Systematic Stewardship : It's Up to the Shareholders a Response to Profs. Kahan and Rock

In an article forthcoming in the Journal of Corporate Law, Systematic Stewardship with Tradeoffs, Profs. Kahan and Rock take issue with the portfolio approach that I offered in Systematic Stewardship (47 J. Corp. L. 627 (2022)) on the grounds that corporate law requires a “single firm focus” that is inconsistent with the portfolio premises of “systematic stewardship.” The implication of their argument is that a manager or director or controlling shareholder (individually or as a group) would violate the duty of loyalty by following such an approach. I argue that corporate law (as developed in Delaware) and our regular practice has already rejected a “single firm focus.” Doctrinally, courts have accommodated corporate concessions to the divergent interests of diversified and undiversified shareholders on the grounds that parties bought and held shares with foreknowledge of these tensions. Portfolio investors commonly pursue corporate governance measures that they believe improve risk-adjusted expected returns across an entire portfolio, even if not optimal for a particular firm. Portfolio investors push firms to adopt risk-taking business strategies that suit the interests of a diversified investor but not necessarily undiversified investors in the firm. Directors added through activist pressure commonly act to promote the interests of portfolio investors, whose support resulted in their appointment or election. The limiting factor on directors’ consideration of these systematic factors, which in the case of climate risk (or financial stability risk) may reduce own-firm returns (at least in the short run), is not our “theory of the corporation” but whether the shareholders will in the end support and legitimate such measures through director elections