Law Commons^™

Outsourcing Voting To Ai: Can Chatgpt Advise Index Funds On Proxy Voting Decisions?, Chen Wang

Fordham Journal of Corporate & Financial Law

Released in November 2022, Chat Generative Pre-training Transformer (“ChatGPT”), has risen rapidly to prominence, and its versatile capabilities have already been shown in a variety of fields. Due to ChatGPT’s advanced features, such as extensive pre-training on diverse data, strong generalization ability, fine-tuning capabilities, and improved reasoning, the use of AI in the legal industry could experience a significant transformation. Since small passive funds with low-cost business models generally lack the financial resources to make informed proxy voting decisions that align with their shareholders’ interests, this Article considers the use of ChatGPT to assist small investment funds, particularly small passive …

Purpose Proposals, Jill E. Fisch

All Faculty Scholarship

Repurposing the corporation is the hot issue in corporate governance. Commentators, investors and increasingly issuers, maintain that corporations should shift their focus from maximizing profits for shareholders to generating value for a more expansive group of stakeholders. Corporations are also being called upon to address societal concerns – from climate change and voting rights to racial justice and wealth inequality.

The shareholder proposal rule, Rule 14a–8, offers one potential tool for repurposing the corporation. This Article describes the introduction of innovative proposals seeking to formalize corporate commitments to stakeholder governance. These “purpose proposals” reflect a new dynamic in the debate …

Asset Managers As Regulators, Dorothy S. Lund

Faculty Scholarship

The conventional view of regulation is that it exists to constrain corporate activity that harms the public. But amid perceptions of government failure, many now call on corporations to tackle social problems themselves. And in this moment of dissatisfaction with government, powerful asset managers have stepped in to serve as regulators of last resort, adopting rules that bind corporate America on issues of great social importance, including climate change and workplace diversity. This Article describes this dynamic — where shareholders have become regulators — which has been made possible by the rise of institutional shareholding (and index investing in particular) …

Corporate Governance Gaming: The Collective Power Of Retail Investors, Sergio Alberto Gramitto Ricci, Christina M. Sautter

Faculty Works

The GameStop saga and meme stock frenzy have shown the pathway to the most disruptive revolution in corporate governance of the millennium. New generations of retail investors use technologies, online forums, and gaming dynamics to coordinate their actions and obtain unprecedented results. Signals indicate that these investors, whom we can dub wireless investors, are currently expanding their actions to corporate governance. Wireless investors’ generational characteristics suggest that they will use corporate governance to pursue social and environmental causes. In fact, wireless investors can set in motion a social movement able to bring business corporations to serve their original partly-private-partly-public purpose. …

The Sec's Shareholder Proposal Rule: Creating A Corporate Public Square, James D. Cox, Randall S. Thomas

Faculty Scholarship

In this Article, we take advantage of this Symposium’s goals to think broadly about the future of Rule 14a-8 of the Securities Exchange Act of 1934, the shareholder proposal rule. We set forth a vision for the rule to address boardroom insularity by likening the shareholder proposal rule as the public square for shareholders. The existence of such a forum would redound to the benefit of investors, officers, and boards of directors as a fount of current and useful information about their investors’ and stakeholders’ concerns.

Equality Metrics, Veronica Root Martinez, Gina-Gail S. Fletcher

Faculty Scholarship

This time is different. This time the death of another Black man at the hands of white police officers prompted calls for change not only within police departments, but across all aspects of American life. Those calls for change resulted in significant displays of support for the Black Lives Matter movement and interest in how to eliminate systemic racism and promote racial diversity and justice within one’s daily life and workplace. For the most part, corporations were quick to publicly align themselves with the movement. When carefully examined, however, many of the statements issued by corporations in support of the …

Corporate Law For Good People, Yuval Feldman, Adi Libson, Gideon Parchomovsky

All Faculty Scholarship

This article offers a novel analysis of the field of corporate governance by viewing it through the lens of behavioral ethics. It calls for both shifting the focus of corporate governance to a new set of loci of potential corporate wrongdoing and adding new tools to the corporate governance arsenal. The behavioral ethics scholarship emphasizes the large share of wrongdoing generated by "good people" whose intention is to act ethically. Their wrongdoing stems from "bounded ethicality" -- various cognitive and motivational processes that lead to biased decisions that seem legitimate. In the legal domain, corporate law provides the most fertile …

Caremark And Esg, Perfect Together: A Practical Approach To Implementing An Integrated, Efficient, And Effective Caremark And Eesg Strategy, Leo E. Strine Jr., Kirby M. Smith, Reilly S. Steel

All Faculty Scholarship

With increased calls from investors, legislators, and academics for corporations to consider employee, environmental, social, and governance factors (“EESG”) when making decisions, boards and managers are struggling to situate EESG within their existing reporting and organizational structures. Building on an emerging literature connecting EESG with corporate compliance, this Essay argues that EESG is best understood as an extension of the board’s duty to implement and monitor a compliance program under Caremark. If a company decides to do more than the legal minimum, it will simultaneously satisfy legitimate demands for strong EESG programs and promote compliance with the law. Building …

Restoration: The Role Stakeholder Governance Must Play In Recreating A Fair And Sustainable American Economy A Reply To Professor Rock, Leo E. Strine Jr.

All Faculty Scholarship

In his excellent article, For Whom is the Corporation Managed in 2020?: The Debate Over Corporate Purpose, Professor Edward Rock articulates his understanding of the debate over corporate purpose. This reply supports Professor Rock’s depiction of the current state of corporate law in the United States. It also accepts Professor Rock’s contention that finance and law and economics professors tend to equate the value of corporations to society solely with the value of their equity. But, I employ a less academic lens on the current debate about corporate purpose, and am more optimistic about proposals to change our corporate governance …

Fiduciary Blind Spot: The Failure Of Institutional Investors To Prevent The Illegitimate Use Of Working Americans' Savings For Corporate Political Spending, Leo E. Strine Jr.

All Faculty Scholarship

For decades, American workers have been subjected to increasing pressure to become forced capitalists, in the sense that to provide for retirement for themselves, and to pay for college for their children, they must turn part of their income every month over to mutual funds who participate in 401(k) and 529 programs. These “Worker Investors” save for the long term, often hold portfolios that are a proxy for the entire economy, and depend on the economy’s ability to generate good jobs and sustainable growth in order for them to be able to have economic security. In recent years, there has …

A Mission Statement For Mutual Funds In Shareholder Litigation, Sean J. Griffith, Dorothy S. Lund

Faculty Scholarship

This Article analyzes the conduct of mutual funds in shareholder litigation. We begin by reviewing the basic forms of shareholder litigation and the benefits such claims might offer mutual fund investors. We then investigate, through an in-depth docket review, whether and how the ten largest mutual funds participate in shareholder litigation. We find that although shareholder suits offer potential benefits, the largest mutual funds have essentially forfeited their use of litigation. This finding is particularly striking given that index funds and other long-term oriented mutual funds generally cannot sell their shares when they are dissatisfied with company performance, leaving them …

Index Funds And The Future Of Corporate Governance: Theory, Evidence, And Policy, Scott Hirst, Lucian Bebchuk

Faculty Scholarship

Index funds own an increasingly large proportion of American public companies. The stewardship decisions of index fund managers—how they monitor, vote, and engage with their portfolio companies—can be expected to have a profound impact on the governance and performance of public companies and the economy. Understanding index fund stewardship, and how policymaking can improve it, is thus critical for corporate law scholarship. In this Article we contribute to such understanding by providing a comprehensive theoretical, empirical, and policy analysis of index fund stewardship.

We begin by putting forward an agency-costs theory of index fund incentives. Stewardship decisions by index funds …

Toward Fair And Sustainable Capitalism: A Comprehensive Proposal To Help American Workers, Restore Fair Gainsharing Between Employees And Shareholders, And Increase American Competitiveness By Reorienting Our Corporate Governance System Toward Sustainable Long-Term Growth And Encouraging Investments In America’S Future, Leo E. Strine Jr.

All Faculty Scholarship

To promote fair and sustainable capitalism and help business and labor work together to build an American economy that works for all, this paper presents a comprehensive proposal to reform the American corporate governance system by aligning the incentives of those who control large U.S. corporations with the interests of working Americans who must put their hard-earned savings in mutual funds in their 401(k) and 529 plans. The proposal would achieve this through a series of measured, coherent changes to current laws and regulations, including: requiring not just operating companies, but institutional investors, to give appropriate consideration to and make …

The Specter Of The Giant Three, Scott Hirst, Lucian Bebchuk

Faculty Scholarship

This Article examines the large, steady, and continuing growth of the Big Three index fund managers — BlackRock, Vanguard, and State Street Global Advisors. We show that there is a real prospect that index funds will continue to grow, and that voting in most significant public companies will come to be dominated by the future “Giant Three.”

We begin by analyzing the drivers of the rise of the Big Three, including the structural factors that are leading to the heavy concentration of the index funds sector. We then provide empirical evidence about the past growth and current status of the …

The New Titans Of Wall Street: A Theoretical Framework For Passive Investors, Jill E. Fisch, Asaf Hamdani, Steven Davidoff Solomon

All Faculty Scholarship

Passive investors — ETFs and index funds — are the most important development in modern day capital markets, dictating trillions of dollars in capital flows and increasingly owning much of corporate America. Neither the business model of passive funds, nor the way that they engage with their portfolio companies, however, is well understood, and misperceptions of both have led some commentators to call for passive investors to be subject to increased regulation and even disenfranchisement. Specifically, this literature takes a narrow view both of the market in which passive investors compete to manage customer funds and of passive investors’ participation …

Investing In Corporate Procedure, Jessica M. Erickson

Law Faculty Publications

Corporate litigation is in crisis. At the state level, shareholder lawsuits challenging mergers and other corporate decisions are ubiquitous but rarely end with meaningful relief for shareholders. At the federal level, securities class actions are rife with ethical challenges and low-value settlements. Over the last several decades, multiple groups — including judges, legislatures, and corporate boards — have tried to solve this problem, but all have come up short. This Article argues that the solution lies in rewriting the procedural rules that govern corporate lawsuits. New standing requirements would lead to better screening of these claims. Discovery limits and heightened …

Nonvoting Shares And Efficient Corporate Governance, Dorothy S. Lund

Faculty Scholarship

A growing number of technology companies, including Google, Zillow, and Snap, have issued stock that does not allow investors to vote on corporate decisions. But there is fundamental disagreement among scholars and investors about whether nonvoting stock is beneficial or harmful. Critics argue that nonvoting shares perpetually insulate corporate insiders from influence and oversight, and therefore increase agency costs. By contrast, proponents contend that nonvoting shares may provide benefits that exceed these agency costs, such as enabling corporate insiders to pursue their long-term vision for the company without interference from outside shareholders.

This Article offers a novel perspective on this …

Do Institutional Owners Monitor? Evidence From Voting On Connected Transaction Proposals In Hong Kong-Listed Companies, Félix E. Mezzanotte, Simon Fung

Michigan Business & Entrepreneurial Law Review

The conventional view in Hong Kong has been that institutional owners tend to be passive owners and that they do little to monitor the companies’ management. We investigated whether the presence of institutional owners in Hong Kong-listed companies was associated with greater monitoring of management through dissent voting by hand-collecting information for a sample (n= 96) of connected transaction proposals (“CT proposals”) and of their voting outcomes, as announced in the Stock Exchange of Hong Kong during the period from 2012–14. Our study shows that voting approval rates on CT proposals were lower (i.e. greater dissent voting) when institutional owners …

Theories And Solutions On Wolf Pack Activism, Kimberly Goldman

Michigan Business & Entrepreneurial Law Review

Section I will describe the key players involved in wolf pack activism and their conflicting motives, including both the members of wolf packs and those affected by them. Given that not all shareholders have common interests, this will include an analysis of the motives of various types of shareholders and an analysis of how these diverse motives may affect the wealth sustainability of companies. Section II will explain the phenomenon of wolf packs in corporate governance by describing the circumstances that lead to their formation and the various regulations (or lack thereof) pertaining to them. Section III will describe divergent …

Third-Party Institutional Proxy Advisors: Conflicts Of Interest And Roads To Reform, Matthew Fagan

University of Michigan Journal of Law Reform

With the rise of institutional activist investors in recent decades—including a purported 495 activist campaigns against U.S. corporations in 2016 alone—the role that third-party institutional proxy advisors play in corporate governance has greatly increased. The United States Office of Government Accountability estimates that clients of the top five proxy advisory firms account for about $41.5 trillion in equity throughout the world. For several years, discussions have developed regarding conflicts of interest faced by proxy advisors. For example, Institutional Shareholder Services, the top proxy advisory firm in the world, frequently provides advice to institutional investors on how to vote proxies while …

Center-Left Politics And Corporate Governance: What Is The 'Progressive' Agenda?, Christopher Bruner

Scholarly Works

For as long as corporations have existed, debates have persisted among scholars, judges, and policymakers regarding how best to describe their form and function as a positive matter, and how best to organize relations among their various stakeholders as a normative matter. This is hardly surprising given the economic and political stakes involved with control over vast and growing "corporate" resources, and it has become commonplace to speak of various approaches to corporate law in decidedly political terms. In particular, on the fundamental normative issue of the aims to which corporate decision-making ought to be directed, shareholder-centric conceptions of the …

How Corporate Governance Is Made: The Case Of The Golden Leash, Matthew D. Cain, Jill E. Fisch, Sean J. Griffith, Steven Davidoff Solomon

Steven Davidoff Solomon

This Article presents a case study of a corporate governance innovation—the incentive compensation arrangement for activist-nominated director candidates colloquially known as the “golden leash.” Golden leash compensation arrangements are a potentially valuable tool for activist shareholders in election contests. In response to their use, several issuers adopted bylaw provisions banning incentive compensation arrangements. Investors, in turn, viewed director adoption of golden leash bylaws as problematic and successfully pressured issuers to repeal them. The study demonstrates how corporate governance provisions are developed and deployed, the sequential response of issuers and investors, and the central role played by governance intermediaries—activist investors, institutional …

Corporate Power Is Corporate Purpose I: Evidence From My Hometown, Leo E. Strine Jr.

All Faculty Scholarship

This paper is the first in a series considering a rather tired argument in corporate governance circles, that corporate laws that give only rights to stockholders somehow implicitly empower directors to regard other constituencies as equal ends in governance. By continuing to suggest that corporate boards themselves are empowered to treat the best interests of other corporate constituencies as ends in themselves, no less important than stockholders, scholars and commentators obscure the need for legal protections for other constituencies and for other legal reforms that give these constituencies the means to more effectively protect themselves.

Using recent events in the …

How Corporate Governance Is Made: The Case Of The Golden Leash, Matthew D. Cain, Jill E. Fisch, Sean J. Griffith, Steven Davidoff Solomon

All Faculty Scholarship

This Article presents a case study of a corporate governance innovation—the incentive compensation arrangement for activist-nominated director candidates colloquially known as the “golden leash.” Golden leash compensation arrangements are a potentially valuable tool for activist shareholders in election contests. In response to their use, several issuers adopted bylaw provisions banning incentive compensation arrangements. Investors, in turn, viewed director adoption of golden leash bylaws as problematic and successfully pressured issuers to repeal them.

The study demonstrates how corporate governance provisions are developed and deployed, the sequential response of issuers and investors, and the central role played by governance intermediaries—activist investors, institutional …

The New Governance And The Challenge Of Litigation Bylaws, Jill E. Fisch

All Faculty Scholarship

Corporate governance mechanisms designed to ensure that managers act in shareholders’ interest have evolved dramatically over the past forty years. “Old governance” mechanisms such as independent directors and performance-based executive compensation have been supplemented by innovations that give shareholders greater input into both the selection of directors and ongoing operational decisions. Issuer boards have responded with tools to limit the exercise of shareholder power both procedurally and substantively. This article terms the adoption and use of these tools, which generally take the form of structural provisions in the corporate charter or bylaws, the “new governance.”

Delaware law has largely taken …

Lessons From Institutional Shareholder Services: Governing Benefit Corporations' Third-Party Standard, Tammi S. Etheridge

Michigan Business & Entrepreneurial Law Review

Almost one hundred years ago, Henry Ford, as CEO of the Ford Motor Company, announced a plan to cease payment of special dividends to shareholders. Instead, the company would reinvest its profits to employ more workers and build more factories. Investing in new workers and factories would cut the cost of cars and make them affordable to more people. Ford publicly declared that his “ambition [was] to employ still more men, to spread the benefits of this industrial system to the greatest possible number, to help them build up their lives and their homes. To do this we are putting …

The Institutional Appetite For Quack Corporate Governance, Alicia J. Davis

Articles

This Article offers evidence that higher quality internal corporate governance is associated with higher levels of ownership by institutional investors. This finding is consistent with the idea that institutions have greater reason than individual investors to prefer well-governed firms, but surprising given the substantial empirical evidence that casts doubt on the efficacy of internal governance mechanisms. The study described in this Article also finds that higher quality external governance is associated with lower proportions of ownership by certain types of institutional investors, also a somewhat surprising result given available empirical evidence on the positive relationship between external governance and firm …

The Institutional Appetite For Quack Corporate Governance, Alicia J. Davis

Alicia Davis

This Article offers evidence that higher quality internal corporate governance is associated with higher levels of ownership by institutional investors. This finding is consistent with the idea that institutions have greater reason than individual investors to prefer well-governed firms, but surprising given the substantial empirical evidence that casts doubt on the efficacy of internal governance mechanisms. The study described in this Article also finds that higher quality external governance is associated with lower proportions of ownership by certain types of institutional investors, also a somewhat surprising result given available empirical evidence on the positive relationship between external governance and firm …

Introduction To Institutional Investor Activism: Hedge Funds And Private Equity, Economics And Regulation, William W. Bratton, Joseph A. Mccahery

All Faculty Scholarship

The increase in institutional ownership of recent decades has been accompanied by an enhanced role played by institutions in monitoring companies’ corporate governance behaviour. Activist hedge funds and private equity firms have achieved a degree of success in actively shaping the business plans of target firms. They may be characterized as pursuing a common goal – in the words used in the OECD Steering Group on Corporate Governance, both seek ‘to increase the market value of their pooled capital through active engagement with individual public companies. This engagement may include demands for changes in management, the composition of the board, …

A Canadian Model Of Corporate Governance, Carol Liao

All Faculty Publications

What is Canada’s actual legal model to govern its corporations? Recent landmark judicial decisions indicate Canada is shifting away from an Anglo-American definition of shareholder primacy. Yet the Canadian securities commissions have become increasingly influential in the governance sphere, and by nature are shareholder-focused. Shareholders’ rights have increased well beyond what was ever contemplated by Canadian corporate laws, and the issue of greater shareholder vs. board control has now become the topic of live debate. The future of Canada's overall model seems to rest on what will be more compelling: the constancy of the corporate statutes and trajectory of the …