Tuesday, May 17, 2022

Sharfman on Twitter and “Portfolio Primacy”

Over at the University of Chicago's ProMarket site, Bernard Sharfman has posted: Will “Portfolio Primacy” Throw a Monkey Wrench in Elon Musk’s Plans to Acquire Twitter? In the piece, Sharfman argues that even if one assumes Musk's offer for Twitter maximizes the value of that firm, "investment advisers to index funds, such as BlackRock, Vanguard, and State Street (the Big Three)" may vote against the deal on the basis of portfolio primacy because:

[A]n investment adviser who manages a stock fund should be managing the fund based on an approach that attempts to maximize the financial value of the entire stock portfolio at any point in time, not just the value of any individual stock investment. This approach is referred to as “portfolio primacy.”… [L]et’s say that the investment adviser to the S&P 500 fund comes to the conclusion that a Musk takeover of Twitter will so distract Musk from his duties at Tesla that it will lead to a significant reduction in the market value of Telsa’s stock. Because the S&P 500 fund has so much more in terms of dollar holdings of Tesla than Twitter, this expected reduction in the market value of Tesla stock could easily outweigh whatever positive value the fund derives from Musk purchasing Twitter.

 

May 17, 2022 in Stefan J. Padfield | Permalink | Comments (0)

Tuesday, May 3, 2022

Korsmo & Myers on "The Rise of the Trading Price Paradigm in Corporate Law"

Below is an interesting and perhaps Twitter-relevant excerpt from Charles Korsmo & Minor Myers, What Do Stockholders Own? The Rise of the Trading Price Paradigm in Corporate Law, 47 J. Corp. L. 389, 394 (2022).

Expressed in the conventional analytical framework, Delaware now protects the stockholder's entitlement in a public corporation with a liability rule, where the stockholder's entitlement may be taken in a non-consensual exchange like a merger at any price exceeding the prevailing trading price.

This paradigm shift augurs dramatic change not simply in appraisal, but in all of merger law. Most obviously, the shift will necessarily affect the basic measure of damages in other contexts. Indeed, the Court of Chancery has already confronted this scenario: a breach of fiduciary duty that gave rise to no damages because the transaction was at a premium to the market price. But perhaps the most notable doctrinal reckoning involves Unocal and its progeny, which afford directors the power to defend against the threat of acquisitions where the price is “too low.” That power reached is fullest expression in the 2011 Air Products v. Airgas decision, a ruling that remains controversial. The board of Airgas blocked a $70 acquisition offer from Air Products, even though Airgas stock had previously been trading between $40 and $50 per share. The Court of Chancery held that the “inadequate price” justified the continuing defenses by Airgas, bringing the control fight to an end.

The continuing force of the reasoning behind Airgas is now in serious doubt. If the best evidence of the value of the corporation is the market price, as the supreme court held in Aruba, and the absence of higher bidders is sufficient demonstration of the attractiveness of the bid, as the supreme court held in DFC Global, and the opinion of informed insiders is insufficient to call into question the fairness of a market-tested bid, as the supreme court held in Dell, on what ground can Airgas still stand?

May 3, 2022 in Stefan J. Padfield | Permalink | Comments (0)

Monday, May 2, 2022

To say they are shareholders only begins analysis.

I recently posted (here) a link to, and brief overview of, a letter from twenty-two of the nation’s leading professors of law and finance urging the SEC to withdraw its climate disclosure proposal. Brett McDonnell submitted an interesting comment to that post, highlighting a potential tension between espousing views that prioritize shareholder wealth maximization while at the same time rejecting the calls of some of the world’s largest shareholders for greater climate-related disclosures. (Please be sure to read his full comment.) In response, Lawrence Cunningham suggested I post an additional excerpt from the letter, which addresses this issue in more detail. You’ll find that excerpt below. However, this all reminded me of a recent article by Amanda Rose, and so I’ll start my excerpts with a quote from that article.

Traditional asset managers claim their commitment to ESG is motivated by a desire to improve long-term fund performance for the benefit of investors. But agency costs offer an alternative potential explanation: embracing the ESG movement may help asset managers curry political favor, enabling them to fend off greater regulation of the industry; it may advance the personal sociopolitical commitments of those who ran them; or it may offer a way to attract investors to fund offerings without imposing any meaningful limitations on how a fund is managed.

Amanda M. Rose, A Response to Calls for SEC-Mandated ESG Disclosure, 98 Wash. U.L. Rev. 1821, 1824–25 (2021).

Now, on to the letter (the full version is here):

Continue reading

May 2, 2022 in Stefan J. Padfield | Permalink | Comments (0)

Friday, April 29, 2022

ICYMI: "Twenty-Two National Professors Urge SEC to Withdraw Climate Disclosure Proposal"

As per the relevant press release (via Lawrence Cunningham): "Twenty-two of the nation’s leading professors of law and finance this week wrote the Securities and Exchange Commission (SEC) to dispute the agency’s authority to adopt a new far-reaching climate disclosure regime and to urge an immediate withdrawal of the proposal." You can find the full letter here. Here is a hopefully useful excerpt:

The following analysis raises concerns that the Proposal is neither necessary nor appropriate for either investor protection or the public interest and will not promote other statutory goals. The SEC would do better to withdraw the Proposal and revisit the subject with a fresh approach focused on America’s ordinary investors rather than an elite global subset. The three parts of this letter address each statutory issue in turn, as follows:

I. “Investor Demand” versus “Investor Protection”
    A. Investor Varieties: Diverse Institutions and Individuals
    B. Climate Shareholder Proposals: Few Are Made, Most Lose, Many Are Political
    C. The Ample Supply of Climate Disclosure
    D. Correlation of Climate Practices with Economic Performance Is Not Causation
II. Authority of Others and the “Public Interest”
    A. The Environmental Protection Agency’s Statutory Jurisdiction
    B. State Corporate Law Prerogatives on Purposes, Powers and Business Judgments
    C. Risk of Unconstitutional Compelled Political Speech
III. Other Statutory Considerations
    A. Certain High Costs versus Highly Speculative Benefits
    B. Impairs Investment Industry Competition
    C. Compliance Burdens Discourage Public Company Registrations

April 29, 2022 in Stefan J. Padfield | Permalink | Comments (2)

Thursday, April 21, 2022

ICYMI: Coca-Cola walks back "illegal discriminatory outside-counsel policies"

As reported by The American Civil Rights Project (here):

After months of pressure from concerned stockholders, Coca-Cola’s General Counsel Monica Howard Douglas recently let it be known that the illegal discriminatory outside-counsel policies Coke announced with great fanfare last year “have not been and are not policy of the company.” ...

In January 2021, Douglas’s predecessor, Bradley Gayton, published the policies in a highly publicized open letter addressed to “U.S. Firms Supporting The Coca-Cola Company.” Under it, Coke’s law firms were required to staff Coke matters so that that “diverse” attorneys performed at least 30% of all hours billed, with “Black attorneys” performing “at least half [15%] of that amount” .... The letter stated that non-compliance for two successive quarters “will result” in Coke’s unilateral reduction of a firm’s future legal fees and that all future consideration for both new legal work and inclusion in Coke’s preferred-vendor list would turn on compliance....

[T]he ACR Project wrote to Coke, its officers, and its directors, on behalf of several shareholders, demanding the public retraction of the discriminatory policies. If Coke had refused, these shareholders would hold Coke’s officers and directors personally liable for breaching their fiduciary duties to investors.

After months of foot dragging, Ms. Douglas responded with her assurance that the discriminatory policies are not now and never have been company policy.

April 21, 2022 in Stefan J. Padfield | Permalink | Comments (0)

Wednesday, April 20, 2022

Workshop for Law Professors on Teaching Capitalism (July 10-14, 2022)

The following comes to us from the Law & Economics Center at the Antonin Scalia Law School at George Mason University.

The Law & Economics Center is pleased to announce that we are now accepting applications to the Workshop for Law Professors on Teaching Capitalism. This program will be held at the Park Hyatt Beaver Creek Resort and Spa in Beaver Creek, Colorado with attendees arriving on Sunday, July 10 and departing on Thursday, July 14.

The Workshop for Law Professors on Teaching Capitalism is a five-day program that will deepen law professors' understanding of the fundamentals of capitalism, educate the participants in methods and techniques for teaching about capitalism as a stand-alone course in their own law schools, and help guide these professors in ways to integrate lessons learned from capitalism and discussions around the topic into their subject-specific doctrinal courses like corporations, constitutional law, or on common law subjects. The workshop is designed to enrich the curricula of law schools across the country by encouraging a more robust discussion of capitalism and its relationship with the law in courses, by giving its attendees the tools necessary to take this instructional guidance back to their home institutions.  Across 9 lectures (and a film night), law professors will learn from the leading experts on the pedagogy of teaching capitalism and from other key scholars in the subjects covered.

Workshop Faculty Includes:

George Priest (Yale Law School)

Mike Munger (Duke University)

Donald Boudreaux (George Mason University)

Jim Huffman (Lewis & Clark Law School)

The LEC offers a $1,000 honorarium for successful completion of the program (from which attendees are expected to cover their own travel and incidental expenses).

To Apply, Please Visit: https://cvent.me/DXGWXZ

April 20, 2022 in Stefan J. Padfield | Permalink | Comments (0)

Thursday, March 10, 2022

Virtual Panel Discussion: Bankruptcy and Mass Torts

The following comes to us from the Law & Economics Center at Scalia Law.

The Law & Economics Center at Scalia Law to Hold Virtual Panel Discussion Analyzing Reforms to the Bankruptcy Code and Examining Case Law Developments in Mass Tort Bankruptcies Next Week

On Friday, March 18, 2022, from 12:00 PM – 1:00 PM EST, the Law & Economics Center at the George Mason University Antonin Scalia Law School will host a virtual event entitled Bankruptcy and Mass Torts: Examining the Economics, Purposes, and Structure of Bankruptcy Law in Light of Developments in Congress and the Courts. A panel of experts will address the questions and concerns facing Congress as it debates reforms to the Bankruptcy Code and discuss case law developments.

The time-tested law that has developed under the United States Bankruptcy Code creates a sophisticated set of rules, structures, and procedures to preserve value in distressed businesses to protect stakeholders and maximize the return to creditors. Recent uses of legal mechanisms to take advantage of Chapter 11 and other provisions of the Code—including corporate restructuring and divisional mergers by companies facing liabilities from mass tort litigation—have drawn criticism in Congress and challenges in court.

Are these filings employing useful mechanisms to maximize the intended economic benefits of the Bankruptcy Code, or are they abuses of process? How do these bankruptcies affect litigants’ rights to recover? Are safeguards in the Bankruptcy Code and corporate law sufficient to control fraud, or are reforms necessary? Is there a problem with the Code that needs solving? What are the unintended consequences of tinkering with the Bankruptcy Code? These are questions facing Congress as it debates reforms to the Bankruptcy Code and for courts determining whether to allow bankruptcies to proceed under these circumstances.

To take part in the virtual discussion, register here. The panelists: Anthony Casey (Deputy Dean and Donald M. Ephraim Professor of Law and Economics, The University of Chicago Law School), Alexandra Lahav (Ellen Ash Peters Professor of Law, University of Connecticut School of Law), Samir Parikh (Professor of Law, Lewis & Clark Law School), and Lindsey Simon (Assistant Professor of Law, University of Georgia School of Law). The panel will be moderated by Donald J. Kochan (Professor of Law and Deputy Executive Director, Law & Economics Center, George Mason University Antonin Scalia Law School).

March 10, 2022 in Stefan J. Padfield | Permalink | Comments (0)

Friday, February 18, 2022

Robert Miller On Making Business Decisions Under a Stakeholder Model

Robert Miller has posted How Would Directors Make Business Decisions Under a Stakeholder Model? on SSRN (here).  The abstract:

Strong forms of the stakeholder model of corporate governance hold that, in making business decisions, directors should consider the interests of all corporate constituencies (employees, customers, suppliers, shareholders, etc.) in such a way that directors may sometimes decide to transfer value to a non-shareholder constituency even though doing so produces no net benefit for shareholders even in the long-term. This article makes four main points about the stakeholder model. First, although its advocates often speak as if the model placed all corporate constituencies on a par, in fact the model uniquely disadvantages shareholders: since the claims of other constituencies arise in contract or by law, directors have no power to invade these claims for the benefit of shareholders; hence, business decisions made under a stakeholder model will often transfer value from shareholders to other constituencies but never from other constituencies to shareholders. Second, although critics of the stakeholder model have long argued that the model provides no definite standard by which directors may decide what to do in particular cases, this greatly understates the point. In fact, the stakeholder model leaves business decisions radically indeterminate, for it includes no normative criteria by which any business decision could be judged to be any better or any worse than any other. Third, some normative criteria that can be added to the stakeholder model and might seem to solve this problem in fact fail to do so; this includes criteria based on Kaldor-Hicks efficiency, on hypothetical bargains among the corporate constituencies, or even on Delaware doctrines about allocating merger consideration among classes of shareholders. Finally, the article notes a surprising point of agreement between advocates of stakeholderism and its critics, viz., that decisions made under a stakeholder model would be essentially political in nature. That is, they will be based not on rational, normative considerations but on the varying abilities of different constituencies to pressure or lobby the directors—i.e., business decisions become essentially rent-seeking contests.

February 18, 2022 in Stefan J. Padfield | Permalink | Comments (0)

Wednesday, February 9, 2022

Perhaps worth keeping an eye on: Krehbiel v. BrightKey, Inc. (workplace political opinion discrimination claim)

According to their website, on November 15, 2021, the Center for Individual Rights (CIR) filed a complaint alleging workplace political opinion discrimination in the case of Krehbiel v. BrightKey, Inc.  An amended complaint was filed on Jan. 3, 2022.  You can find links to both complaints here.  What follows is a brief description of the case as per CIR (emphasis mine).

On November 15, the Center for Individual Rights filed a political opinion and racial discrimination lawsuit against BrightKey, Inc., a Maryland corporation, which fired its vice president of operations, Greg Krehbiel, over views that he expressed in his off-work podcast. BrightKey violated Krehbiel’s rights under county, state, and federal anti-discrimination law.

In his podcast, Krehbiel questioned diversity hiring requirements and enhanced penalties for “hate crimes.” Other BrightKey employees discovered Krehbiel’s podcast. They objected to the content because his views were the product of “white privilege.” Shortly after discovering the podcast, a group of employees walked out and demanded the company fire Krehbiel. BrightKey swiftly acceded to the employees’ demands.

CIR is suing BrightKey for firing Krehbiel over the political opinions that he expressed in his podcast. Howard County, Maryland is one of many jurisdictions around the country that protects employees from political opinion discrimination. The suit also alleges racial discrimination under Howard County, state, and federal anti-discrimination law. Krehbiel expressed legitimate public policy positions, but because of his race, BrightKey employees construed his views as bigoted. CIR filed the case in the United States District Court for the District of Maryland.

February 9, 2022 in Stefan J. Padfield | Permalink | Comments (1)

Sunday, January 23, 2022

Christina Parajon Skinner Reviews “Grow the Pie: How Great Companies Deliver Both Purpose and Profit”

This morning, my inbox included a link to: Christina Parajon Skinner, Cancelling Capitalism? Grow the Pie: How Great Companies Deliver Both Purpose and Profit, 97 Notre Dame L. Rev. 417 (2021) [SSRN: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4000768 ]. What follows is an excerpt from the introduction.

In February 2019, Amazon announced a plan to build its new national headquarters in Queens, New York. The plan would create between 25,000 and 40,000 well-paid jobs and fill New York City's tax coffers with at least $27.5 billion. But Amazon cancelled its decision in the face of intense political opposition. Perhaps the most vocal opponent was New York congressional Representative Alexandria Ocasio-Cortez. She roundly celebrated Amazon's retreat, tweeting, “today was the day a group of dedicated, everyday New Yorkers & their neighbors defeated Amazon's corporate greed.”

But the congresswoman's maligning of Amazon's relocation was a sleight of hand. She told her followers that the “tax breaks” that would have gone to Amazon would instead now be available for public works, like subway repairs and teacher salaries. But this was wrong. The tax breaks would not be a “donation” of dollars that would have taken funds away from other public uses; rather, Amazon would have had some reductions from future tax bills if and only if--the company had improved the community in financially concrete ways. Yet Amazon was bullied out of town on these false pretenses, and Queens lost out on jobs, urban development, and hefty corporate tax payments. Here, both Amazon and Queens residents lost out--the citizens perhaps the most.

The tale of Amazon in retreat is one of many hard-hitting examples Alex Edmans gives in his book, Grow the Pie, all of which illustrate the growing popular antipathy against corporate profit. In the most charitable interpretation of Edmans's examples, people and politicians increasingly reject capitalism--the private harnessing of free-economic markets--because they appear to misunderstand the role that profits play in society. In other cases, however, it seems that politicians feint ignorance of the social benefits of capitalism in seeking to hum the most popular tune. Grow the Pie disabuses misperceptions by providing novel evidence and examples that bust the myriad myths now perpetuating the growing movement to “cancel capitalism,” as I'll call it here.

Continue reading

January 23, 2022 in Stefan J. Padfield | Permalink | Comments (0)

Saturday, January 8, 2022

Tallarita on The Limits of Portfolio Primacy (Revised)

Roberto Tallarita has revised The Limits of Portfolio Primacy on SSRN (here). An excerpt of the abstract follows.

According to a theory that is gaining increasing support, we should expect large asset managers (and, in particular, index fund managers) to become “climate stewards” and force companies to reduce their impact on climate change. According to this theory, by maximizing the value of their entire portfolio (portfolio primacy) rather than the value of the individual company (shareholder primacy), index fund managers are incentivized to reduce climate externalities and therefore to steer companies toward decarbonization. This Article offers the first systematic critique of this theory and identifies four crucial limits that undermine its practical impact: mispricing of climate mitigation, portfolio biases, fiduciary conflicts, and insulation from index funds stewardship.... [C]limate stewardship would create unsolvable fiduciary conflicts on multiple levels: between fund managers and fund investors; between large asset managers and undiversified shareholders; and between corporate directors and the individual company....

January 8, 2022 in Stefan J. Padfield | Permalink | Comments (0)

Saturday, January 1, 2022

Two SSRN Postings: "The Cost (and Unbenefit) of Conscious Capitalism" & "Mitigation of Reputational Risk via Responsive CSR"

Aswani, Bilokha, Cheng, and Cole have posted The Cost (and Unbenefit) of Conscious Capitalism on SSRN (here). The abstract:

This paper examines the costs and benefits of ‘stakeholder governance’ for shareholders and other stakeholders by using the adoption of constituency statutes as a quasi-exogenous shock to corporate governance. Constituency statutes permit board members to consider all stakeholder interests, relaxing fiduciary duty to only shareholders. Using a sample of U.S. publicly traded firms (1981-2010) and employing a difference-in-difference methodology, we find that the discretionary adoption of ‘stakeholder governance’ leads to managerial entrenchment and a reduction in institutional ownership and shareholder wealth with little to no ‘trade-off’ benefits to other stakeholders. As states adopted constituency statutes, signs of managerial entrenchment increased (proxied by significant declines in earnings transparency and jumps in CEO and Director compensation) as did harm to shareholder wealth and to governance through institutional ownership. At the same time, we do not observe potential ‘trade-off’ benefits to the non-shareholder stakeholders these statutes were intended to help; we find that labor, customers, and creditors only marginally benefited (if at all) from the introduction of these statutes. These results are robust to a battery of checks including the biasedness in the staggered DiD estimator.

Choi, Cook, Via, and Zhang have posted The Mitigation of Reputational Risk via Responsive CSR: Evidence from Securities Class Action Lawsuits on SSRN (here). The abstract:

We examine the strategic production of CSR as a post-shock damage control instrument (responsive CSR). We proxy for these shocks using securities lawsuits. Using hand-collected data to supplement our main CSR dataset, we find that responsive CSR is temporary and consists primarily of strategically placed news releases to blunt short-term effects from periodic negative news developments related to the litigation process. Firms use responsive CSR synergistically with advertising, and it is concentrated in firms headquartered in urban or liberal-leaning states that exert high ESG demands. We find that responsive CSR mostly represents window dressing – it does not add long-term value and is associated with board members that are faced with significant reputational concerns.

January 1, 2022 in Stefan J. Padfield | Permalink | Comments (0)

Friday, December 24, 2021

ICYMI: 23 states file comment opposing DOL's proposed rule that "promotes a social activist agenda over the interests of employees, retirees, and other retirement fund beneficiaries."

You can read the full comment letter here.  For additional background on the proposed rule, go here.  An excerpt from the letter:

It is our position that social and political issues should not be considered by fiduciaries in employee retirement savings investment decisions. We are not opposed to any person or entity considering ESG or other social factors when investing their own money; individuals and companies may promote social causes through their investments to the extent they desire. But we are opposed to investment managers and employers being encouraged or mandated to consider ESG factors and protected from legal action when they do. Adopting this Proposed Rule and allowing employers and investment managers to consider ESG factors makes what should be a financial decision into a political one....

Under the Proposed Rule, plan fiduciaries will more often choose ESG investments, employers can serve their political agendas, and investment managers are protected from adverse consequences of their social investment decisions. Indeed, the government may also exert pressure on plan sponsors who do not offer ESG defaults as a way of driving capital to achieve desired social outcomes. But it is the employees and beneficiaries—whose retirement savings are affected—who will suffer. The Proposed Rule encourages fiduciaries to favor social causes to the potential detriment of employees’ retirement savings. Moreover, retirement plans that consider ESG factors will incur higher investment costs. As a result, less of each employee’s retirement savings is available for investment and the return may be much less. A fiduciary cannot sacrifice investment returns or assume greater investment risks as a means of promoting collateral social justice policy goals....

The consensus background on sub-regulatory guidance in this area across the political spectrum highlights one critical point of agreement: the longstanding view that the fiduciary duty under ERISA requires an objective assessment of an investment’s economic risk and return when evaluating whether it is appropriate for a plan. Fiduciaries remain bound by statute to manage investments with an ‘‘eye single’’ to maximizing the funds available to pay retirement benefits. Yet, the Proposed Rule promotes ERISA fiduciaries to subordinate those interests in favor of other objectives. The Proposed Rule does not protect employee retirement savings but increases the risk of loss and costs by encouraging investments that are often misleading, administratively costly, and historically untested. While it is never appropriate to encourage plan sponsors to take such risks, it is particularly indefensible in a time when Americans struggle with inflation and financial uncertainties. The Proposed Rule risks the economic security of retirees to further a political agenda. The Department should not adopt the Proposed Rule.

December 24, 2021 in Stefan J. Padfield | Permalink | Comments (1)

Sunday, December 19, 2021

Lee on Prosocial Fraud

Julia Y. Lee has published Prosocial Fraud in 2 Seton Hall L. Rev. 199.  Here is an excerpt:

This Article identifies the concept of prosocial fraud--that is, fraud motivated by the desire to help others. The current incentive-based legal framework focuses on deterring rational bad actors who must be constrained from acting on their worst impulses. This overlooks a less sinister, but more endemic species of fraud that is not driven by greed or the desire to take advantage of others. Prosocial fraud is induced by prosocial motives and propagated through cooperative norms. This Article argues that prosocial fraud cannot be effectively deterred through increased sanctions because its moral ambiguity lends itself to self-deception and motivated blindness. The presence of a beneficiary other than the self allows individuals to supplant one source of morality (honesty), with another (benevolence), providing a powerful source of rationalization that weakens the deterrent impact of legal sanctions.

After examining the types of motives that typify prosocial fraud, this Article identifies structural and situational factors--definitional ambiguity, incrementalism, and third-party complicity--that increase its prevalence. Given the cognitive and psychological biases at play, this Article suggests that any efforts to curb prosocially motivated fraud focus less on adjusting sanctions and more on exploring alternative mechanisms of ex ante, private enforcement....

Empathy and altruism may ... play a role in dishonest helping behavior motivated by the desire to restore equity. Whereas negative inequity produces feelings of envy, positive inequity induces feelings of guilt, which motivates individuals to dishonestly help others. Particularly where the risks of being caught are low, individuals are more prone to act on emotions such as envy, guilt, and empathy. Moreover, when individuals act dishonestly to restore equity, they subjectively “discount the immorality of their actions.”

December 19, 2021 in Stefan J. Padfield | Permalink | Comments (0)

Wednesday, December 8, 2021

Three SSRN Postings: "Empty Voting", "Stakeholder Syndrome", and "Surveillance State Capitalism"

Jill E. Fisch, Mutual Fund Stewardship and the Empty Voting Problemhttps://papers.ssrn.com/sol3/papers.cfm?abstract_id=3939112 ):

The exercise of institutional voting power is by fund managers or governance teams, people who have “little or no economic interest in the shares that they vote,” This “empty voting” has the potential to undermine the legitimacy of the shareholder franchise. It is of particular concern when the assets committed to a broad-based index fund are voted to support initiatives that have the potential to sacrifice economic value in favor of social or societal objectives about which the shareholders invested in that index fund may not agree.

Matteo Gatti & Chrystin D. Ondersma, Stakeholder Syndrome: Does Stakeholderism Derail Effective Protections for Weaker Constituencies? ( https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3793732 ):

Because available evidence suggests that corporations will seek to undermine any proposal that meaningfully shifts power and resources to workers, it is unlikely stakeholderism could provide equivalent protections that can actually improve workers’ position; assuming it could, its implementation would be no more feasible than direct regulation. Neither do we believe that stakeholderism can provide a fertile landscape for direct regulation, because corporations are likely to use stakeholderism as a pretext to wield greater political power and to shape the debate in their own favor, thus interfering with direct regulation. Ultimately, given the risks of allowing managers and directors wield stakeholderism in their own interests, political capital should be spent on achieving direct regulation rather than on a stakeholderist corporate governance reform.

Lauren Yu-Hsin Lin & Curtis J. Milhaupt, China's Corporate Social Credit System and the Dawn of Surveillance State Capitalism ( https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3933134 ):

Chinese state capitalism is transitioning toward a panoptic, technology-assisted variant that we call “surveillance state capitalism.” The mechanism driving the emergence of this variant is China’s corporate social credit system (CSCS) .... The CSCS is linked to a system of corporate rewards and punishments, representing a futuristic strategy of automated screening to determine which enterprises are allowed market access and benefits.... A key finding is that while the CSCS is a facially neutral means of measuring legal compliance, politically connected firms (regardless of their status as state-owned or private enterprises, or the extent of state equity ownership) receive higher overall scores .... The channel for this result is a “social responsibility” category that valorizes awards from the government and contributions to Chinese Communist Party (CCP)-sanctioned causes.

December 8, 2021 in Stefan J. Padfield | Permalink | Comments (0)

Tuesday, December 7, 2021

Some Highlights From the Federalist Society's 2021 National Lawyers Convention

Fair to say, corporate governance was very much a theme:

The full convention schedule can be found here: https://fedsoc.org/conferences/2021-national-lawyers-convention .

December 7, 2021 in Stefan J. Padfield | Permalink | Comments (0)

Friday, December 3, 2021

Video Debate: "Is ‘Woke Capitalism’ a Threat to Democracy?"

View the debate here: https://youtu.be/uhg7P1DHxVk .

From the video description: The MIT Sloan Adam Smith Society chapter hosted a virtual debate between Roivant founder and chairman Vivek Ramaswamy and Chicago Booth Professor Luigi Zingales on the topic: “Is ‘Woke Capitalism’ a Threat to Democracy?”

I have not yet watched the video, but I have heard both speakers before and expect the debate to be of interest to our readers.  Here's a bit more from the description:

In 1970, Milton Friedman urged business leaders to prioritize shareholder value when making business decisions. Businesses have turned away from this model of late, and are instead actively pursuing social and political goals. Is it good for society when businesses promote political causes and take social stances? Is it good for business? What are the costs when corporate managers focus exclusively on maximizing profit?

December 3, 2021 in Stefan J. Padfield | Permalink | Comments (3)

Sunday, November 28, 2021

Chaffee on "Index Funds and ESG Hypocrisy"

Eric Chaffee has published Index Funds and ESG Hypocrisy in 71 Case W. Res. L. Rev. 1295.  Here is an excerpt from Part I of that essay:

[S]tatements from BlackRock, State Street, and Vanguard can be boiled down into a contradictory phrase that sounds like it belongs in George Orwell's novel, 1984: “Diversity is conformity.” To unpack this idea a bit more, BlackRock, State Street, and Vanguard are selling index fund shares with the promise of diversification of the portfolios that underlie those funds to stabilize returns while mitigating risk, yet at the same time, they are fueling conformity through their voting power related to those funds.

This Essay takes the position that the importation of ESG voting into index funds by the dominate players in the index fund industry is unacceptable because it creates an unresolvable conflict of interests, is misleading to those purchasing shares in mutual funds, and is undemocratic. This Essay argues that these issues could be resolved by the SEC promulgating rules creating a fund name taxonomy to make it clear to investors the nature of the funds in which they are investing.

This Essay contributes to the existing literature in three main ways. First, this Essay contains an extensive analysis of the problems of pursuing ESG objectives through index funds, which include that it creates an unresolvable conflict of interest, is misleading, and is undemocratic. Second, this Essay proposes a fund name taxonomy for investment funds to resolve the problems with pursuing ESG objectives through index funds, which includes the requirement that the title “index fund” be reserved only for passively managed funds that are designed to track the components of financial markets. Such an approach would fit the underlying purposes of federal securities regulation to mandate disclosure and allow investors to make informed decisions regarding their investments. Third, the analysis and proposal in this Essay is especially important because at the time of this Essay, the United States Securities and Exchange Commission (SEC) is considering whether additional rulemaking is needed relating to section 35(d) of the Investment Company Act of 1940, which mandates honesty in the naming of investment funds.

 

November 28, 2021 in Stefan J. Padfield | Permalink | Comments (0)

Tuesday, November 23, 2021

Dec. 3-4: Teaching Inclusive Capitalism

The following comes to us from Robert Ashford.  For more information, including details about the agenda and registration, go here.

Inter-Collegiate Seminar on Teaching Inclusive Capitalism in Key Undergraduate Courses Throughout the Curriculum

Friday - Saturday, Dec. 3-4, 2021 | 1 - 4 p.m. ET

Purpose and Background

This seminar will share progress made and explore next steps in the continuing effort to teach widely in colleges and universities the following principle of fuller employment and its many important implications:

A broader distribution of capital acquisition with the future earnings of capital creates the rational expectation of a broader distribution of discretionary capital income in future years (to people with a higher propensity to consume) and therefore greater incentive to employ more labor and capital in earlier years.

A growing number of professors of economics have characterized this principle of fuller employment as “the most important contribution to economic theory in many decades: an idea with many practical, beneficial policy implications for both current and future generations” [Letter from Professors of Economics in Support of Inclusive Capitalism.]

A key motivation for this new form of Inclusive Capitalism is the need to fundamentally address the current and growing trends in income inequality and environmental destruction.

This two-day virtual event will bring together professors of economics and other disciplines from Assumption University, Eckerd College, Rutgers University, University of South Florida, Syracuse University, and Virginia Tech to discuss the creation of a teaching and research agenda centered around Inclusive Capitalism.

November 23, 2021 in Stefan J. Padfield | Permalink | Comments (0)

Sunday, November 7, 2021

Christina Parajon Skinner on Central Bank Activism

Christina Parajon Skinner has published "Central Bank Activism" in the Duke Law Journal.  Below is the abstract.  You can find a draft of the paper on SSRN here.

Today, the Federal Reserve is at a critical juncture in its evolution. Unlike any prior period in U.S. history, the Fed now faces increasing demands to expand its policy objectives to tackle a wide range of social and political problems--including climate change, inequality, and foreign and small business aid.

This Article develops a framework for recognizing and identifying the problems with “central bank activism.” It refers to central bank activism as situations in which immediate public policy problems push the Fed to aggrandize its power beyond the text and purpose of its legal mandates, which Congress has established. To illustrate, this Article provides in-depth exploration of both contemporary and historic episodes of central bank activism, thus clarifying the indicia of central bank activism and drawing out the lessons that past episodes should teach us going forward.

This Article urges that, while activism may be expedient in the near term, there are long-term social costs. Activism undermines the legitimacy of central bank authority, erodes central bank political independence, and ultimately renders a weaker central bank. In the end, this Article issues an urgent call to resist the allure of activism. And it places front and center the need for vibrant public discourse on the role of a central bank in American political and economic life today.

Christina Parajon Skinner, Central Bank Activism, 71 Duke L.J. 247, 247–48 (2021).

November 7, 2021 in Stefan J. Padfield | Permalink | Comments (0)