Saturday, December 25, 2021
In recent years, there’s been a lot of talk about the macro effects of consolidation in the asset management industry, whereby a handful of managers own stock in just about everything. In particular, several scholars have argued that these massive investors “own the economy,” and therefore internalize any externalities generated by the antisocial behavior of an individual portfolio company. Therefore, the theory goes, these firms have an interest in reducing sources of systemic risk, like climate change, or potentially racial inequality. See, e.g., Madison Condon, Externalities and the Common Owner, 95 Wash. L. Rev. 1 (2020); John C. Coffee, The Future of Disclosure: ESG, Common Ownership, and Systematic Risk; Jim Hawley & Jon Lukomnik, The Long and Short of It: Are We Asking the Right Questions? Modern Portfolio Theory and Time Horizons, 41 Seattle U. L. Rev. 449 (2018).
There were always some kinks in the theory. Most obviously, concerns have been raised that asset managers encourage less competition among portfolio firms, to the detriment of customers and labor. See, e.g., Miguel Anton, Florian Elder, Mireia Gine, & Martin C. Schmalz, Common Ownership, Competition, and Top Management Incentives; Zohar Goshen & Doron Levit, Common Ownership and the Decline of the American Worker. I’ve written about how the theory sits uneasily with our concepts of corporate governance, and glosses over the fact that these investments are held in different funds which may not all have identical interests.
Still, law professors like myself find it attractive because at the end of the day, it provides a justification for more stakeholder-focused business practices without challenging the underpinnings of shareholder primacy or the structure of the modern corporation. We get to have our cake and eat it too. No wonder, then, that the Chair of MSCI said that ESG investing is a mechanism to “protect capitalism. Otherwise, government intervention is going to come, socialist ideas are going to come.” At the end of the day, ESG investing is an incredibly mild intervention that leaves our corporate regulatory system intact.
Which is why two new papers, The Limits of Portfolio Primacy, by Roberto Tallarita, and Systemic Stewardship with Tradeoffs, by Marcel Kahan and Edward Rock, are so important. Both take a hard look not only at the ways in which this theory is out of sync with current corporate governance standards, but also at more practical realities – namely, the actual investments of large asset managers, and the ways in which they do not, in fact, own the economy, while many of the worst corporate actors are beyond their influence.
And on that note … happy Christmas to everyone who celebrates (and to those of us who just enjoy the festive atmosphere)! I hope everyone is having a wonderful (safe, healthy!) holiday season.