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Colleen Baker

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PhD (Wharton) Professor Baker is an expert in banking and financial institutions law and regulation, with extensive knowledge of over-the-counter derivatives, clearing, the Dodd-Frank Act, and bankruptcy, in addition to being a mediator and arbitrator.

Previously, she spent time at the U. of Illinois Urbana-Champaign College of Business, the U. of Notre Dame Law School, and Villanova University Law School. She has consulted for the Federal Reserve Bank of Chicago, and for The Volcker Alliance.  Prior to academia, Professor Baker worked as a legal professional and as an information technology associate. She is a member of the State Bars of NY and TX. Read More

This morning, my inbox included a link to: Christina Parajon Skinner, Cancelling Capitalism? Grow the Pie: How Great Companies Deliver Both Purpose and Profit …, 97 Notre Dame L. Rev. 417 (2021) [SSRN: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4000768 ]. What follows is an excerpt from the introduction.

In February 2019, Amazon announced a plan to build its new national headquarters in Queens, New York. The plan would create between 25,000 and 40,000 well-paid jobs and fill New York City’s tax coffers with at least $27.5 billion. But Amazon cancelled its decision in the face of intense political opposition. Perhaps the most vocal opponent was New York congressional Representative Alexandria Ocasio-Cortez. She roundly celebrated Amazon’s retreat, tweeting, “today was the day a group of dedicated, everyday New Yorkers & their neighbors defeated Amazon’s corporate greed.”

But the congresswoman’s maligning of Amazon’s relocation was a sleight of hand. She told her followers that the “tax breaks” that would have gone to Amazon would instead now be available for public works, like subway repairs and teacher salaries. But this was wrong. The tax breaks would not be a “donation” of dollars that would have taken funds away from other public uses; rather, Amazon would have had some reductions from future tax bills if and only if–the company had improved the community in financially concrete ways. Yet Amazon was bullied out of town on these false pretenses, and Queens lost out on jobs, urban development, and hefty corporate tax payments. Here, both Amazon and Queens residents lost out–the citizens perhaps the most.

The tale of Amazon in retreat is one of many hard-hitting examples Alex Edmans gives in his book, Grow the Pie, all of which illustrate the growing popular antipathy against corporate profit. In the most charitable interpretation of Edmans’s examples, people and politicians increasingly reject capitalism–the private harnessing of free-economic markets–because they appear to misunderstand the role that profits play in society. In other cases, however, it seems that politicians feint ignorance of the social benefits of capitalism in seeking to hum the most popular tune. Grow the Pie disabuses misperceptions by providing novel evidence and examples that bust the myriad myths now perpetuating the growing movement to “cancel capitalism,” as I’ll call it here.

Roberto Tallarita has revised The Limits of Portfolio Primacy on SSRN (here). An excerpt of the abstract follows.

According to a theory that is gaining increasing support, we should expect large asset managers (and, in particular, index fund managers) to become “climate stewards” and force companies to reduce their impact on climate change. According to this theory, by maximizing the value of their entire portfolio (portfolio primacy) rather than the value of the individual company (shareholder primacy), index fund managers are incentivized to reduce climate externalities and therefore to steer companies toward decarbonization. This Article offers the first systematic critique of this theory and identifies four crucial limits that undermine its practical impact: mispricing of climate mitigation, portfolio biases, fiduciary conflicts, and insulation from index funds stewardship…. [C]limate stewardship would create unsolvable fiduciary conflicts on multiple levels: between fund managers and fund investors; between large asset managers and undiversified shareholders; and between corporate directors and the individual company….

Aswani, Bilokha, Cheng, and Cole have posted The Cost (and Unbenefit) of Conscious Capitalism on SSRN (here). The abstract:

This paper examines the costs and benefits of ‘stakeholder governance’ for shareholders and other stakeholders by using the adoption of constituency statutes as a quasi-exogenous shock to corporate governance. Constituency statutes permit board members to consider all stakeholder interests, relaxing fiduciary duty to only shareholders. Using a sample of U.S. publicly traded firms (1981-2010) and employing a difference-in-difference methodology, we find that the discretionary adoption of ‘stakeholder governance’ leads to managerial entrenchment and a reduction in institutional ownership and shareholder wealth with little to no ‘trade-off’ benefits to other stakeholders. As states adopted constituency statutes, signs of managerial entrenchment increased (proxied by significant declines in earnings transparency and jumps in CEO and Director compensation) as did harm to shareholder wealth and to governance through institutional ownership. At the same time, we do not observe potential ‘trade-off’ benefits to the non-shareholder stakeholders these statutes were intended to help; we find that labor, customers, and creditors only marginally benefited (if at all) from the introduction of these statutes. These results are robust to a battery of checks including the biasedness in the staggered

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You can read the full comment letter here.  For additional background on the proposed rule, go here.  An excerpt from the letter:

It is our position that social and political issues should not be considered by fiduciaries in employee retirement savings investment decisions. We are not opposed to any person or entity considering ESG or other social factors when investing their own money; individuals and companies may promote social causes through their investments to the extent they desire. But we are opposed to investment managers and employers being encouraged or mandated to consider ESG factors and protected from legal action when they do. Adopting this Proposed Rule and allowing employers and investment managers to consider ESG factors makes what should be a financial decision into a political one….

Under the Proposed Rule, plan fiduciaries will more often choose ESG investments, employers can serve their political agendas, and investment managers are protected from adverse consequences of their social investment decisions. Indeed, the government may also exert pressure on plan sponsors who do not offer ESG defaults as a way of driving capital to achieve desired social outcomes. But it is the employees and beneficiaries—whose retirement savings are affected—who will

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Julia Y. Lee has published Prosocial Fraud in 2 Seton Hall L. Rev. 199.  Here is an excerpt:

This Article identifies the concept of prosocial fraud–that is, fraud motivated by the desire to help others. The current incentive-based legal framework focuses on deterring rational bad actors who must be constrained from acting on their worst impulses. This overlooks a less sinister, but more endemic species of fraud that is not driven by greed or the desire to take advantage of others. Prosocial fraud is induced by prosocial motives and propagated through cooperative norms. This Article argues that prosocial fraud cannot be effectively deterred through increased sanctions because its moral ambiguity lends itself to self-deception and motivated blindness. The presence of a beneficiary other than the self allows individuals to supplant one source of morality (honesty), with another (benevolence), providing a powerful source of rationalization that weakens the deterrent impact of legal sanctions.

After examining the types of motives that typify prosocial fraud, this Article identifies structural and situational factors–definitional ambiguity, incrementalism, and third-party complicity–that increase its prevalence. Given the cognitive and psychological biases at play, this Article suggests that any efforts to curb prosocially motivated fraud focus less on adjusting…

Jill E. Fisch, Mutual Fund Stewardship and the Empty Voting Problem ( https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3939112 ):

The exercise of institutional voting power is by fund managers or governance teams, people who have “little or no economic interest in the shares that they vote,” This “empty voting” has the potential to undermine the legitimacy of the shareholder franchise. It is of particular concern when the assets committed to a broad-based index fund are voted to support initiatives that have the potential to sacrifice economic value in favor of social or societal objectives about which the shareholders invested in that index fund may not agree.

Matteo Gatti & Chrystin D. Ondersma, Stakeholder Syndrome: Does Stakeholderism Derail Effective Protections for Weaker Constituencies? ( https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3793732 ):

Because available evidence suggests that corporations will seek to undermine any proposal that meaningfully shifts power and resources to workers, it is unlikely stakeholderism could provide equivalent protections that can actually improve workers’ position; assuming it could, its implementation would be no more feasible than direct regulation. Neither do we believe that stakeholderism can provide a fertile landscape for direct regulation, because corporations are likely to use stakeholderism as a pretext to wield greater political power and to shape the

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Fair to say, corporate governance was very much a theme:

The full convention schedule can be found here: https://fedsoc.org/conferences/2021-national-lawyers-convention .

View the debate here: https://youtu.be/uhg7P1DHxVk .

From the video description: The MIT Sloan Adam Smith Society chapter hosted a virtual debate between Roivant founder and chairman Vivek Ramaswamy and Chicago Booth Professor Luigi Zingales on the topic: “Is ‘Woke Capitalism’ a Threat to Democracy?”

I have not yet watched the video, but I have heard both speakers before and expect the debate to be of interest to our readers.  Here’s a bit more from the description:

In 1970, Milton Friedman urged business leaders to prioritize shareholder value when making business decisions. Businesses have turned away from this model of late, and are instead actively pursuing social and political goals. Is it good for society when businesses promote political causes and take social stances? Is it good for business? What are the costs when corporate managers focus exclusively on maximizing profit?

Eric Chaffee has published Index Funds and ESG Hypocrisy in 71 Case W. Res. L. Rev. 1295.  Here is an excerpt from Part I of that essay:

[S]tatements from BlackRock, State Street, and Vanguard can be boiled down into a contradictory phrase that sounds like it belongs in George Orwell’s novel, 1984: “Diversity is conformity.” To unpack this idea a bit more, BlackRock, State Street, and Vanguard are selling index fund shares with the promise of diversification of the portfolios that underlie those funds to stabilize returns while mitigating risk, yet at the same time, they are fueling conformity through their voting power related to those funds.

This Essay takes the position that the importation of ESG voting into index funds by the dominate players in the index fund industry is unacceptable because it creates an unresolvable conflict of interests, is misleading to those purchasing shares in mutual funds, and is undemocratic. This Essay argues that these issues could be resolved by the SEC promulgating rules creating a fund name taxonomy to make it clear to investors the nature of the funds in which they are investing.

This Essay contributes to the existing literature in three main ways. First, this…

The following comes to us from Robert Ashford.  For more information, including details about the agenda and registration, go here.

Inter-Collegiate Seminar on Teaching Inclusive Capitalism in Key Undergraduate Courses Throughout the Curriculum

Friday – Saturday, Dec. 3-4, 2021 | 1 – 4 p.m. ET

Purpose and Background

This seminar will share progress made and explore next steps in the continuing effort to teach widely in colleges and universities the following principle of fuller employment and its many important implications:

A broader distribution of capital acquisition with the future earnings of capital creates the rational expectation of a broader distribution of discretionary capital income in future years (to people with a higher propensity to consume) and therefore greater incentive to employ more labor and capital in earlier years.

A growing number of professors of economics have characterized this principle of fuller employment as “the most important contribution to economic theory in many decades: an idea with many practical, beneficial policy implications for both current and future generations” [Letter from Professors of Economics in Support of Inclusive Capitalism.]

A key motivation for this new form of Inclusive Capitalism is the need to fundamentally address the current and…