Wednesday, September 18, 2019

Reflections on the First Annual ISG/Corporate Issuers Conference

This past Friday, I had the privilege of attending the First Annual ISG/Corporate Issuers Conference, hosted by the Investor Stewardship Group (ISG) and the John L. Weinberg Center for Corporate Governance at the University of Delaware. The Investor Stewardship Group is “an investor-led effort that includes … more than 60 U.S. and international institutional investors with combined assets in excess of US$31 trillion in the U.S. equity markets,” which was formed “to establish a framework of basic investment stewardship and corporate governance standards for U.S. institutional investor and boardroom conduct.”[1] The John L. Weinberg Center for Corporate Governance “is one of the longest-standing corporate governance centers in academia, and the first and only corporate governance center in the State of Delaware, the legal home for a majority of the nation’s public corporations.”[2] Charles M. Elson is the Edgar S. Woolard, Jr., Chair in Corporate Governance and the Director of the Weinberg Center.[3]

The primary work product of the ISG is the “framework for U.S. Stewardship and Governance comprising of a set of stewardship principles for institutional investors and corporate governance principles for U.S. listed companies. The corporate governance framework articulates six principles that the ISG believes are fundamental to good corporate governance at U.S. listed companies.” Meanwhile, the “stewardship framework seeks to articulate a set of fundamental stewardship responsibilities for institutional investors.” The Framework “became effective on January 1, 2018.”[4]

The agenda for the conference included a “deep-dive” into both the ISG Stewardship Principles and ISG Corporate Governance Principles, as well as “Fireside Chat” consisting of Charles Elson interviewing Marty Lipton. What follows, in no particular order, are three of my reflections on the conference. The Chatham House Rule applied, so I will not attribute any statements to any particular speakers.

• Both the stewardship and governance frameworks consist of six core principles (A-F and 1-6, respectively), each of which include sub-parts. Signatories generally agree to some type of comply-or-explain accountability mechanism. Two principles in particular stuck out to me: Stewardship Principle B (“Institutional investors should demonstrate how they evaluate corporate governance factors with respect to the companies in which they invest.”)[5] and Governance Principle 1 (“Boards are accountable to shareholders.”).[6] As to the latter, I was particularly interested in sub-part 6 (“In order to enhance the board’s accountability to shareholders, directors should encourage companies to disclose sufficient information about their corporate governance and board practices.”). The reason these grabbed my attention is because the relevant discussion suggested to me that these provisions could provide some added impetus for generating more transparency with regard to expected value calculations. Assuming corporate decision-makers are duty-bound to maximize shareholder value, they should be calculating the expected value of competing projects/investments whenever reasonably possible. When calculating expected value isn’t feasible for some reason, these decision-makers should be able to explain why not, as well as what rational basis they had for believing they were choosing the optimal value-generating path despite the difficulty of calculating expected value. While I realize much of this is essentially presumed by the business judgment rule, I nonetheless think the market would benefit from more of this type of disclosure. One might contrast this with situations such as when Apple CEO Tim Cook told shareholders, “When we work on making our devices accessible by the blind, I don’t consider the bloody ROI [return on investment],”[7] or when Ed Stack, the chairman and chief executive of Dick’s Sporting Goods Inc., decided that Dick’s should “take a stand” on gun violence by foregoing the sale of assault-style weapons and said in connection therewith, “I don’t really care what the financial implication is.”[8] Relatedly, a project I’m currently working on argues we have entered an age wherein the omnipresent specter of political bias necessitates heightened scrutiny of business decisions potentially motivated by ideological self-interest, particularly when the decision-maker is using other people’s money. Is there cause for concern if the talking points of your money manager are indistinguishable from a speech by Elizabeth Warren or Bernie Sanders?

• While the content of the Principles does not necessarily constitute a direct challenge to shareholder wealth maximization, the surrounding discussion at the conference at least suggested to me there was a related appetite for some of the stakeholder focus we’ve recently seen from the Business Roundtable.[9] To the extent this is correct, and to the extent someone wants to further characterize this shareholder versus stakeholder debate in terms of a David versus Goliath narrative, looking at the backers of the Principles suggests those defending shareholder wealth maximization will be playing the role of David.[10] Of course, many will likely object that there is no conflict, perhaps pointing to the fact that Delaware law permits boards to choose the relevant time horizon for wealth maximization, and that all the Principles are doing that might cramp any shareholder wealth maximization rule is focusing attention on the long term. However, pure shareholder wealth maximization likely applies some form of discounting to present value in order to compare long- and short-term projects, and in at least some cases the value associated with the short-term approach will be greater. Thus, the potential for conflict arguably remains even with the most generous compatibility characterization.

• I’m surprised we don’t hear more of the anti-totalitarianism justification for stakeholder primacy. The basic gist is that we are confronting unsustainable issues of inequality in various forms, and if market participants don’t provide some market-based solutions, then government will intervene in a way that increases the risk of some type of corporate statism, which in turn doesn’t have the greatest track record. It is certainly fair to respond that this argument suffers from the same short-comings as other slippery-slope arguments, and could be used to justify the very decrease in free markets that it asserts will be avoided. However, it still seems like a way to reach a portion of the unconvinced that might otherwise be entrenched – so I remain a bit surprised I don’t hear it more. Perhaps it’s just too unpalatable for the core base of the stakeholder movement.







[7] Jessica Shankleman, Tim Cook tells climate change sceptics to ditch Apple shares, THE GUARDIAN (Mar. 3, 2014), available at .

[8] Sarah Nassauer, How Dick’s Sporting Goods Decided to Change Its Gun Policy, THE WALL STREET JOURNAL (Dec. 4, 2018), available at .



Stefan J. Padfield | Permalink


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