Month: October 2019

Columbia Law School Symposium on Corporate Governance “Counter-Narratives”: On Corporate Purpose and Shareholder Value(s) III

Session III: Securities Law in Twenty-First Century America:
A Conversation with SEC Commissioner Robert Jackson

Photo: Robert J. Jackson. Jr. Commissioner, U.S. Securities and Exchange Commission

SEC Commissioner Robert Jackson comments on three major issues the Commission has been investigating: (1) the concentration of ownership among American stock exchanges; (2) the extent of common ownership of, and potential for undue influence over, U.S. corporations by large institutional shareholders; and (3) the role of corporate boards in promoting and protecting stakeholder interests as well as shareholder interests.

In the first of the three areas, Jackson argues that the ownership of 12 of the 13 U.S. stock exchanges by just three financial conglomerates suggests a competitiveness problem—one that, despite the significant reductions in trading costs during the last 15 years, should receive further investigation. To the concerns raised by the common and increasingly concentrated ownership of U.S. public companies by institutional shareholders, the Commissioner’s main response is to note that whatever culpability corporate America is forced to assume for our large and growing environmental and social problems must be shared with the largest U.S. institutional shareholders, whose collective resources and influence confer a responsibility to help guide companies when responding to such problems. Finally, on the issue of stakeholder theory and ESG, Jackson insists that asking corporate boards to put the interests of all stakeholders on a par with their shareholders’ when making strategic business decisions would be a mistake. Besides creating a major accountability problem, the adoption of stakeholder theory in place of “the clear, single-minded objective function of increasing long-run shareholder value” would deprive boards of their principal guide “when making the difficult tradeoffs among stakeholders that effective oversight and management of public companies require.”

A Conversation with SEC Commissioner Robert Jackson. Moderated by John Coffee

Sustainability and Capital Markets— Are We There Yet?

In their 2016 report, called “Charting the Future of Capital Markets,” the High Meadows Institute surveyed the mainstream capital market ecosystem by soliciting the views and practices of its key stakeholders around the issue of long-term value creation. In this follow-up report, the authors report that much has changed during the past three years. The role of investors in proactively shaping corporate practices is gaining more attention as ESG issues and responsible investment have become mainstream concerns, as new responsible investment regulations and frameworks have been implemented, and as shifting demographics continue to pressure capital market participants and stakeholders to change their practices.

At the same time, the report notes significant remaining challenges. The lack of a standard industry definition and framework for ESG data and reporting on ESG continues to be a significant impediment, as does the shortage of qualified ESG analysts and infrastructure to support true ESG integration. Surveys also suggest most corporate boards have yet to recognize the full significance of ESG integration or its value to the firm.

Authored by Chris Pinney, Sophie Lawrence, and Stephanie Lau

Columbia Law School Symposium on Corporate Governance “Counter-Narratives”: On Corporate Purpose and Shareholder Value(s) II

Session II: Capitalism and Social Insurance

In what first of five sessions of a recent Columbia Law School symposium devoted to discussion of his new book, Prosperity—and The Purpose of the Corporation, Oxford University’s Colin Mayer begins by calling for a “radical reinterpretation” of the corporate mission. For all but the last 50 or so of its 2,000-year history, the corporation has combined commercial activities with a public purpose. But since Milton Friedman’s famous pronouncement in 1970 that the social goal of the corporation is to maximize its own profits, the gap between the social and private interests served by corporations appears to have grown ever wider, helping fuel the global outbreaks of populist protest and indictments of capitalism that fill today’s media.

In Mayer’s reinterpretation, the boards of all companies will produce and publish statements of corporate purpose that envision some greater social good than maximizing shareholder value. To that end, he urges companies to make continuous investments of their financial capital and other resources in developing other forms of corporate capital—human, social, and natural—and to account for such investments in the same way they now account for their investments in physical capital.

Although the author appears to prefer that such changes be mandatory, enacted through new legislation and enforced by regulators and the courts, his main efforts are directed at persuading the largest institutional owners of corporations—many of whom are already favorably predisposed to ESG—to support these corporate initiatives.

Marty Lipton, after expressing enthusiasm about Mayer’s proposals, suggests that mandating such changes is likely neither feasible nor desirable, but that attempts—like his own New Paradigm—to gain the acceptance and support of large shareholders is the most promising strategy. Ron Gilson, on the other hand, after voicing Lipton’s skepticism about the enforceability of such statements of purpose, issues a number of warnings. One is about the political risks associated with ever more concentrated ownership of public companies in a world where populist distrust of all concentrations of wealth and power is clearly on the rise. But most troubling for the company themselves is the confusion such proposals could create for corporate boards whose responsibility is to limit two temptations facing corporate managements: short-termism, or underinvestment in the corporate future to boost near-term earnings (and presumably stock prices); and what Gilson calls hyperopia, or overinvestment designed to preserve growth (and management’s jobs) at all costs.

With Jeffrey Gordon. Moderated by Merritt Fox

Columbia Law School Symposium on Corporate Governance “Counter-Narratives”: On Corporate Purpose and Shareholder Value(s)

Session I: Corporate Purpose

Ira Millstein
Founding Chair, Ira M. Millstein Center for Global Markets and Corporate Ownership, Columbia Law School
Ira Millstein, Founding Chair, Ira M. Millstein Center for Global Markets and Corporate Ownership,
Columbia Law School

Sponsored by the Ira M. Millstein Center for Global Markets and Corporate Ownership, Columbia Law School

In what Jeff Gordon describes as “the great risk shift,” large U.S. companies have responded during the last 50 years to the forces of globalization and increased pressure from investors by transferring the risks associated with product and worker obsolescence from their shareholders to their employees. Layoffs have generally meant very large, if not complete, losses of “firm-specific investments” by displaced employees. And the problem is especially troubling in the U.S., where the employees of large companies lose not only their jobs and income streams, but also often their connection to their social network, to the entire system of social welfare and insurance that tends to be provided by large companies and the workplace.

In Mayer’s reinterpretation, the boards of all companies will produce and publish statements of corporate purpose that envision some greater social good than maximizing shareholder value. To that end, he urges companies to make continuous investments of their financial capital and other resources in developing other forms of corporate capital—human, social, and natural—and to account for such investments in the same way they now account for their investments in physical capital.

Although the author appears to prefer that such changes be mandatory, enacted through new legislation and enforced by regulators and the courts, his main efforts are directed at persuading the largest institutional owners of corporations—many of whom are already favorably predisposed to ESG—to support these corporate initiatives.

Marty Lipton, after expressing enthusiasm about Mayer’s proposals, suggests that mandating such changes is likely neither feasible nor desirable, but that attempts—like his own New Paradigm—to gain the acceptance and support of large shareholders is the most promising strategy. Ron Gilson, on the other hand, after voicing Lipton’s skepticism about the enforceability of such statements of purpose, issues a number of warnings. One is about the political risks associated with ever more concentrated ownership of public companies in a world where populist distrust of all concentrations of wealth and power is clearly on the rise. But most troubling for the company themselves is the confusion such proposals could create for corporate boards whose responsibility is to limit two temptations facing corporate managements: short-termism, or underinvestment in the corporate future to boost near-term earnings (and presumably stock prices); and what Gilson calls hyperopia, or overinvestment designed to preserve growth (and management’s jobs) at all costs.

With Colin Mayer, Ronald Gilson, and Martin Lipton

How Board Oversight Can Drive Climate and Sustainability Performance

The authors present persuasive evidence in their recent article that board leadership is essential for solving critical sustainability issues like climate change. As fiduciaries to investors and stewards of a company’s performance and success, corporate directors have a critical role to play in providing oversight of material risks to corporate strategy and performance, especially those posed by climate change.

Drawing upon a report by Ceres and KKS Advisors, the authors show that perhaps most important among best practices for companies intent on establishing effective board governance are the creation of formal board mandates for sustainability, the recruitment of directors with sustainability expertise, and the linking of executive pay to sustainability performance. The authors’ study also provides compelling evidence that when companies put in place such governance features, their sustainability performance improves notably. The international banking group BNP Paribas and the electric utility Iberdrola are held up as illustrations of governance systems that are likely to be effective in helping companies respond to climate change.

Authored by Veena Ramani and Bronagh Ward