Suchergebnisse

Based on a panel discussion convened by the American Enterprise Institute at its 11th policy conference, Washington, D.C., Dec. 3, 1987.

The U.S. securities markets have recently undergone (or are undergoing) three fundamental transitions: (1) institutionalization (with the result that institutional investors now dominate both trading and stock ownership); (2) extraordinary ownership concentration (with the consequence that the three largest U.S. institutional investors now hold 20% and vote 25% of the shares in S&P 500 companies); and (3) the introduction of ESG disclosures (which process has been driven in the U.S. by pressure from large institutional investors). In light of these transitions, how should disclosure policy change? Do institutions and retail investors have the same or different disclosure needs? Why are large institutions pressing for increased ESG disclosures? This Article will focus on the desire of institutions for greater ESG disclosures and suggest that two reasons underlie this demand for more information: (1) ESG disclosures overlap substantially with systematic risk, which is the primary concern of diversified investors; and (2) high common ownership enables institutions to take collective action to curb externalities caused by portfolio firms, so long as the gains to their portfolio from such action exceed the losses caused to the externality-creating firms. This transition to a portfolio-wide perspective (both in voting and investment decisions) has significant implications but also is likely to provoke political controversy. In its final hours, the Trump Administration adopted new rules that discourage voting based on ESG criteria and thus by extension chill ESG investing. This controversy will continue. As more institutions shift to portfolio-wide decision making, there is an optimistic upside: externalities may be curbed by collective shareholder action. For entirely rational reasons, the new "universal" shareholders who now dominate the market will resist even large public companies who might seek to impose externalities on other companies. Owning the market, the "universal" shareholder will protect the market. Still, this process of resistance may produce frictions, and the disclosure needs of individual investors and institutional investors will increasingly diverge. Of course, not all institutional investors are indexed or even diversified, but those that remain undiversified (for example, hedge funds) logically have the perspective of an option-holder and favor greater risk-taking. Across the board, retail investors have different perspectives and preferences than do institutional investors. Above all, the combination of high common ownership and institutional sensitivity to systematic risk makes disclosure a far more powerful force. Once a very good disinfectant, it may now be developing a laser-like power to effect significant social change.

Few doubt that hedge fund activism has radically changed corporate governance in the United States – for better or for worse. Proponents see activists as desirable agents of change who intentionally invest in underperforming companies to organize more passive shareholders to support their proposals to change the target's business model and/or management. So viewed, the process is fundamentally democratic, with institutional shareholders determining whether or not to support the activist's proposals. Skeptics respond that things do not work this simply. Actual proxy contests are few, and most activist engagements are resolved through private settlement negotiations between the activists, who rarely hold 10% or more of the stock, and corporate management. Driving this process of private resolution is management's fear of ouster if they allow the matter to go to a proxy contest. But as a result, activists holding often only a small percentage of the stock are imposing their agenda on other shareholders who hold much more. Increasingly, large indexed investors – BlackRock, State Street and Vanguard in particular – are objecting that this pattern of private settlements excludes them. Against this backdrop, this article attempts to map the "agency costs" of contemporary activism on the premise that any new structure of governance will have its own unique agency costs. Basically, it identifies four areas in which activists have interests that can conflict with those of the other shareholders: Private Benefits. Activists do receive private benefits (most notably in the form of expense reimbursement), but to date these benefits have been fairly modest (probably for a variety of reasons). Information Leakage. The appointment of hedge fund nominees to a corporate board is followed by a short-term increase in information leakage in the target firm's stock price. That is, the target firm's stock price regularly moves in the direction of a subsequent public disclosure – and does so significantly more often and more emphatically than in the case of a control group of firms. This can most plausibly be explained as a consequence of informed trading by persons apprised of the material information that is to be released in the subsequent public disclosure. Moreover, this phenomenon of information leakage is significantly greater when the hedge fund's nominees include a hedge fund employee (as opposed to nominees who are simply independent directors). Further, once hedge fund nominees are appointed to the board, bid/ask spreads widen in comparison to the spreads on stocks in a control group. Thwarted Majorities. Activists often have a short-term agenda, to which indexed investors object. Given these disagreements, it is undemocratic (even if predictable) that an organized minority can dominate a larger, more dispersed "silent majority." This is a "horizontal" agency cost in contrast to more traditional "vertical" agency costs. Public Morality. Although most institutional investors favor public goals, such as greater gender diversity on the board and a shift from "dirty" to "clean" energy, activists have opposed both and are constraining the ability of public companies to behave in a manner consistent with the public morality. Finally, this article will discuss proposed reforms intended to minimize these agency costs, without materially chilling shareholder activism.

Uniquely in the United States, lawyers litigate large cases on behalf of many claimants who could not afford to sue individually. In these class actions, attorneys act typically as risk-taking entrepreneurs, effectively hiring the client rather than acting as the client's agent. Lawyer-financed, lawyer-controlled, and lawyer-settled, such entrepreneurial litigation invites lawyers to sometimes act more in their own interest than in the interest of their clients. And because class litigation aggregates many claims, defendants object that its massive scale amounts to legalized extortion. Yet, without such devices as the class action and contingent fees, many meritorious claims would never be asserted. John Coffee examines the dilemmas surrounding entrepreneurial litigation in a variety of specific contexts, including derivative actions, securities class actions, merger litigation, and mass tort litigation. His concise history traces how practices developed since the early days of the Republic, exploded at the end of the twentieth century, and then waned as Supreme Court decisions and legislation sharply curtailed the reach of entrepreneurial litigation. In an evenhanded account, Coffee assesses both the strengths and weaknesses of entrepreneurial litigation and proposes a number of reforms to achieve a fairer balance. His goal is to save the class action, not discard it, and to make private enforcement of law more democratically accountable. Taking a global perspective, he also considers the feasibility of exporting a modified form of entrepreneurial litigation to other countries that are today seeking a mechanism for aggregate representation. ; https://scholarship.law.columbia.edu/books/1004/thumbnail.jpg

The current law on insider trading is remarkably unrationalized because it contains gaps and loopholes the size of the Washington Square Arch. For example, if a thief breaks into your office, opens your files, learns material nonpublic information, and trades on that information, he has not breached a fiduciary duty and is presumably exempt from insider trading liability. But drawing a line that can convict only the fiduciary and not the thief seems morally incoherent. Nor is it doctrinally necessary. The basic methodology handed down by the Supreme Court in SEC v. Dirks and United States v. O'Hagan dictates (i) that a violation of the insider trading prohibition requires conduct that is "deceptive" (the term used in Section 10(b) of the Securities Exchange Act of 1934), and (ii) that trading that amounts to an undisclosed breach of a fiduciary duty is "deceptive." This formula illustrates, but does not exhaust, the types of duties whose undisclosed breach might also be deemed deceptive and in violation of Rule 10b-5. Many forms of theft or misappropriation of confidential business information could easily be deemed sufficiently deceptive to violate Rule 10b-5. More generally (and more controversially), the common law on finders of lost property (which generally treats a finder as a bailee for the true owner) might be used to justify a duty barring recipients from trading on information that has been inadvertently released or released to them without lawful authorization. Nonetheless, current law has stopped short of generally prohibiting the computer hacker and other misappropriators who make no false representation and do not compensate the tipper. This article surveys possible means by which to fashion a more coherent and consistent prohibition on insider trading. It assumes that legislation is unlikely (and might even aggravate the problem), but that the SEC has broad discretion to adopt rules (just as it did in 2000 in adopting Rule 10b5-1 and 10b5-2). Specific rules are proposed. At the same time, this article acknowledges that the goal of reform should not be to achieve parity of information, and that there are potentially high costs in attempting to extend the boundaries of insider trading to reach all instances of inadvertent release. Deception, it argues, should be the key, both for doctrinal and policy reasons.