Marcel Kahan (New York University School of Law; European Corporate Governance Institute) & Edward B. Rock (New York University School of Law; European Corporate Governance Institute) have posted Systemic Stewardship with Tradeoffs on SSRN. Here is the abstract:
'Universal owners' – asset managers and owners that hold a significant swath of many public companies — have become important forces in the capital markets. As a group, they hold a significant percentage of the shares of public companies, often with substantial holdings in individual portfolio firms. 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, board diversity targets, etc.). Others push for a more ambitious agenda in which universal owners would take affirmative steps to mitigate risks to the long term value of the portfolio such as the risk of climate change by, for example, pushing carbon emitters to cut output, whether or not that promotes 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, securities regulation and potentially antitrust in a fundamental way that could create significant risks of liability and a significant potential for political backlash. Third, universal owners typically manage a wide variety of different portfolios for different clients each of whom is owed fiduciary duties. A 'trade-off' 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 act unilaterally and under cloak of promoting single firm value, but by doing so will not be very effective in promoting portfolio value.