Leverage is related to the noun “lever”, describing a structure which uses a mechanical advantage to make lifting or applying pressure easier and more effective . By extension, as a verb, it is also used to refer to the fact of gaining a strategic or political advantage, e.g. the Biden administration have suggested offering $100 to lever people into being vaccinated.
The process of applying a lever has become the term “leverage” and when saying leverage the first thing that springs to the mind ( or occurs) to financial people is the ratio of borrowed money, debt, to equity (also known as gearing, especially in English English rather than American English). For example, if you have 10 euros thanks to a bit of financial engineering you can borrow 100 euros against that.
In other words, the influence an amount of money can have can be multiplied various times by borrowing against it, as demonstrated in this example:
Prime brokers extend less of the leverage that hedge funds relied on to juice Spac returns
The word also has its place in traditional economics;
Shortage of adult workers has given younger employees more leverage to seek better wages
However, with the rise of ESG and CSR (aka Corporate Social Responsibility) issues, leverage is currently frequently used to refer to the pressure or influence an individual or entity can exert due to their stake in a company.
Which gave rise to the headline
meaning that investors that wish to enhance stock returns are taking into account alternative performance measures in order to outperform. Indeed Dan Ariely’s Irrational Capital’s research team claim there is a direct link between corporate culture and business performance.
Another example is that of the activist fund Bluebell Capital which leveraged a less than €20 million holding in Danone, worth over €40bn to oust ( or get rid of) the CEO and chair Emmanuel Faber. In other words, with only a small stake in the company, the fund manager managed to exert sufficient influence on other shareholders to bring about radical change.
But let’s not think that this attitude is a completely modern concept as Archimedes himself said back in the 3rd century B.C
“Give me a place to stand and rest my lever on, and I can move the Earth.”