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

Innovation in Stock Exchanges: Driving ESG Disclosure and Performance

In their recent article these authors discuss how stock exchanges are in a unique position to promote ESG transparency and leverage their institutional capacity to build more sustainable capital markets. To facilitate the quick uptake of material ESG disclosure and raise the quality and comparability of the data, the Athens Stock Exchange has created ESG guidelines for listed companies that will be published in the summer of 2019.

One important feature of the guidelines is their degree of sectoral specificity and emphasis on materiality. The guidelines and supporting metrics they propose are based on reporting practices endorsed by international sustainability standards like the SASB’s industry standards. This materiality-oriented approach will help issuers focus on the sustainability value drivers inherent in their business, and so ensure that corporate ESG disclosures satisfy the demand of investors for comparable quantitative and accounting metrics that help companies communicate their commitment to long-term value creation.

Authored by Tania Bizoumi, Socrates Lazaridis and Natassa Stamou

Social Capital, Trust, and Corporate Performance: How CSR Helped Companies During the Financial Crisis (and Why It Can Keep Helping Them)

The authors summarize the findings of their study, published recently in the Journal of Finance, that shows that CSR investments can help companies when they perhaps need it most—that is, during sharp downturns when overall trust in companies and markets declines.

Companies with high-CSR rankings experienced stock returns that were five to seven percentage points higher than their low-CSR counterparts during the 2008-2009 financial crisis, and even larger excess returns during the Enron crisis of 2001-2003.  High-CSR companies during the crisis also reported better operating performance, higher growth, higher employee productivity, and greater access to debt markets—while continuing to generate higher shareholder returns as late as the end of 2013. Many of these operating improvements continued well into the post-crisis period, though at more modest levels.

As the authors view their findings, the “social capital” built up by corporate CSR programs complements effective financial capital management in increasing shareholder wealth mainly by limiting companies’ downside risk.  CSR is seen as not only reducing systematic as well as firm-specific risk, but as also providing protection against overall “loss of trust.” The social capital created by CSR programs is said to provide a kind of insurance policy that pays off when investors and the overall economy face a severe crisis of confidence.

Authored by Karl Lins, Henri Servaes, and Ane Tamayo

Four Things No One Will Tell You About ESG Data

As the ESG finance field and the use of ESG data in investment decision-making continue to grow, our authors seek to shed light on several important aspects of ESG measurement and data. This article is intended to provide a useful guide for the rapidly rising number of people entering the field. The authors focus on the following:

    1. The sheer variety, and inconsistency, of the data and measures, and of how companies report them.  Listing more than 20 different ways companies report their employee health and safety data, the authors show how such inconsistencies lead to significantly different results when looking at the same group of companies.
    2. “Benchmarking,” or how data providers define companies’ peer groups, can be crucial in determining the performance ranking of a company. The lack of transparency among data providers about peer group components and observed ranges for ESG metrics creates market-wide inconsistencies and undermines their reliability.
    3. The differences in the imputation methods used by ESG researchers and analysts to deal with vast “data gaps” that span ranges of companies and time periods for different ESG metrics can cause large “disagreements” among the providers, with different gap-filling approaches leading to big discrepancies.
    4. The disagreements among ESG data providers are not only large, but actually increase with the quantity of publicly available information. Citing a recent study showing that companies that provide more ESG disclosure tend to have more variation in their ESG ratings, the authors interpret this finding as clear evidence of the need for “a clearer understanding of what different ESG metrics might tell us and how they might best be institutionalized for assessing corporate performance.”

What can be done to address these problems with ESG data? Companies should “take control of the ESG data narrative” by proactively shaping disclosure instead of being overwhelmed by survey requests. To that end, companies should “customize” their metrics to some extent, while at the same time seeking to self-regulate by reaching agreement with industry peers on a “reasonable baseline” of standardized ESG metrics designed to achieve comparability. Investors are urged to push for more meaningful ESG disclosure by narrowing the demand for ESG data into somewhat more standardized, but still manageable metrics. Stock exchanges should consider issuing—and perhaps even mandating—guidelines for ESG disclosures designed in collaboration with companies, investors, and regulators. And data providers should come to agreement on best practices and become as transparent as possible about their methodologies and the reliability of their data.

Authored by Sakis Kotsantonis and George Serafeim

ESG as a Value-Creation Tool for Active Investors: A Profile of Inherent Group

A growing number of investment managers claim to integrate environmental, social, and governance considerations into their investment strategy and processes, write Tony Davis and Beau Lescott in this Spring issue article, but few have described how they do so in depth. Even fewer reinforce the importance of sustainability within their own firms by becoming a certified “B Corporation.” This article offers a rare, inside look at how one such value-oriented manager uses ESG as a tool for differentiated investment sourcing, underwriting, and corporate engagement with the aim of achieving superior risk-adjusted returns.

One of the main arguments of the article—and a key principle of the firm’s investment approach—is that ESG, as applied to both corporate strategy and operations, is an important factor in determining a company’s cost of capital. The authors present specific examples of their investment process at work, highlighting how active engagement with management on ESG issues can catalyze progress that becomes valued by the capital markets.

Authored by Tony Davis and Beau Lescott

Private Equity 4.0: Using ESG to Create More Value with Less Risk

A growing number of private equity firms have responded to the increased focus on climate change, social issues, and technology disruption, write the authors in this Spring issue article, by broadening their corporate mission to encompass all important stakeholders, as well as their limited partners. And in the process, the management of ESG risks and pursuit of ESG opportunities have become increasingly fundamental to the staying power and value creation potential of PE firms by reducing the risk of their investments, discovering new sources of growth, and increasing their resilience to changes in the political and regulatory environment.

This article tells the story of how the Nordic PE firm, Summa Equity, has turned its ESG approach into a core competence and a source of competitive advantage that has enabled the firm to distinguish itself from its competitors and bring about significant improvements in the financial performance of its portfolio companies while providing benefits for their stakeholders. Using the U.N. Sustainable Development Goals to guide them, the firm invests in companies they perceive to be addressing major environmental or social challenges in an innovative and commercially successful way. This has led to investments in significant growth opportunities in areas such as health care, education, waste management, and acquaculture. And the firm’s returns to its investors have been high enough—and the perceived social benefits large enough—that the firm recently closed its second fund (which was significantly oversubscribed) for 650 million euros, and received the ESG award at the 2019 Private Equity Awards in London.

Authored by Reynir Indahl and Hannah Gunvor Jacobsen