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Matt Yglesias recently riled up the corporate law twittersphere with this tweet claiming that the shareholder value theory requires evil if evil increases shareholder value:

The  responses were swift and critical.  Stephen Bainbridge led off:

Dave Hoffman also critiqued the claim.

Hoffman went on to point out that directors are not obligated to seize every possible profit-maximizing opportunity:

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A coalition of consumer groups put together a study to evaluate the effectiveness of new disclosures proposed by the SEC.  In essence, the disclosures are supposed to help consumers recognize the differences between different types of financial advisers.  The study found that the proposed disclosures were not particularly effective:

To begin, participants in our testing probably read the CRS in more depth than they would on their own. Despite that more in-depth reading, participants struggled throughout with sorting out the similarities and differences between the Broker-Dealer Services and Investment Adviser Services. Both the formatting and the language contributed to the confusion.

On the upside, the testing provides a useful starting point for thinking about how the initial draft disclosures can be improved.  Instead of giving up on disclosure entirely, the authors argued for more work to get it right:

we believe that this report is an important first step in an iterative process designed to improve the SEC’s first published draft. This report helps to identify how typical investors read and misread, understand and misunderstand, and interpret and misinterpret efforts to communicate complex and technical concepts and information. We firmly believe that the results of our testing show that a usable document that communicates clearly and well with potential investors

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Corporate managers have long complained about proxy advisory services, such as ISS, Egan-Jones, and Glass Lewis.  They argue that proxy advisors provide governance advice to companies – for a fee – and then make influential voting recommendations to client shareholders, functionally creating a kind of shakedown service (“Pay us and we’ll be able to recommend that shareholders vote in your favor; don’t, and who knows what we’ll do?”).  Corporations argue that shareholders don’t conduct their own analysis of issues anymore, and blindly vote with however proxy services recommend – giving them far too much power.

There is plenty of reason to be skeptical of their complaints.  At least one study shows that most institutional investors take recommendations into account but ultimately make their own decisions.  And as John Coates recently testified before Congress on the issue, there is no evidence of a market failure necessitating congressional regulation, and regulation might make the industry more concentrated and less competitive, which is the exact opposite of what we should strive for.

I won’t deny that to the extent proxy advisory services potentially have conflicts, these should be known and their policies for cleansing should be clear.  But one cannot help but suspect that companies’ reasons for objecting to proxy advisors is the same as their objection to unions – it’s not conflicts or corruption, it’s that they overcome transactions costs of  a disaggregated constituency and facilitate coordination so as to create a countervailing power center.  Managers, in other words, just don’t want to be challenged – by anyone.

That said, corporate complaints have found a sympathetic ear among Republicans in Congress and now, apparently, in Jay Clayton at the SEC.  The SEC just announced that it was withdrawing two no-action letters from 2004 that have become the bete noire of corporate managers, in preparation for an upcoming Roundtable on the Proxy Process.  Clayton even went out of his way to issue a separate statement clarifying that staff guidance is non-binding, if we hadn’t gotten the message that anything done under previous administrations is now suspect.

You can’t read the letters online, because apparently withdrawing them means making them inaccessible unless you have access to a legal database – and that, by the way, is just terrible practice from a transparency point of view; I’d rather they just be clearly marked as withdrawn.

That said, I will summarize (and embed the letters in this post, if I can get the tech to cooperate).  But first, some background – and this is going to get long, so I’m putting the rest behind a cut.

[More under the jump]

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It was a busy second half of the week. More after the break:

I’ve been absolutely riveted by Nike’s decision to make Colin Kaepernick the face of its new ad campaign.  (I assume most readers are aware of the basics but here’s an article to catch you up if you need it.)  It’s a daring move, not just because of the controversy over Kaepernick himself, but also because of Nike’s relationship with the NFL: Nike is the official supplier of uniforms and sideline gear (a deal that was just extended through 2028), and presumably, in that capacity, Nike wants to keep the NFL popular and football fans happy.

So, there’s so much to chew over here.

We start with the ongoing tension between the fact that it is good marketing for companies to look like they care about various social causes – whatever those causes may be – and their fiduciary duty not to actually care about those things. (Assuming you buy into a shareholder primacy model, etc etc). 

My favorite example for my students is, well, this FT Alphaville blog post in reaction to Jamie Dimon’s ostentatious announcement that he was giving his employees a raise.  And then there’s Tax Exempt Lobbying, a new paper by Marianne Bertrand, Matilde Bombardini, Raymond J. Fisman, and Francesco Trebbi, finding that companies strategically direct charitable giving so as to please politicians that have control over their fates.

So on the one hand, it may be good business to promote Kaepernick, but Nike has to absolutely pretend that’s not really its motivation.

(More under the jump)

FINRA recently appointed Jack Ehnes as a public governor.  As the CEO of CalSTRS, he helps manage approximately $224 billion in assets.  

Although Mr. Ehnes does not seem to have many of the same kinds of conflicts as other Public Governors currently serving on FINRA’s governing board, he would not be my pick to represent the interests of public investors.  CalSTRs has significant business relationships with entities associated with other board members.  To illustrate, take a quick glance at this CalSTRS investment committee report.  It shows CalSTRS investing with Bridgewater and Blackstone.  Notably, persons affiliated with Bridgewater and Blackstone already serve on FINRA’s governing board.  CalSTRS likely has significant additional relationships with other large players.  

If FINRA is serious about serving as (and not just portraying itself as) an investor protection organization, it should add investor advocates without these entangling business relationships to its board as public governors.