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Creating an Ethical Stock Exchange SKOLL CENTRE FOR SOCIAL ENTREPRENEURSHIP WORKING PAPER CREATING AN ETHICAL STOCK EXCHANGE JAMIE HARTZELL AUGUST 2007 2 CREATING AN ETHICAL STOCK EXCHANGE JAMIE HARTZELL 3 CONTENTS 5-13 SECTION 1 – WHY IS AN ETHICAL EXCHANGE NECESSARY? 22-26 SECTION 4 – THE STRUCTURE OF AN ETHICAL EXCHANGE 5 THE EXISTING MARKETS 22 THE STAKEHOLDERS EXECUTIVE SUMMARY 6 PRICE SETTING ON THE EXISTING MARKETS 22 THE FUNCTIONS OF THE ETHICAL EXCHANGE 7 UNSUITABILITY OF THE EXISTING MARKETS FOR 22 TRADE AND NEW INVESTMENT EXECUTION ETHICAL BUSINESSES 22 COMPLIANCE WITH THE FINANCIAL SERVICES 8 THE EXTENT OF ETHICAL PUBLIC OFFERINGS (EPOS) AND MARKETS ACT AND THE COMPANIES ACT 10 DEMAND FOR AN ETHICAL EXCHANGE FROM 22 MARKETING SOCIAL ENTERPRISES 23 OWNERSHIP AND CONTROL OF THE EXCHANGE 11 THE BENEFITS OF A WIDE PUBLIC SHAREHOLDER BASE 23 ELIGIBLE INVESTMENTS CREATING A 12 DEMAND FOR AN ETHICAL EXCHANGE FROM INVESTORS 24 PRICING SOCIAL AND ENVIRONMENTAL RETURNS 25 CRITERIA FOR MARKET LISTING 14-17 SECTION 2 – THE EVOLUTION OF AN ETHICAL EXCHANGE 25 FINANCIAL CRITERIA 14 HISTORY OF ETHICAL SHARE TRADING TO DATE 25 SOCIAL AND ENVIRONMENTAL CRITERIA MARKET FOR 15 WHAT WOULD AN ETHICAL EXCHANGE DO? 25 TRANSPARENCY AND THE PROVISION 15 GENERATE LIQUIDITY IN INVESTMENTS IN OF INFORMATION SOCIAL ENTERPRISES 15 BRING NEW ISSUES TO MARKET 27-29 SECTION 5 – PRICING SHARES AND BONDS ETHICAL CAPITAL 15 ATTRACT NEW INVESTORS 27 THE FIVE MODELS 16 SUPPORT SMALLER ENTERPRISES WITH 27 OPTION 1 – FIXED PRICE TRADING START-UP FINANCE 27 OPTION 2 – SET PRICE TRADING 16 CREATE NEW FINANCIAL OPPORTUNITIES 27 OPTION 3 – SET PRICE TRADING, BUT WITH THE 16 OFFER TRAINING IN FINANCIAL AND ADDITION OF A LIQUIDITY FUND COMPLIANCE ISSUES 27 OPTION 4 – VARIABLE PRICE, ORDER DRIVEN 28 OPTION 5 – VARIABLE PRICE, QUOTE DRIVEN 18-21 SECTION 3 – HOW THE EXCHANGE WOULD WORK 28 WHICH MODEL? 18 AVOIDING SPECULATION 28 RULES FOR SETTING PRICE 19 NON PROFIT NATURE 29 COMMUNICATING PRICE TO INVESTORS 19 MEMBERSHIP 19 THE ‘RULE BOOK’ 30 SECTION 6 – FINANCING THE EXCHANGE 20 COMMUNICATIONS WITH INVESTORS 30 TRADE EXECUTION 20 CHARGES 20 THE SHAPE OF AN ETHICAL EXCHANGE IN THE FUTURE Editing: OPEN ACCESS. this policy statement in a prominent position Alex Nicholls SOME RIGHTS RESERVED. The text is not altered and is used in full (the As the publisher of this work, the Skoll Centre use of extracts under existing fair usage rights is Production: for Social Entrepreneurship has an open access not affected by this condition) The history of the Stock Exchange dates back to volumes of shares traded increases, the workings of Liz Nelson policy which enables anyone to access our content The work is not resold 1694, when William III first made government these markets are becoming more speculative, and electronically without charge. A copy of the work or link to its use online is borrowing transferable from one person to another. less transparent. Vast fortunes are won or lost in a Layout: sent to the address below for our archive. Society Media We want to encourage the circulation of our This gave rise to a number of ‘stock-jobbers’ who matter of minutes with just a few clicks of a mouse. work as widely as possible without affecting the Copyright Department made money trading in these debts. For many And the trades that do take place have less to do Skoll Centre for Social Entrepreneurship ownership of the copyright, which remains with Skoll Centre for Social Entrepreneurship years these traders operated from a courtyard with the activities of the company itself and more Saïd Business School the copyright holder. Saïd Business School in Sweetings Alley and a nearby café called to do with the system that allows the trading. Park End Street Park End Street Oxford OX1 1HP Users are welcome to download, save or distribute Oxford Jonathan’s. But over the next three hundred In 1984, Traidcraft launched the first public United Kingdom this work electronically or in any other format, OX11HP years they helped to mobilise and pool the share issue ever undertaken by an ethical business. including in foreign language translation, without United Kingdom nation’s savings by investing them in the capital Over the last 20 years, the public appetite for this Tel: +44 (0)1865 288 838 written permission subject to the conditions set developments and new companies that are so form of investment has steadily grown. Yet the Email: [email protected] out in the Skoll Centre open access licence which Tel +44 (0)1865 288 838 you can read at the back of this publication. Email: [email protected] familiar to us today, creating the London Stock process of putting together a share issue and of For full details of the Skoll Centre’s work, see Exchange which in 2005 turned over £420 million. setting up the subsequent trading mechanisms www.sbs.ox.ac.uk/skoll Please read and consider the full licence. The You are welcome to ask for permission to use this The practice of stock trading has never been remains haphazard and uncoordinated. Despite following are some of the conditions imposed by work for purposes other than those covered by popular. Robert Louis Stevenson referred to it as this, ethical businesses raising share capital have Creating An Ethical Stock Exchange the licence: the Skoll Centre open access licence. The Skoll © Skoll Centre for Social Entrepreneurship 2007 Centre circulation licence is adapted from the ‘knavish in its private practice and treason in its chosen to make their own arrangements rather than Some rights reserved – see copyright licence The Skoll Centre for Social Entrepreneurship ‘attribution/no derivatives/ noncommercial’ version public’. Today the world’s stock exchanges are list on the existing markets, which are too focused for details. and the author(s) are credited of the Creative Commons licence. To find out more some of the main drivers of the global economy. on financial and not enough on environmental and ISBN: 978-1-905551-51-4 The Skoll Centre website address (www.sbs. about Creative Commons licences go to Government’s can thrive or fall according to social returns. ox.ac.uk/skoll) is published together with a copy of www.creativecommons.org changes in the fortunes of these markets. Yet as the There is then a need for a genuinely ethical SKOLL CENTRE FOR SOCIAL ENTREPRENEURSHIP SAID BUSINESS SCHOOL UNIVERSITY OF OXFORD 4 CREATING AN ETHICAL STOCK EXCHANGE JAMIE HARTZELL 5 SECTION 1 exchange which is as supportive of the activities This institution should already have an ethical of an enterprise as it is of its profitability. With outlook before being asked to take on the running of an increasing number of social enterprises now an ethical exchange. However, a key question at the raising capital through share and bond issues, outset is the extent to which this organisation should WHY IS AN ETHICAL this market would channel the nation’s appetite itself own the exchange, or whether it should be for direct ethical investment. The market would owned by its members, with the activities limited to also open new horizons in ethical investment, ensuring that the needs of members are met whilst presenting a direct challenge to the existing system remaining within the law and rules and guidance EXCHANGE and a benchmark for other markets to live up set by the Financial Services Authority. This issue is to. Section 1 therefore outlines the need for an explored in Section 4. ethical exchange, the wider context in which it Section 5 is dedicated to the complex issue would operate, and the evolution of ethical trading of pricing. It examines the full range of pricing NECESSARY? mechanisms to date. mechanisms currently in use and which would The reason for such a market is so not only to prove most appropriate for an ethical exchange. provide a mechanism by which equity investors in Ultimately, an ethical exchange would need to social enterprises can disinvest when they need to. be self-financing. The exchange has the capacity Properly constructed, such a market could achieve to generate income, from membership fees as well much more, eventually becoming a vital support as services provided. Whether this is likely to be service for all public share and bond issues of enough to ever make it self-financing is explored in an ethical nature. For not only could it generate Section 6. liquidity in shares listed on the market, it could Setting up a working ethical exchange does not also undertake new issues thereby providing a necessarily mean that it will prove attractive to the focal point for the marketing of new and existing enterprises who might list on it. Some enterprises, ethical investment products, look to raise financial for example, may not wish to encourage greater standards within the companies listed on the liquidity for their investors. Providing clear and market, thereby increasing transparency and investor transparent financial information of adequate confidence, and help to bring smaller, start-ups to quality to meet the demands of a increasingly market through Ethical Public Offerings (EPOs), sophisticated investor and of the increasingly thereby providing an exit route for ethical venture strict Financial Services Authority is also a serious capital investors. Section 2 outlines the activities an challenge to many social enterprises. Whether the ethical exchange would undertake. level of advice and support needed to meet these THE EXISTING MARKETS Moreover, the Financial Services and Markets Act In the minds of many of the members of standards can be provided at an achievable cost There are currently three main trading markets (FSMA) limits the extent to which the investment the public who make up the ethical investment remains to be seen.
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