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Hart and Zingales' New Corporate Governance I: Cherrypicking Examples of Shareholder Support for ESG

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.

Why We Should Keep Teaching Dodge v. Ford Motor Co.

I have a post up at The CLS Blue Sky Blog on the titular subject.

Would a director be fully protected by relying on an astrologer or a psychic?

Keith Paul Bishop asks "May A Director Properly Rely On Her Rabbi?":

In prescribing the duties of directors, California Corporations Code Section 309 provides that a director is entitled to rely on information, opinions, reports or statements prepared or presented by "counsel, independent accountants or other persons as to matters which the director believes to be within such person's professional or expert competence".   While the statute makes no reference to religious authorities, it would appear to allow a director to rely on such persons so long as the director believes the matters were within their professional or expert competence.  For example, a director of a corporation that prepares kosher food might rely on a rabbi as to matters pertaining to kashrut.

DGCL section 141(e) is comparable, specifically providing that a director is "fully protected" by relying on such a person. Which made me wonder whether a director could get protection for replying in good faith on an astrologer or psychic provided the director believes the matter is within their professional expertise. 

Perhaps surprisingly (or perhaps not), I was unable to find an caselaw on point. I did find a law review article, however, which opined:

When the argument focuses on valuation and management hires well credentialed investment bankers, it is difficult to see how a court can “look behind” competently prepared valuations.114 Judges and commentators acknowledge that investment bankers make biased valuations with disconcerting frequency, but no one credibly suggests preferable alternative experts.

114 For a partial but quite useful summary of the problems and indeterminacies that investment bankers face in preparing fairness opinions, see Carney, supra note 41, at 533-35. For clear expression of the court's inability to second-guess substance as opposed to procedure, see, e.g., the PLI's 21st Annual Institution on Securities Regulation, supra note 34. In one colloquy, E. Norman Veasey, now Chief Justice of the Delaware Supreme Court, suggested that the board should “look behind what the (investment) bankers are telling it.” Moore et al., supra note 34, at 279. To Veasey's suggestion, practitioner Steven Volk replied that all a director could do is “to satisfy himself that this is a reputable banker of national repute,” and stressed that beyond that inquiry the director could only “go to a different discipline, he could hire an astrologer or some other mystic to cross-check the results.” Id. at 280. See also, Panel Discussion, supra note 40, at 601 (noted practitioner, Arthur Fleischer, responding to calls for investment banking standards of conduct by stating that he was “not clear on what (the proponent was) talking about” and that “(t)he key fact for the banker is to act sensibly: that is it, and there is not anything more.”) (emphasis added). See also id. (Panelists “had an argument in the hall after the first panel about what the word 'fair' means in these (fairness) letters, and we had no real agreement within the group.”).

Park McGinty, The Twilight of Fiduciary Duties: On the Need for Shareholder Self-Help in an Age of Formalistic Proceduralism, 46 Emory L.J. 163 (1997).