New Research on Corporate Purpose, Stakeholderism and ESG

In Collaboration with ECGI and Bar Ilan University

New Research on Corporate Purpose, Stakeholderism and ESG

  • 07 - 08 June 2022
  • Tel Aviv, Israel

Watch the event here: https://www.youtube.com/playlist?list=PL0ysOguv9W0KFMiU8ruroMTZY6_zyDnCO

By invitation only

New Research on Corporate Purpose, Stakeholderism and ESG

ECGI and Bar Ilan University

 

Tuesday, 7 June 2022

09:30 – 16:20 IDT | 08:30 – 15:20 CEST

Wednesday, 8 June 2022

09:40 – 16:45 IDT | 08:40 – 15:45 CEST

Location

Bar-Ilan University, Weisfeld Hall, Feldman building (301)

Supported by:

        

 

Information

Address:
Bar-Ilan University, Tel Aviv, Israel
Contact:
Yael Carmi
The Raymond Ackerman Family Chair in Israeli Corporate Governance Bar-Ilan University

Tuesday, 7 June 2022 09:30 IDT (08:30 CEST)

09:30
- 11:50

Session 1

09:30

Coffee

09:45

Greetings

09:55

What is Wrong with Corporate Law? The Purpose of the Law and the Law of Purpose

Speakers:
Discussant:
Back to full programme

What is Wrong with Corporate Law? The Purpose of the Law and the Law of Purpose

Time:
09:55h

Paper author: Colin Mayer

This article argues that corporate purpose should be put at the heart of corporate law. It addresses the objections to this that there is little that corporate law prevents firms from doing in determining their corporate purposes, and, even if they were given greater latitude, companies would do little more than they do at present in formulating their purposes. The claim of the article is twofold. First that the critics of the law of corporate purpose have failed to recognize the role that purpose can play in addressing the primary defect of the current system – namely the divergence of the private interests of the corporation from the public interests of society and the natural world. That derives from the disconnect that currently exists between the private incentives of the pursuit of profit from the public interest in human and natural world flourishing and prosperity. The second claim is that not only can the law address that defect through requiring the adoption of appropriately formulated corporate purposes, but it also provides an essential means of commitment to the delivery of long-term prosperity. At present, the law does not permit of commitment to objectives beyond the pursuit of the success of the company for the benefit of its members and it thereby fails to protect companies which seek to create long-term prosperity through committing to the interests of others. The law can and should both ensure the alignment of the corporation’s incentives with individual, societal, and planetary interests and promote the resolution of their problems by enabling one of the most powerful institutional entities that we have created to date, namely the firm, to commit credibly to their resolution. Its failings on both counts have been the source of intensifying crises. We need to acknowledge this and recognize the potential to provide a remedy for the cause of them – namely the laws that have created the corporation.

Speakers

Discussants

Conference Documents

Back to full programme

Systemic Stewardship with Tradeoffs

Time:
10:45h

Paper authors: Marcel Kahan and Edward Rock

Many have started to look to the corporate sector to control carbon emissions, mitigate climate change, and redress other problems. But any serious effort to control carbon emissions (or other problems) will have winners and losers: companies that will benefit from reduction; and companies that will bear the brunt of mitigation efforts. In particular, concentrated carbon emitters such as oil exploration and production companies are likely to suffer. If so, who will force the carbon emitters to cut their carbon output? Who will be the agents of change in the corporate sector?
In recent years, the proponents of a corporate focused strategy have started to look to “universal owners” – the asset managers and owners that hold a significant swath of many public companies. Some commentators have argued that universal owners should use their influence in portfolio companies to maximize the value of the overall portfolio, rather than the value of any particular company. For some, this means that universal owners should adopt “systemic stewardship” that would push for market wide initiatives to reduce environmental externalities and control systemic risk (e.g., standardized climate risk disclosure). According to others, universal owners should pursue a more ambitious agenda and take affirmative steps to mitigate the risks of climate change to the long-term value of the portfolio by, for example, pushing carbon emitters to cut output, whether or not that promotes individual firm value.
But shareholders, even universal owners, do not manage companies. Rather, the business and affairs of a corporation are managed by full time senior management teams under the general oversight of a board of directors, within a framework created by corporate law. In this article, we analyze the extent to which universal owners can and should be expected to sacrifice single firm value even when doing so increases the value of the overall portfolio. We are quite pessimistic about the potential of systemic stewardship that entails substantial tradeoffs among portfolio companies.

This is for three principal reasons. First, universal owners would have to take into account the possibility that inducing some firms to reduce environmental externalities and mitigate risk will generate a competitive response that will eliminate the benefits from these actions for their other portfolio companies. If that were to happen, universal owners would be stuck with the losses without receiving any corresponding gains. Second, corporate law, as it currently stands, has a strong “single firm focus” (“SFF”) that stands in sharp contrast to the potential “multi-firm focus” (“MFF”) of large portfolio investors. If universal owners were to work individually or together to protect their overall portfolios from systemic risk, it would clash with corporate law in a fundamental way that could create significant risks of liability. Third, universal owners typically manage a wide variety of different portfolios for different clients each of whom is owed fiduciary duties. A “tradeoff” strategy that would benefit some portfolios at the expense of other portfolios would conflict with these fiduciary duties as well as with the core multi-client multi-portfolio business model. As a result, we expect that universal owners will not act in concert and will not openly pursue a MFF strategy. Rather, they will act unilaterally and under cloak of promoting single firm value. But because any serious effort to mitigate climate change will involve tradeoffs, we do not expect universal owners to be effective in controlling carbon emissions.

 

Speakers

Discussants

Conference Documents

11:35

Coffee

11:50
- 14:40

Session 2

Back to full programme

Stakeholder Capitalism at the Time of COVID

Time:
11:50h

Paper authors: Lucian A. Bebchuk, Kobi Kastiel, Roberto Tallarita

This Article investigates the time of COVID-19 to test the claims of supporters of stakeholder capitalism (“stakeholderism”). Such supporters advocate encouraging and relying on corporate leaders to use their discretion to serve stakeholders such as employees, customers, suppliers, local communities, and the environment. The pandemic followed and was accompanied by peak support for stakeholderism and broad expressions of commitment to it from corporate leaders. Nonetheless, and even though the pandemic heightened risks to stakeholders, we document that corporate leaders negotiating deal terms failed to look after stakeholder interests. Some supporters of stakeholder capitalism argue that corporate leaders should and do give weight to stakeholder interests because delivering value to stakeholders is a major element of corporate purpose. Other supporters maintain that corporate leaders considering a sale of the company should and do seek to benefit stakeholders, because fulfilling implicit promises to do so serves shareholders’ ex ante interest in inducing stakeholder cooperation, arguably essential to corporate success. We find that the evidence is inconsistent with the claims of both views. We conduct a detailed examination of all the $1B+ acquisitions of public companies that were announced during the COVID pandemic, totaling more than 100 acquisitions with an aggregate consideration exceeding $700 billion. We find that deal terms provided large gains for the shareholders of target companies, as well as substantial private benefits for corporate leaders. However, although many transactions were viewed at the time of the deal as posing significant post-deal risks for employees, corporate leaders largely did not obtain any employee protections, including payments to employees who would be laid off post-deal. Similarly, we find that corporate leaders failed to negotiate for protections for customers, suppliers, communities, the environment, and other stakeholders. After conducting various tests to examine whether this pattern could have been driven by other factors, we conclude that it is likely to have been driven by corporate leaders’ incentives to benefit stakeholders only to the extent needed to serve shareholders’ interests. While we focus on decisions in the acquisition context, we explain why our findings also have implications for ongoing-concern decisions, and we discuss and respond to potential objections to our conclusions. Overall, our findings cast substantial doubt on the claims made by supporters of stakeholder capitalism. Those who seriously care about corporations’ external effects on shareholders should not harbor illusory hopes that corporate leaders would protect stakeholder interests on their own. Instead, they should concentrate their efforts on securing governmental interventions (such as carbon taxes and employee protection policies) that could truly protect stakeholders.

Speakers

Discussants

Conference Documents

Back to full programme

Sustainability or Performance? Rating and Fund Managers’ Incentives

Time:
12:40h

Paper authors: Nickolay Gantchev, Mariassunta Giannetti, and Rachel Li

We explore how mutual funds react when the tradeoff between sustainability and performance becomes salient. Following the introduction of Morningstar’s sustainability ratings (the “globe” ratings), mutual funds increased their holdings of sustainable stocks in order to improve their globe ratings. This trading behavior created buying pressure, decreasing the returns of stocks with high sustainability ratings. Consequently, a tradeoff between sustainability and performance emerged. Since performance appears to be more important in attracting flows than sustainability, in the new equilibrium, funds do not trade to improve their globe ratings and the globe ratings do not affect investor flows.

Speakers

Discussants

Conference Documents

13:30

Lunch

14:40
- 16:20

Session 3

Back to full programme

Paying Passive Managers to Engage? Does it Improve ESG?

Time:
14:40h

Paper:  Marco Becht, Julian Franks, Hideaki Miyajima  and Kazunori Suzuki

This paper examines active ownership in Japan by an equity ownership service, Governance for Owners Japan (GOJ). GOJ engages with portfolio companies on behalf of Japanese andinternational institutional investors. The engagements are exclusively private and are not observable to the public. We use the stated objectives of the interventions to measure the incidence of success, and the stock market response to the public announcement of engagement outcomes. We fnd a high rate of success and average cumulative abnormal returns (CARs) of about 2.6 percent between -5 and +5 of an event date in response to outcome announcements. Since there is more than one outcome per engagement, the average CARs per engagement is 6.5 percent. Target companies were more likely to adopt recommendations proposed in GOJ’s private engagements than in a sample of public activist engagements over a similar time period.

Speakers

Discussants

Conference Documents

Back to full programme

Socially Responsible Divestment

Time:
15:30h

Paper authors: Alex Edmans, Doron Levit, Jan Schneemeier

Blanket exclusion of “brown” stocks is seen as the best way to reduce their negative externalities, by starving them of capital and hindering their expansion. We show that a more effective strategy may be tilting -- holding a brown stock if it is best-in-class, i.e. has taken a corrective action. While such holdings allow the firm to expand, they also encourage the corrective action. We derive conditions under which tilting dominates exclusion for externality reduction. If the corrective action is unobservable to the market, the investor is unable to tilt even if she has perfect information -- doing so would lead her to hold a company that has taken the action but the market thinks it has not, leading to accusations of greenwashing. Even if managers can costlessly disclose a signal of their actions, they will only do so under certain circumstances, and even a manager intending to take the action will only disclose a noisy signal.

Speakers

Discussants

Conference Documents

Wednesday, 8 June 2022 09:40 IDT (08:40 CEST)

09:40
- 11:55

Session 1

09:40

Coffee

10:00

The False Hope of Stewardship in the Context of Controlling Shareholders: Making Sense out of the Global Transplant of a Legal Misfit

Speakers:
Discussant:
Back to full programme

The False Hope of Stewardship in the Context of Controlling Shareholders: Making Sense out of the Global Transplant of a Legal Misfit

Time:
10:00h

Paper author: Dan W. Puchniak

In 2010, the United Kingdom issued the world’s first stewardship code. Since then, stewardship codes have been issued in many of the world’s leading economies and now exist in 20 jurisdictions on six continents, with more jurisdictions considering adopting them. In the UK, stewardship codes were promised to transform rationally passive institutional investors into actively engaged shareholders to prevent another Global Financial Crisis. More recently, the new 2020 UK Code has been promoted as a mechanism to save the planet by incentivizing institutional investors to pressure listed companies to focus on ESG. There is a vigorous debate and developed literature on whether the UK Code will achieve these goals. However, what has been lost in this debate is that outside of the UK/US it may not matter nearly as much if stewardship succeeds in changing the behavior of institutional investors. This is because, with the notable exception of the UK/US, institutional investors are collectively minority shareholders in most listed companies in almost every jurisdiction in the world. Moreover, in almost every jurisdiction, with the notable exception of the UK/US, most listed companies already have a rationally active – non-institutional – controlling shareholder as their “steward”. Why then have jurisdictions around the world adopted UK-style stewardship codes which are designed based on the assumption that institutional investors collectively control most listed companies? This Article answers this question by undertaking the first in-depth global comparative analysis of the curious transplant of UK-style stewardship codes into jurisdictions dominated by controlling shareholders and examines the role that stewardship plays in these jurisdictions. It does this by drawing on a unique collection of recent in-depth case studies on stewardship in 22 jurisdictions by leading corporate law experts, hand-collected data analyzing the content of every stewardship code that has ever been issued, and fresh hand-compiled data on shareholder ownership structures in listed companies around the world. It reveals that stewardship has been coopted by governments and institutional investors to serve their own diverse purposes – a troubling trend which will likely be exacerbated post-Covid-19, when an authentic focus on an inclusive society and the environment will be more critical than ever.

Speakers

Discussants

Conference Documents

Back to full programme

Corporate Purpose in Public and Private Firms

Time:
10:50h

Paper author: Claudine Gartenberg

Analyzing data from approximately 1.5 million employees across 1,108 established public and private US companies, we find that the strength of employee beliefs related to purpose is weaker in public companies. Among public companies, those beliefs are stronger for firms with more committed owners. These patterns are most pronounced within the salaried middle and hourly ranks, rather than senior executives. Differences across firms can be attributed, in part, to differences in leadership and incentive characteristics. Our findings are consistent with higher owner commitment, and the corresponding policies that arise alongside this higher commitment, enabling a stronger sense of purpose inside organizations.

Speakers

Discussants

Conference Documents

11:40

Coffee

11:55
- 14:45

Session 2

Back to full programme

Are All ESG Funds Created Equal? Only Some Funds Are Dedicated

Time:
11:55h

Paper authors: Michelle Lowry, Pingle Wang, Kelsey Wei

Although flows into ESG funds have risen dramatically, it remains unclear whether these funds are truly committed to sustainable investments and how much their investments matter. We shed light on this debate by examining the incentives of fund managers. We find that conditional on similarly large ESG investments, ESG funds vary in their incentives to engage with portfolio firms. ESG funds with higher incentives to engage – committed ESG funds – hold their ESG investments longer, pay more attention to firms’ ESG risk exposure and implement less negative screening. Strikingly, only investments by committed ESG funds contribute to real ESGimprovements, and these funds have outperformed other ESG funds on their ESG holdings. Our paper highlights the importance of incentives when assessing the real impacts of sustainable investments and calls for greater investor awareness of a hidden form of greenwashing

Speakers

Discussants

Conference Documents

Back to full programme

Mutual Funds’ Strategic Voting on Environmental and Social Issues

Time:
12:45h

Paper authors: Roni Michaely, Guillem Ordonez-Calafi, Silvina Rubio

Environmental and social (ES) funds in non-ES families must balance incorporating the stakeholder’s interests they advertise and maximizing shareholder value favored by their families. We find that these funds support ES proposals that are far from the majority threshold, while opposing them when their vote is more likely to be pivotal, consistent with greenwashing. This strategic voting is not exhibited in governance proposals, by ES funds in ES families or by non-ES funds in non-ES families, reinforcing the notion of strategic voting to accommodate family preferences while appearing to meet the fiduciaries responsibilities of the funds.

Speakers

Discussants

Conference Documents

13:35

Lunch

14:45
- 16:45

Session 3

14:45

Which Firms Require More Governance? Evidence From Mutual Funds’ Revealed Preferences

Speakers:
Discussant:
Back to full programme

Which Firms Require More Governance? Evidence From Mutual Funds’ Revealed Preferences

Time:
14:45h

Paper author: Irene Yi

This paper develops measures of mutual funds’ governance preferences to study whether funds prefer that certain companies strengthen shareholder rights relative to others. To this end, I examine the differences in fund votes across their portfolio firms’ proposals on a given issue and estimate funds’ preference rankings of firms by implementing the Metropolis-Hastings Markov chain Monte Carlo algorithm. Greater enthusiasm among funds does not always translate into higher vote support. Funds prefer firms with more agency issues to strengthen shareholder rights. Contrary to the view that the net benefits of takeover defenses are higher for young and small firms, funds are not enthusiastic about large and mature firms increasing shareholder rights. This paper provides novel evidence on fund preferences in the cross-section of companies and uncovers that funds demand more governance from some companies rather than voting in a “one-size-fits-all” manner.

Speakers

Discussants

Conference Documents

Back to full programme

Identifying Corporate Governance Shocks

Time:
15:35h

Paper authors: Byung Hyun Ahn, Panos N. Patatoukas, Steven Davidoff Solomon

An emerging line of research finds that firms incorporated in Universal Demand (UD) law adopting states experience an increase in the use of entrenchment provisions. Our investigation shows that the empirical link between UD laws and management entrenchment is influenced by a small number of firms adopting antitakeover provisions after substantial long-term drops in value. Using hand-collected data, we provide case-bycase evidence that the vast majority of changes in the use entrenchment provisions are in fact announced before the enactment of UD laws and cannot be causally attributed to UD laws. Our granular analysis has broad implications for law and finance research.

Speakers

Discussants

Conference Documents

16:25

Farewell Greetings

Speakers

Presentations

Back to all presentations

What is Wrong with Corporate Law? The Purpose of the Law and the Law of Purpose

Time:
09:55h

Paper author: Colin Mayer

This article argues that corporate purpose should be put at the heart of corporate law. It addresses the objections to this that there is little that corporate law prevents firms from doing in determining their corporate purposes, and, even if they were given greater latitude, companies would do little more than they do at present in formulating their purposes. The claim of the article is twofold. First that the critics of the law of corporate purpose have failed to recognize the role that purpose can play in addressing the primary defect of the current system – namely the divergence of the private interests of the corporation from the public interests of society and the natural world. That derives from the disconnect that currently exists between the private incentives of the pursuit of profit from the public interest in human and natural world flourishing and prosperity. The second claim is that not only can the law address that defect through requiring the adoption of appropriately formulated corporate purposes, but it also provides an essential means of commitment to the delivery of long-term prosperity. At present, the law does not permit of commitment to objectives beyond the pursuit of the success of the company for the benefit of its members and it thereby fails to protect companies which seek to create long-term prosperity through committing to the interests of others. The law can and should both ensure the alignment of the corporation’s incentives with individual, societal, and planetary interests and promote the resolution of their problems by enabling one of the most powerful institutional entities that we have created to date, namely the firm, to commit credibly to their resolution. Its failings on both counts have been the source of intensifying crises. We need to acknowledge this and recognize the potential to provide a remedy for the cause of them – namely the laws that have created the corporation.

Speakers

Discussants

Conference Documents

Back to all presentations

Systemic Stewardship with Tradeoffs

Time:
10:45h

Paper authors: Marcel Kahan and Edward Rock

Many have started to look to the corporate sector to control carbon emissions, mitigate climate change, and redress other problems. But any serious effort to control carbon emissions (or other problems) will have winners and losers: companies that will benefit from reduction; and companies that will bear the brunt of mitigation efforts. In particular, concentrated carbon emitters such as oil exploration and production companies are likely to suffer. If so, who will force the carbon emitters to cut their carbon output? Who will be the agents of change in the corporate sector?
In recent years, the proponents of a corporate focused strategy have started to look to “universal owners” – the asset managers and owners that hold a significant swath of many public companies. Some commentators have argued that universal owners should use their influence in portfolio companies to maximize the value of the overall portfolio, rather than the value of any particular company. For some, this means that universal owners should adopt “systemic stewardship” that would push for market wide initiatives to reduce environmental externalities and control systemic risk (e.g., standardized climate risk disclosure). According to others, universal owners should pursue a more ambitious agenda and take affirmative steps to mitigate the risks of climate change to the long-term value of the portfolio by, for example, pushing carbon emitters to cut output, whether or not that promotes individual firm value.
But shareholders, even universal owners, do not manage companies. Rather, the business and affairs of a corporation are managed by full time senior management teams under the general oversight of a board of directors, within a framework created by corporate law. In this article, we analyze the extent to which universal owners can and should be expected to sacrifice single firm value even when doing so increases the value of the overall portfolio. We are quite pessimistic about the potential of systemic stewardship that entails substantial tradeoffs among portfolio companies.

This is for three principal reasons. First, universal owners would have to take into account the possibility that inducing some firms to reduce environmental externalities and mitigate risk will generate a competitive response that will eliminate the benefits from these actions for their other portfolio companies. If that were to happen, universal owners would be stuck with the losses without receiving any corresponding gains. Second, corporate law, as it currently stands, has a strong “single firm focus” (“SFF”) that stands in sharp contrast to the potential “multi-firm focus” (“MFF”) of large portfolio investors. If universal owners were to work individually or together to protect their overall portfolios from systemic risk, it would clash with corporate law in a fundamental way that could create significant risks of liability. Third, universal owners typically manage a wide variety of different portfolios for different clients each of whom is owed fiduciary duties. A “tradeoff” strategy that would benefit some portfolios at the expense of other portfolios would conflict with these fiduciary duties as well as with the core multi-client multi-portfolio business model. As a result, we expect that universal owners will not act in concert and will not openly pursue a MFF strategy. Rather, they will act unilaterally and under cloak of promoting single firm value. But because any serious effort to mitigate climate change will involve tradeoffs, we do not expect universal owners to be effective in controlling carbon emissions.

 

Speakers

Discussants

Conference Documents

Back to all presentations

Stakeholder Capitalism at the Time of COVID

Time:
11:50h

Paper authors: Lucian A. Bebchuk, Kobi Kastiel, Roberto Tallarita

This Article investigates the time of COVID-19 to test the claims of supporters of stakeholder capitalism (“stakeholderism”). Such supporters advocate encouraging and relying on corporate leaders to use their discretion to serve stakeholders such as employees, customers, suppliers, local communities, and the environment. The pandemic followed and was accompanied by peak support for stakeholderism and broad expressions of commitment to it from corporate leaders. Nonetheless, and even though the pandemic heightened risks to stakeholders, we document that corporate leaders negotiating deal terms failed to look after stakeholder interests. Some supporters of stakeholder capitalism argue that corporate leaders should and do give weight to stakeholder interests because delivering value to stakeholders is a major element of corporate purpose. Other supporters maintain that corporate leaders considering a sale of the company should and do seek to benefit stakeholders, because fulfilling implicit promises to do so serves shareholders’ ex ante interest in inducing stakeholder cooperation, arguably essential to corporate success. We find that the evidence is inconsistent with the claims of both views. We conduct a detailed examination of all the $1B+ acquisitions of public companies that were announced during the COVID pandemic, totaling more than 100 acquisitions with an aggregate consideration exceeding $700 billion. We find that deal terms provided large gains for the shareholders of target companies, as well as substantial private benefits for corporate leaders. However, although many transactions were viewed at the time of the deal as posing significant post-deal risks for employees, corporate leaders largely did not obtain any employee protections, including payments to employees who would be laid off post-deal. Similarly, we find that corporate leaders failed to negotiate for protections for customers, suppliers, communities, the environment, and other stakeholders. After conducting various tests to examine whether this pattern could have been driven by other factors, we conclude that it is likely to have been driven by corporate leaders’ incentives to benefit stakeholders only to the extent needed to serve shareholders’ interests. While we focus on decisions in the acquisition context, we explain why our findings also have implications for ongoing-concern decisions, and we discuss and respond to potential objections to our conclusions. Overall, our findings cast substantial doubt on the claims made by supporters of stakeholder capitalism. Those who seriously care about corporations’ external effects on shareholders should not harbor illusory hopes that corporate leaders would protect stakeholder interests on their own. Instead, they should concentrate their efforts on securing governmental interventions (such as carbon taxes and employee protection policies) that could truly protect stakeholders.

Speakers

Discussants

Conference Documents

Back to all presentations

Sustainability or Performance? Rating and Fund Managers’ Incentives

Time:
12:40h

Paper authors: Nickolay Gantchev, Mariassunta Giannetti, and Rachel Li

We explore how mutual funds react when the tradeoff between sustainability and performance becomes salient. Following the introduction of Morningstar’s sustainability ratings (the “globe” ratings), mutual funds increased their holdings of sustainable stocks in order to improve their globe ratings. This trading behavior created buying pressure, decreasing the returns of stocks with high sustainability ratings. Consequently, a tradeoff between sustainability and performance emerged. Since performance appears to be more important in attracting flows than sustainability, in the new equilibrium, funds do not trade to improve their globe ratings and the globe ratings do not affect investor flows.

Speakers

Discussants

Conference Documents