributable to South African activity, the other twelve had less than one percent of their worldwide sales in South Africa.

Over the years, using a consistent definition, the Institute's investments in companies with operations in South Africa have steadily decreased, primarily as a result of companies' ceasing operations there. The securities of the 13 companies presently held by MIT have a value of $84 million, which is 5.4 percent of the total market value of the general investments as of March 23, 1990. Just over four years ago, on December 1, 1985, the corresponding figure was $168 million, or 18 percent of the general investments.

The assertion by the Coalition Against Apartheid that MIT's investments in companies doing business in South Africa has grown is based on a broader definition of "doing business." That definition includes 52 companies that have any of these involvements with South Africa: employees, licenses, distribution agreements, franchises, or outstanding loans. Even using the Coalition's own calculations and their broad definition, MIT's investments declined in the past year from $322 million to $289 million.

Implications for other Programs and Policies

The Coalition's call for divestment of companies involved in South Africa raises other questions affecting the Institute. Divestment by an institutional investor is a public act of disapproval of the policies and practices of the affected corporations. If MIT were to disapprove of the practices of these 52 companies because of their involvement in South Africa to such a degree that we were to refuse to own their securities, then logically, we should refuse gifts from these companies. Along these lines, we should also refuse to continue other relationships with them, such as recruiting access to our graduates, participation in work-study and internship programs, research sponsorship, and membership in the Industrial Liaison Program. Our relations with these companies directly contribute to and strengthen the Institute's programs, and weakening these relationships would not, in my view, be in MIT's interests.

Consideration by the executive committee

The Advisory Committee on Shareholder Responsibility (ACSR) will hold an open meeting to give members of this community an opportunity to express their views and concerns about these issues. These views will be communicated to the Executive Committee of the Corporation, which is responsible for policy on the issue of investments and South Africa, and will be considered by that committee at a meeting this spring. Members of the executive committee will act on the basis of their best judgment, exercising their individual and collective responsibility as trustees concerning what is best for this university.

Paul E. Gray '54->

March 1990->