Institutional shareholders are increasingly using their “voice” in matters of corporate policy, and, in particular, are taking an interest in “environmental, social, governance” (ESG) performance measures at their portfolio companies.  Investments are selected, and shareholders engage with management, using a variety of ESG metrics, often concerning matters like climate change, gender and racial diversity, and similar issues.  Though it’s often argued that some ESG engagement reflects the investors’ personal policy preferences rather than a sincere attempt to improve corporate performance, it seems that at least some ESG factors are, in fact, wealth maximizing.  It’s also been argued that many institutional investors have already diversified away their vulnerability to idiosyncratic risks and, by engaging on ESG matters, are attempting to protect themselves against systemic risks.

Nonetheless, the trend has met with some criticism.  One set of concerns pertains to protection of retail investors to whom the institutional investors owe fiduciary duties – fear that their money is being used to advance social causes favored by the investment manager, rather than to benefit investors in the fund.

A parallel set of concerns has less to do with protecting fund beneficiaries than with protecting portfolio companies.  In the most charitable account,…

Risk factor disclosures are required under SEC rules, and encouraged under the PSLRA (which insulates from private liability forward-looking statements that are “accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those in the forward-looking statement,” 15 U.S.C. § 78u-5).  The theory is that investors, armed with adequate warnings, can make intelligent decisions about how to value a company’s securities.

Both the SEC in its guidance, and Congress when passing the PSLRA, emphasized that “boilerplate” warnings are not helpful; investors must be given specific, tailored information about the firm-specific risks that the company faces.  For example, the SEC instructs firms, “Do not present risks that could apply to any issuer or any offering. Explain how the risk affects the issuer or the securities being offered.”  17 C.F.R. § 229.303.  Meanwhile, in the PSLRA’s legislative history, the Conference Report states that “boilerplate warnings will not suffice…. The cautionary statements must convey substantive information about factors that realistically could cause results to differ materially from those projected.”

Scholars have documented that firm-specific risk warnings are helpful to investors.  For example, a while ago I blogged about a study by Karen K. Nelson and Adam…

If you’re anything like me, you’ve spent the last few days procrastinating studying the drama unfolding at CBS.  (If you’re not aware, here’s an article summarizing the state of play; the rest of this post assumes readers are familiar with the basic facts).

There’s a lot to chew on here, and I’m sure that as the case develops, there will be much more to say, but here are some off-the-cuff initial thoughts, in no particular order.

[More under the jump]

I’ve been hunkered down grading exams this week, so all I’ve got for you is this tale tail of a developing economy:

Dog Always Brings A Leaf To ‘Buy’ Himself Treats At The Store

For the last five years or so, the campus of Colombia’s Diversified Technical Education Institute of Monterrey Casanare has been home to a sweet black dog named Negro. There, he serves as a guardian of sorts, keeping watch over things as students go about their studies.

In return, Negro is cared for by the school’s faculty, who provide him with food, water, attention and a safe place with them to pass the night.

But the dog has apparently decided that anything beyond that is up to him.

Early on in Negro’s tenure at the school, he came to be aware of the little store on campus where students gather to buy things on their breaks; sometimes they’d buy him cookies sold there.

This, evidently, is where the dog first learned about commerce — and decided to try it out himself.

“He would go to the store and watch the children give money and receive something in exchange,” teacher Angela Garcia Bernal told The Dodo. “Then one

…

Zohar Goshen and Sharon Hannes have just posted to SSRN an interesting paper, The Death of Corporate Law, arguing that markets and private ordering have begun to supplant adjudication as a mechanism for resolving corporate disputes because the increasing sophistication of investors has made private resolutions less costly. 

There are many excellent insights in the piece, which furthers the taxonomy developed by Goshen and Richard Squire in Principal Costs: A New Theory for Corporate Law and Governance to add the costs of adjudication into the mix.  Yet there may be some ways that the theory is incomplete.  For example, the authors focus on the effect of shareholders’ rising “competence” – because of the concentration of investment in the hands of institutions – rather than on shareholders’ rising power, which (according to some) may not be accompanied by greater competence at all.  Managers have acted to counteract that rising power (dual class stock regimes, delays in going public), which might represent an efficient bargain to which investors are agreeing (the authors’ view), or simply a forthcoming source of dispute.

But the other piece that’s missing, of course, is the role of securities law.  Investors’ rising power…

The #MeToo movement has shone a spotlight not only on sexual harassment, but also on the NDAs and arbitration agreements that allow it to flourish undetected for many years – until, in some cases, it finally explodes into a full-grown corporate crisis.

Part of the explanation is that victims choose to enter into settlements rather than conduct lengthy, expensive, and potentially humiliating court battles – which is understandable and a problem for which there is no obvious immediate solution.

But the other part of the explanation is that women (and men, who are harassed at lower rates but still may be targeted) are frequently forced to sign agreements to arbitrate claims confidentially as a condition of employment or the use of various services, and the Supreme Court – with its muscular interpretation of the Federal Arbitration Act – has held that states are virtually powerless to regulate these agreements.  These agreements, it is well understood, are less about providing a venue for resolution of claims than about preventing claims at all, if for no other reason than most prohibit class actions.  So until Congress is willing to modify the FAA (which, well, I’m not going to hold my breath), the situation continues.…

I tell my students that corporate waste technically may be a mechanism for defeating the business judgment rule in the absence of any other evidence of lack of compliance with fiduciary duty, but – as one Delaware decision put it – it’s really more theoretical than real.  See Steiner v. Meyerson, 1995 Del. Ch. LEXIS 95.  When my students ask for some kind of real world example of waste, I tell them the facts of Fidanque v. American Maracaibo Co., 92 A.2d 311 (Del. Ch. 1952), where a corporation paid “consulting fees” to a 70-year-old former executive who had recently suffered a stroke that left him sufficiently incapacitated to be noticeable during his deposition.

I assumed that case was sui generis, but it turns out history has a way of repeating, this time in the form of Sumner Redstone’s contract with CBS.  As described in a recent opinion by Chancellor Bouchard, plaintiff stockholders of CBS adequately alleged that the Board made wasteful payments by refusing to terminate Redstone’s $1.75 million contract as Executive Chair once his declining health left him unable to eat or speak, and by designating him Chairman Emeritus – at a $1 million salary –…