Thursday, April 1, 2021

Corporate Governance Gaming

Christina Sautter and Sergio Alberto Gramitto Ricci recently uploaded Corporate Governance Gaming to SSRN.  This is the abstract:

The GameStop saga and meme stock frenzy have shown the pathway to the most disruptive revolution in corporate governance of the millennium. New generations of retail investors use technologies, online forums, and gaming dynamics to coordinate their actions and obtain unprecedented results. Signals indicate that these investors, whom we can dub wireless investors, are currently expanding their actions to corporate governance. Wireless investors’ generational characteristics suggest that they will use corporate governance to pursue social and environmental causes. Their engagement with corporate governance has the potential to spark a social movement. The movement would be based on disintermediation of investments and aimed at bringing business corporations to serve their original partly-private-partly-public purpose. This article discusses premises, architecture, and characteristics of the movement that would cause business corporations to re-marry their partly-private-partly-public purpose. If such a movement proves successful, the paradigm shift that finally makes corporations serve the welfare of a broader range of stakeholders would happen at the hands of shareholders.

Sautter and Gramitto are the first I know of to tackle what the new dynamics the Gamestop affair ushered in mean for corporate governance.  As I read through the paper, I thought about how the SEC now grapples with how to oversee securities markets with retail investors trading meme stocks.  Sautter and Gramitto are likely right in predicting that younger retail investors may be more inclined to vote and may prioritize ESG matters in ways that institutional intermediaries have not.  They even document evidence of massive retail investor coordination now occurring around shareholder votes for certain memestock companies. 

Changes in the regulatory environment may accelerate retail investor impact on corporate governance.  The Biden-era SEC seems poised to carefully consider how investor demands and preferences have changed.  The SEC may soon facilitate ESG disclosures of intense interest to retail investors.  Meaningful ESG disclosures would likely catalyze the dynamics Sautter and Gramitto recognize.

Sautter and Gramitto are also correct that social media has diminished coordination costs for retail investors, enabling them to organize, strategize, and vote on governance matters in ways that we have not seen before.  If these shareholders vote for directors who prioritize ESG issues as Sautter and Gramitto predict, they will shift corporate behavior, possibly reducing short-term thinking and increasing corporate focus on ESG issues. 

Ultimately, the return of retail investor voice to corporate governance may moot debates over corporate purpose.  As Utah's Jeff Schwartz pointed out, securities market dynamics have largely forced corporate management to single mindedly pursue shareholder wealth maximization.  If retail investors change these dynamics in the ways foreseen by Sautter and Gramitto, corporate management will behave differently.

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