Peter and Julia Mahoney have a new paper that raises the titular question:
ESG disclosure mandates that go beyond current requirements to disclose known company-specific material risks are unlikely to help, and may harm, the Main Street investors who are the SEC’s primary constituency. ... While the separation of ownership and control between corporate managers and shareholders has generated an enormous body of literature, the “new” separation of ownership and control between institutional investors and their beneficiaries has received less attention.
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Proponents of ESG mandates might argue that the magnitude of the social problems justifies institutional investor activism even at some cost to beneficiaries. This is a corporate social responsibility argument once removed. In other words, it expresses the view that corporate managers owe a duty to act in socially responsible ways and therefore asset managers should pressure their portfolio companies to do so.
The argument against delegating the solutions to social problems to asset managers rather than the political process turns on issues of competence, legitimacy, and conflicts of interest. Shareholder primacy is in large measure a rule about the allocation of responsibility in a market-oriented democratic society. Law and regulation impose constraints on corporate and asset managers, permitting them to act, within the constraints, as faithful agents of their principals while still serving society’s interests as mediated through the political process. Asset managers are not selected on the same basis as political leaders and have neither the skills nor democratic legitimacy to make the sensitive tradeoffs necessary to craft public policy. In practice, managers’ appeals to the interests of other constituencies have often been self-interested.
I think the Mahoneys are right in suggesting that the conflict between asset managers and their customers is an important and understudied one. As I briefly noted in my book Corporate Governance after the Financial Crisis:
If the separation of ownership and control is a problem in search of a solution, encouraging institutional investors to take an active corporate governance role simply moves the problem back a step: it does not solve it.
See also my article, Stephen M. Bainbridge, The Case for Limited Shareholder Voting Rights, 53 UCLA L. Rev. 601, 636 n.89 (2006):
The analysis to this point suggests that the costs of institutional investor activism likely outweigh any benefits such activism may confer with respect to redressing the principal-agent problem. Even if one assumes that the cost-benefit analysis comes out the other way, however, it should be noted that institutional investor activism does not solve the principal-agent problem but rather merely relocates its locus.
The vast majority of large institutional investors manage the pooled savings of small individual investors. From a governance perspective, there is little to distinguish such institutions from corporations. The holders of investment company shares, for example, have no more control over the election of company trustees than they do over the election of corporate directors. Accordingly, fund shareholders exhibit the same rational apathy as corporate shareholders. Kathryn McGrath, a former SEC mutual fund regulator, observes: “A lot of shareholders take ye olde proxy and throw it in the trash.” Karen Blumental, Fidelity Sets Vote on Scope of Investments, Wall St. J., Dec. 8, 1994, at C1. The proxy system thus “costs shareholders money for rights they don't seem interested in exercising.” Id. Indeed, “Ms. McGrath concedes that she herself often tosses a proxy for a personal investment onto a ‘to-do pile’ where ‘I don't get around to reading it, or when I do, the deadline has passed.”’ Id. Nor do the holders of such shares have any greater access to information about their holdings, or ability to monitor those who manage their holdings, than do corporate shareholders. Worse yet, although an individual investor can always abide by the “Wall Street” Rule with respect to corporate stock, he cannot do so with respect to such investments as an involuntary, contributory pension plan.
For beneficiaries of union and state and local government employee pension funds, the problem is particularly pronounced. As we have seen, those who manage such funds may often put their personal or political agendas ahead of the interests of the fund's beneficiaries. Accordingly, it is not particularly surprising that pension funds subject to direct political control tend to have poor financial results. Romano, supra note 75, at 825.
Their article goes into much greater depth, of course.
