Economists Oliver Hart and Luigi Zingales, have a new paper out, The New Corporate Governance (April 19, 2022), in which they argue that:
In the last few years, there has been a dramatic increase in shareholder engagement on environmental and social issues. In some cases shareholders are pushing companies to take actions that may reduce market value. It is hard to understand this behavior using the dominant corporate governance paradigm based on shareholder value maximization. We explain how jurisprudence has sustained this criterion in spite of its economic weaknesses. To overcome these weaknesses we propose the criterion of shareholder welfare maximization and argue that it can better explain observed behavior. Finally, we outline how shareholder welfare maximization can be implemented in practice.
I likely will have more to say about this article. But let's start off with their initial claim that "there has been a dramatic increase in shareholder engagement on environmental and social issues." In their opening paragraph, they support that claim with some curated examples:
Consider the following activity in 2021. Eighty one percent of DuPont shareholders approved a proposal requiring the company to disclose how much plastic the company releases into the environment each year and to assess the effectiveness of DuPont’s pollution policies. Sixty four percent of ExxonMobil shareholders approved a proposal requiring the company to describe “if, and how, ExxonMobil’s lobbying activities (direct and through trade associations) align with the goal of limiting average global warming to well below 2 degrees Celsius (the Paris Climate Agreement’s goal)”. Fifty two percent of Duke Energy shareholders approved a proposal that requests disclosures on contributions to candidates, parties, committees, and 501(c)(4) organizations. Ninety five percent of Wendy’s shareholders approved a proposal requiring the company “to disclose concrete evidence on the effectiveness of its Supplier Code of Conduct in protecting the human rights of workers at its produce and meat suppliers, with respect to COVID‐19 in particular.”
One thought it was only lawyers who believe the plural of anecdote is data.
Let's take a closer look at the totality of the 2021 proxy season, using the 2021 edition of the annual Gibson Dunn analysis of shareholder proposals during the 2021 season.
First, it is true that the number of environmental and social proposals "increased notably, up 37% and 13%, respectively, from 2020." Point for Hart and Zingales. On the other hand, the rate at which proposals in the social and environmental spaces were withdrawn "rose markedly in 2021 compared to 2020 (increasing to 46% and 62%, respectively)."
Second, although the average level of support received by environmental proposals increased, the average remained below 50% of votes cast at 42.3%. Likewise, while the average level of report received by social proposals increased, it remained below one-third of votes cast (30.6%). About two-thirds of environmental and social proposals failed (66%).
In sum, Hart & Zingales' anecdotes do not make a persuasive case for the proposition that shareholders have abandoned the profit motive en masse. Or that there is a new corporate governance.
