Deep Dive Episode 200 – Corporate Social Responsibility, Investment Strategy, and Liability Risks

Environmental, Social and Corporate Governance (ESG) investing is growing in popularity, especially after major investment firm BlackRock signaled support for what it called “ESG Integration,” or the practice of incorporating material ESG information into investment and divestment decisions. However, since this strategy is relatively young, the short–and long–term merits and potential harm to investors are both unclear.

A distinguished panel joins us to discuss a new paper, titled “Corporate Collusion” and written by former U.S. Ambassador and White House Counsel C. Boyden Gray, and to offer their differing views on the legal issues involved, including ESG, ERISA requirements, fiduciary duty, and more.


Although this transcript is largely accurate, in some cases it could be incomplete or inaccurate due to inaudible passages or transcription errors.



Nick Marr:  Welcome, everyone, to this Federalist Society virtual event as today, just this afternoon, September 28, 2021, we’re having a discussion on “Corporate Social Responsibility, Investment Strategy, and Liability Risks.” I’m Nick Marr, Assistant Director of Practice Groups here at The Federalist Society. As always, please note that expressions of opinion on today’s call are those of our experts.


We have a great program. The program today is co-sponsored by FedSoc’s new In-House Counsel Working Group and our Regulatory Transparency Project. You can learn more about both projects by going on our website.


We’ll have a couple of announcements. First, we’ll be looking to you, our audience, for questions as we go along. We do have 90 minutes, so we’ll have plenty of time for your questions. Please submit those via the chat, either the Q&A chat or the chat function. That way, our moderator can get to them.


I’ll introduce our moderator. I have the pleasure of introducing you to the Honorable Paul Atkins. He’s a Chief Executive Officer at Patomak Global Partners and himself a former Commissioner of the Securities and Exchange Commission. We’re very pleased that Mr. Atkins is here again—he hosted a program for us earlier this year—to moderate this one. And so with that, Mr. Atkins, the floor is yours.


Hon. Paul Atkins:  Great. Well, thank you very much, Nick. It’s a pleasure to be here. We have a really good program planned for you today with a first-rate quality panel, so I’m really happy to be with them.


As Nick announced, our topic today is “Corporate Social Responsibility, Investment Strategy, and Liability Risks.” And so what we’re going to be focusing on, among other things, though, is, really, in investment management circles, is the burgeoning trend of what’s called environmental, social, and governance investing, so short for that is ESG, which some people have said has taken over the industry, or at least it’s gotten lots of publicity. It’s one of the fastest growing parts of the investment management industry, although it’s not really huge money yet. It’s in the billions, not the trillions of dollars, but it certainly has been growing.


Some of the things I think we’ll talk about today are, is it a fad, is it good for investors, but especially, are there legal issues for investment managers to be aware of as they focus on that because, of course, they do have fiduciary duties to their beneficiaries and investors, their clients. If it be a fad, then are they, by going into this road of investing according to the particular strictures of ESG, however that’s defined, which is one of the issues also, are they sacrificing the best interests of their investors to high quality economic return if they go down this road?


Let me introduce our panel who will be discussing some of these issues. First of all is Ambassador Boyden Gray, who is probably not a stranger to those of you who have been around The Federalist Society for years. He’s partner of Boyden Gray & Associates, and he’s, of course, a former ambassador to the European Union. He’s a former White House Counsel, and a former partner at WilmerHale; Wilmer, Cutler & Pickering, at the time.


Next is David Berger, who is a partner at Wilson Sonsini. He’s a litigator, and he has built a practice, a very impressive practice in corporate governance, fiduciary duties, M&A, and security litigation. He’s been in some very high-profile M&A transactions during his career, so I look forward to hearing from David.


Next is Hester Peirce, who is current Commissioner of the Securities and Exchange Commission. She’s now in her second term, having been re-upped last year for another full term. Before she arrived at the commission, she’s had a very strong career. She was at the Mercatus Institute. She was with the Senate Banking Committee. And then, of course, she was at the SEC working for a certain commissioner, whom I know, in his office—that would happen to be me—and did a wonderful job back there; very proud of everything she’s done. And she started out at WilmerHale, also, in Washington.


And finally, Chief Justice Leo Strine, who’s a former Chief Justice of the Delaware Supreme Court. He was also 13 years as Vice Chancellor of the Court of Chancery in Delaware and wrote some very important, seminal opinions in that court. He’s also now an author of a paper entitled “Toward Fair and Sustainable Capitalism,” which you have probably been able to see in chats and other places on the net.


First of all, I think we should, to answer some of the questions that I outlined there at the beginning, I think we should turn to Ambassador Gray who has written a white paper recently on corporate collusion where he outlines some of the liability risks for the ESG agenda regarding charging higher fees and, quote, “rigging the market.” So those are strong words in a very staid profession like investment management, but Ambassador Gray, I was hoping that you could summarize some of your views for us. So I’ll turn it over to you.


Hon. C. Boyden Gray:  Thank you, Paul, for the introduction. I want to try to run through this pretty quickly because there’s not much time. But the ESG formulation is really quite surprisingly vague, and it can mean anything to anybody, which is not in the American tradition for guidance for behavior, both public and private. If this were a statute, the statute would be thrown out either as intolerably vague or as a violation of the nondelegation doctrine containing no intelligible principles by which to judge conduct.


There are four areas of interest. One is—Paul mentioned it—private sector collusion, when banks get together and say they won’t lend anymore for a certain projects in the energy sector, which has been the main area of focus. That is troublesome. It could be conscious parallelism, but all of these banks that are doing this, and they’re all doing it in concert, more or less have to. They wouldn’t otherwise unless this fear hanging over their heads of ESG and the SEC potentially going after them.


They all have to do it because if someone stays out and does a whole lot better in terms of performance, investment performance, the whole thing falls apart. So all this is a built-in antitrust problem here, the solution to which I’m not going to make a suggestion. It’s not easy, but I do think the problem is obvious.


I think that ERISA and SEC and private fiduciary standards for pension funds and whatnot are more or less the same. They do put constraints on making some decision to do something for social responsibility, which is not in their wheelbase, is not in their authority for an agency, and is dangerous in terms of investment policy because it might lose money. It’s not necessarily what you would do if you’re trying to maximize returns for shareholders, which is the job of most of the people subject to this regime.


One social issue which has cropped up, not with as much attention as the energy piece, is the use of racial quotas. Coca-Cola issued an ultimatum to their law firms that they had to hire by the numbers; that is, they had to have as many minority lawyers in their firms as they exist in the surrounding community. This was impossible to do since the number of minority lawyers is much, much smaller than the number of minorities. And it was simply impossible to do, and it violates a whole bunch of statutes, at least one in 1981, and then it also violates Title VII of the Civil Rights Act of ’64. And they did withdraw the letter after the letter we wrote. Whether that was cause and effect or miscorrelation, I don’t know. But I think this issue is going to come back.


I want to focus the few minutes I have remaining on the energy issue. It’s been an article of faith that the disinvestment is going cause these stocks to drop, and you better get with it because unless you follow people who are investing, say, in alternative energy, you’re going to lose out in the performance rankings. I’m not sure that that’s the way it’s going to turn out, at least in the short to intermediate term. Maybe way after I’m gone, it may. Climate change is not going away. It’s a serious problem, and it’s going to have to be addressed. It is being addressed. But this investment is not necessarily the way to make it happen.


One popular oil ETF has doubled in value in the last year. And if we look at what’s happening in the U.K. and in Europe generally, the pressure on alternative energy has really caused a problem for Europe this winter. It’s sort of ironic that the problem is the winter may be cold, and here we are in a global warming crisis, and it’s the cold that’s going to hurt everybody. But the cold is going to come, and the prices are too high, and I don’t know how Europe’s going to survive it.


And the solution in our country has been to shut down as much as possible by the government, as much production as is possible, and asking the Saudis to bail us out with more production to keep gas prices lower. This is not a way to do investing, and the investment strategies, it seems to me, probably have more to do — or investment results have more to do with what Russia does in squeezing Europe, which they’re not doing, thanks to Europe’s fecklessness in treating Russia and the gas problem. And demand for natural gas has increased, and it’s having to come from Saudi Arabia and other Middle Eastern countries, not from this country, which Europe was expecting.


And I think that investing in certain oil assets now would be a good strategy. It may only be short run, but it would be a good strategy, given the pricing pressure and the huge demand for energy that is now existing in Europe. So I will just take that as my stopping point.


I think it’s important to, as a final note, to say that the Supreme Court has been emphatic more than once in saying that the climate change regulatory agency, EPA, that is the agency that has been assigned by Congress the job of dealing with climate change. And it’s not that the SEC shouldn’t have a role. If the Congress wants the SEC to have a role with certain standards, Congress is free to adopt them, but the SEC can’t make it up. And in the absence of congressional authority, I really believe that all energy, climate change issues, climate change especially, must first go through the EPA unless there’s legislation to change the regime that Congress has already established. Thank you, Paul.


Hon. Paul Atkins:  Thank you very much, Boyden. Let me turn it over to David.


David Berger:  Thank you, Paul. Thank you, Boyden. To paraphrase FDR in a similar situation, let me say good morning to all of you, my fellow ESG activists. I say this because, as Boyden pointed out, and Commissioner Peirce will agree with, I think ESG, as everybody knows, is a very broad term. Commissioner Peirce recently defined it as including whatever the speaker or the news media are focused on at the moment. And I find that to be quite true, that ESG, to me, I’ve characterized it sometimes as everything that sounds good.


Here, while I have fundamental disagreements with Boyden’s article, which I’ll briefly outline in a moment, it is important to remember that ESG, because it’s so broad, covers not just environmental issues, which is the primary focus of Boyden’s paper, but also social issues such as whether corporations can join together to lobby government to limit the power of labor unions or engage in other forms of political speech, whether companies can make decisions for their employees about what type of birth control procedures will and won’t be covered, and whether companies should be involved in governmental decisions about COVID-19 regulations.


All of these are social issues that are covered under the broad rubric of ESG today, and many corporations have, unfortunately in my view, adopted what I call conservative views on these positions, for example, spending a great deal of shareholder money to lobby federal and state and local governments to adopt anti-union policies, argue that corporations should have the right to not pay for various types of healthcare, and argue that corporations should have the so-called freedom to avoid mask or vaccine mandates.


I raise this point because as a corporate lawyer who spends the vast majority of my time defending corporations, I will tell you that in my experience, the crisis that Boyden seems to find from the ESG movement, whether that’s in the environmental area or elsewhere, is, in my opinion, much exaggerated. In fact, I think there is a reason that business leaders and organizations ranging from the Business Roundtable to Doug McMillon at Walmart to Charles Koch at Koch Industries and Tim Cook at Apple all talk about how important core ESG issues, including sustainability, worker rights, and good governance are to corporations.


I believe these views are sincere. And while we can disagree over how best to implement them or how best to disclose them, I believe that there is no crisis in corporate America over ESG issues. To the contrary, while Boyden is dismayed by the supposed ESG pressure on what he calls politically incorrect industries, the reality is that many of our smartest financial investors are supporting ESG solutions to companies in those specific industries. And I think one need only look at Jeff Ubben and his appointment to the ExxonMobil board for a prime example of this.


With that as the backdrop, let me turn to Boyden’s paper, which, while quite interesting, I think rests upon four fundamental flaws. These flaws are as follows. First, the stockholders own the corporation. Second, the institutional investors who own most stock in today’s public markets are required to maximize stock prices over the interests of the beneficiaries on whose behalf the institutional investors are acting. Third, the administrative and regulatory policies of the Trump administration, and in particular, the antitrust and ERISA policies of that administration, are likely to remain in place. And finally, fourth, expanding the ability of the plaintiff’s bar to police the ESG issues that you disagree with will benefit corporations, corporate governance, or the economy at large.


Let me briefly cover these issues before turning it over to those much smarter than I am. First, as to corporate ownership, let’s be clear. Stockholders do not own the corporation. Stockholders own stock. This is an important distinction because while stockholders have significant rights under corporate law, including the right to vote for directors, stockholders generally cannot force corporations to take any particular action. This is critical in the ESG context because stockholders do not have the right to second-guess basic business decisions.


To the contrary, it is the board of directors, not stockholders, who have the power and responsibility to decide and implement corporate policies. As a result, the decisions on the ESG issues identified by Boyden, whether it be to reduce or increase carbon emissions, fight or favor unionization, adopt or reject dual class stock, or other issues that are going to be made by the board and by management, those are decisions made by the board, not by stockholders. The role of stockholders, while significant, is limited to changing the board if they do not like the decisions made by the board on these issues. But stockholders alone cannot force the board to adopt any particular ESG policy.


Second, Boyden’s core argument is that while investors may use their money to further their preferred social roles, some strategies employed by ESG activists may be unlawful. Although Boyden does not specifically define the ESG activists he is talking about, I assume they range from various ESG funds to, as he notes, the three largest asset managers, BlackRock, Vanguard, and State Street, who, between the three of them, manage, according to Boyden, the equivalent of more than three-quarters of U.S. GDP. From there, he moves to the view that these funds could be singularly focused on stock price rather than ESG issues such as pollution.


The problem with Boyden’s argument on this issue is that he fails to recognize the nature of the actual investors in these funds, especially the big three. The reality, as Chief Justice Strine has written eloquently about in a number of articles, is that these three institutional investors have grown so large on the backs of America’s what he calls worker investors who are generally highly incentivized to turn over a portion of their income each month to mutual funds who participate in the 401Ks, 529 plans, Roth IRAs, and other similar retirement programs.


For these investors who are saving for retirement and their children’s future, they do not benefit when companies engage in regulatory shortcuts that allow companies to avoid externalities such as clean air, better working conditions, and higher wages, even if avoiding those externalities results in a temporarily higher stock price. Unfortunately, it is just now that the funds who control the money that these workers are putting into them are starting to realize the real interests of these workers. But as they do so, as they choose to focus on the real interests of these workers and adopt policies that support those interests, those policies cannot be illegal.


Third, much of Boyden’s article is focused upon the unique regulatory agenda that was pursued by the Trump administration, particularly with the ERISA and antitrust agenda. But now, this agenda has been changed and is in the process of continually being changed. For example, we already know that President Biden has announced that his Labor Department will not follow the Trump-era regulations that sought to limit the ability of ERISA fiduciaries from considering ESG factors. As a result, private litigants cannot sue to enforce those standards.


Similarly, I am not sure how much more afield you can get from Trump-era antitrust than Lina Khan. And my takeaway from President Biden’s executive order to promote competition in the American economy is that the administration is far more likely to pursue the big energy companies for antitrust violations resulting from their collective actions to hide the effect of climate change than it is to pursue funds that pursue a clean energy agenda. And in this regard, I would point you to the recent lawsuit by the State of Vermont against the various energy companies alleging a significant coverup over many years of the fears of the issues arising from climate change.


My final point in response to Boyden’s article is merely cautionary. Be careful what you ask for. Again, Biden’s agenda seems to focus on the enforcement by private parties to achieve his stated goals, and that offers a variety of possible causes of action. But I wonder whether private class litigation of the type anticipated in Boyden’s article is really a panacea. I know most if not all of us here are lawyers, but is litigation really the answer to these issues? In my experience, litigation is not a particularly reliable ally on these issues, and in fact, all too often can be a source of needless waste and inefficiency in the legal system.


In sum, stockholder primacy has dominated corporate law for more than 40 years now, and during this time, billions of dollars of government subsidies went to the fossil fuel industry each year, including well over $10 billion in 2020 alone. During this same period, the problems caused by global warming have become all too evident both in this country and across the globe.


In light of this, perhaps we would all be better off if both the progressive environmental policies and the social values based investment booms identified by Boyden are allowed to expand in influence as it seems the policies followed over the last 40 years have created some significant problems that cannot be ignored, and in fact, are not being ignored by stockholders now across the globe.


Thanks for allowing me to be heard. And with that, I will pass the Zoom screen on to Commissioner Peirce.


Hon. Paul Atkins:  Thank you very much, David. So, yes, Commissioner Peirce.


Hon. Hester Peirce:  Thank you, Paul. And thanks to The Federalist Society for inviting me to participate on this panel. And I’m pleased to follow Ambassador Gray and David’s very thought provoking comments. I do have to start with my disclaimer, which is that the views that I represent are my own views and not necessarily those of the commission or my fellow commissioners.


I will focus my comments on the SEC’s consideration of ESG disclosure and other ESG matters. So let me briefly highlight what the SEC is doing in this space and then share with you some of the concerns that I have about the approach that we’re taking.


Chair Gary Gensler has set a very full agenda for the commission, but ESG is certainly at the top of that agenda. In particular, the chair has announced an intention to propose disclosure requirements for public companies relating to climate risk, human capital, and board diversity disclosures. Another area under consideration is whether asset managers who are selling ESG strategies and products should have to disclose how they’re going about carrying out those strategies and what exactly the strategies are.


And then aside from rulemaking, SEC examiners are looking at ESG advisors and products, and SEC staff in the division of corporation finance are looking at disclosures. Last week, for example, the staff in the division published a letter to issuers around climate change disclosures. And then the division of enforcement has announced the creation of an ESG task force, so I suspect that we’ll, at some point, see some enforcement actions following from that.


I’m certainly open to seeing what the chair presents for the commission’s consideration, but the appropriate touchstone for me remains what’s material to the long-term financial value of the issuer. The issuer letter that our staff sent out last week actually suggested a potential move toward the double materiality concept which is gaining traction in Europe, which means that a company needs to report not only what’s material to its long-term value, but sort of looking externally what the company does that’s material to environment, society, and so forth. And while some of these matters are very important, I don’t think that turning the SEC’s disclosure regime into an attempt to deal with all of those kinds of matters makes a lot of sense.


And I think the use of SEC disclosure to get at ESG problems in society, which seems to be the direction that we’re headed, has the potential to harm a lot of stakeholders. So let’s talk about some of those stakeholders here. First, fund and public company shareholders. I just will say from the get-go that I do think that shareholders as residual claimants of the corporation do deserve special consideration when we’re looking at companies. And I think the goal of a company should be to maximize its long-term financial values, so let me just put that out there.


But I think investors, whether it’s in funds or shareholders in companies, will pay the price in terms of lost returns as managers and executives seek to manage to multiple goals, which essentially means that they can do whatever they want, and then they can say, well, we’re meeting one goal or the other. It’s much easier than when they’re just held to this goal of achieving the — of maximizing the long-term financial value of the company.


Investors may not recognize the tradeoff right away, and I think now we’re in an unusual phase in the market where the market is doing very well, and shareholders are seeing a lot of — they’re making a lot of money, they’re seeing these returns, and they’re seeing their portfolios go up in value.


But I look at it with this analogy in mind. I had a tomato plant this year, and my tomato plant produced a grand total of one tomato. Now, I watched that tomato like a hawk. I was very aware of what that tomato — when it was ripening and so forth. It was delicious, but it was one tomato. Now, I compare that to my dad’s garden, which just produced bushel after bushel of tomatoes. And so if someone had come by and taken a couple baskets of tomatoes and handed them to a third party, I don’t think anyone would have noticed. But when times are leaner, as they were in my tomato patch, investors will notice.


The second category that I think will be harmed by this focus on ESG at the SEC is fiduciaries. Fiduciaries clearly are pushing for an ESG focus. They’re offering products and services that are ESG focused, and that’s understandable because there certainly is demand for those products and services. But they are able to charge a premium for those products and services. And so I think over time — but they’re also promising in many instances, not always, but in many instances, they’re promising either that there isn’t a tradeoff between achieving these ESG objectives and financial returns, or they’re saying that actually focusing on ESG objectives will increase financial returns.


And I think that the empirical evidence there is actually because ESG is such an expansive category of items, it’s very hard to do the kind of empirical work you would need to show that link. And so I do worry that if over time it becomes evident to people that ESG is being used at least in some circumstances as a marketing ploy or as a way for asset managers to make their reputations by championing causes that are popular in society, I do have concerns that they’ll lose their reputation as being fiduciaries who are primarily concerned — whose job it is to serve their clients, and clients who are looking for an investment return.


I think the SEC also stands to lose from wading into ESG issues. These are often hot button political and social issues, and we lack the expertise to handle many of these issues. Our principles-based regime has worked well over time. We do not want to become a political institution. I know Ambassador Gray said that Congress could give us this mandate, and indeed, Congress could do that, but I would argue that we’re better when we’re just focusing on getting investors what they need to understand the long-term financial value of a company. And that is part of the reason why our capital markets do so well.


And then, our economy will also suffer if we join this ESG push. Across financial regulators and securities regulators, banking regulators, central banks, there’s a lot of interest now in ESG and trying to drive capital to favored uses and away from disfavored uses. And often, these are wonderful targets. You’re trying to green the economy. You’re trying to address problems like climate change or social problems.


But the problem is that when government comes in and they try to direct capital flows, they’re doing it using a regulator’s vision, which is necessarily going to be limited. We spend our time writing regulations, not thinking about technology or about how to better coordinate people, those kinds of things. And so what I worry is that were essentially turning the financial regulators, and the SEC is now potentially part of this, into central planners for our economy.


And what we could end up doing is directing capital away from the places where it could actually work to solve the climate problems and other problems that are in the ESG bucket. And in the process, we may be sowing the seeds of another financial crisis because we’ve seen in the past that when the financial system is directed by regulators to apply its resources to a particular part of the economy, when regulations drive capital in one direction, it can end up really creating some systemic problems in the financial system, and then that can flow out into the economy.


And then, finally, I do have concerns that we’re harming society at large by politicizing companies and forcing them to toe political lines. In some ways, we’re starting to look a little bit like China where there’s a government official placed within companies, so we have to be very careful not to go down the road of intertwining politics and the corporation.


I think instead, we should celebrate the role that companies have played in the past and do continue to play in making products and services that enrich people’s lives and communities, and in bringing together the talents of people, and bringing those talents together with capital in a way that benefits the whole society and the communities in which they’re situated. Thank you.


Hon. Paul Atkins:  Well, thank you very much, Commissioner Peirce. Let me turn it over to Chief Justice Strine.


Hon. Leo Strine:  Thank you to Mr. Atkins and thank you to all the panelists. It’s great to be with you all.


I’m a little bit confused by this discussion, and I’m going to say why. I think there could be common ground if some of the principles articulated actually applied across the board. And my colleague and friend, Mr. Berger, signaled that.


One of the questions I had after reading Ambassador Gray’s paper was whether he believed in the scientific and actuarial consensus that human generated carbon was generating harmful climate change. Reading his paper, it was very difficult to tell whether he believed in that. I believe he started his presentation by suggesting that he did believe in that.


Well, if we’re going to sue people for colluding, then read the quotes in the Vermont complaint. Are we really in a situation where we think the American Petroleum Institute, for example, is the fulcrum for an illegal conspiracy? And do we actually — if we’re looking at that harm, is the harm now that companies believe that we ought to get moving on this economic, ecological, and human disaster fast, or is the harm that we could have done something in the late 1970s, late 1980s, late 1990s to transition in a way that was much smoother, that didn’t harm American workers and communities as much?


So I’m really perplexed by this idea that corporate cooperation is now an antitrust violation because, again, if you look at the, for example, the reports of the Senate for political responsibility, you’ll find that a huge supermajority of corporate money goes to fund political causes on the right, Orwellian named right-to-work proposals, frankly, electing legislatures that have gerrymandered and done ballot restriction laws. It’s very clear.


And I had not known that the political right is now going to go back to the old time religion where we think corporations stay out of politics. I think that many of us would say, frankly, there’s no legitimacy of public corporations using their money for political purposes. That’s not why people invest, and it’s particularly not why people invest in our current investing system in which you basically have no choice but to give your money over to mutual funds. And mutual funds — people don’t give money to the Index 500 fund to engage in political purposes, and that’s what happened.


So if what we want to do is keep everybody out of politics, then I think there may be some common ground. But if we’re going to apply legal principles in a balanced way, the paper has a certain hysterical quality because the same causes of action that it articulates could be brought in a much more forceful way and much more directly related to investor and economic harm.


The other thing I want to say about the paper in terms of this is just I assume that the paper takes the position that investing in European companies is a breach of fiduciary duty and that anyone who has had a mutual fund that invests in German, Canadian, Australian, Scandinavian companies is engaged in a breach of fiduciary duty. Why? Because the corporate governance systems, to be honest, of most market economies, and if people in the panel want to call everybody else besides us Communist, we’ll see that. It was interesting to see the idea of being tough on Russia is now unpopular.


But the major market economies — our economic allies largely have corporate governance systems that are stakeholder focused. They do very well, and it’s been common for investors to have portfolios that take into account those companies. That’s never been seen as a breach of fiduciary duty, so I don’t really understand that.


I really also don’t understand this whole idea that if you take the view, long term, that investing companies that make money net of externalities is going to create the most sustainable wealth for your diversified investors who own the whole economy and who have to pay taxes, but that’s a breach of fiduciary duty, while government regulators and none of these commentators have ever done anything about the “seize the moment” rapid turnover fund where there’s 500 percent annual turnover, you’re incredibly at odds with the efficient capital markets hypothesis, which is that a rapidly turned over portfolio is never going to manage the market. There are thousands of funds like that. Go after them. Again, let’s apply our principles in an even-handed way.


And so I find this whole thing — and then lastly, the whole idea that plaintiffs’ lawyers are a solution just sort of makes me giggle because if one thing that — for example, the U.S. Chamber and I aren’t always in alliance on a lot of things, but I have done a lot of work with them over time about eliminating rent-seeking and litigation, making sure that corporations aren’t buffeted by frivolous litigation because that hurts diversified investors and society. This idea that we should now weaponize litigation because companies may be thinking about how they affect society.


And so let me turn to another issue of common ground, and I think it may bring us closer. I don’t think of ESG as a populist — and I use E, Paul, up front, for employees because I don’t think they should be buried in the S. And I also believe very much that we need to bring along the industries that make energy, because we all use energy, and we need to help them transition and their workers, and that we’re all in this together. But I don’t think of it as buying a page ad in The New York Times over something that is unrelated to your company.


Properly conceived, ESG is about how your company rubs up against your stakeholders and society, and that fundamentally relates to your business. For example, there was a case recently about Boeing. Nothing could be more important to Boeing’s future than the belief that its products are safe. It’s pretty important that a product be safe when you’re flying in it thousands of miles away from home way above the earth.


Is that an illicit consideration? Is being able to run your food plants in a safe way during COVID and be able to keep them open, is that illicit? Is being able to be seen by an increasingly diverse population as an employer that provides equal opportunity, is that illicit? I think many people would think that that’s good business. And I would tell you as a person who did about as many Delaware cases as anybody that it’s perfectly within people’s fiduciary duties to believe that making money the right way and treating your stakeholders with respect is a sound business judgement.


And so I agree there’s a lot of rhetoric out there that’s wrong, but properly conceived, this is about how you affect society. And from and investor’s standpoint, and this is the only thing I agree with from what Commissioner Peirce said, for example, I believe that the SEC should not be going forward in isolation from other agencies on things like climate and workforce—I don’t call it human capital—kind of issues.


I think it would be good to do it in cooperation, but I think we have to understand where investors may — investors have a diversified economic portfolio, and for 99 percent of Americans, their job is what’s most important to them. They pay taxes, they have other things, and they invest in the whole economy, so they need companies that make money net of externalities.


And if you look — David cited Jeff Ubben, but if you look at the Engine No. 1 thing on total value, what they’re talking about is making money, companies making money net of externalities. And for diversified investors, that’s the gate because we pay taxes. The cost of climate change is trillions of dollars in economic disruption and human cost, and that is borne by someone. And the idea that it’s not borne by investors is just naïve.


And so one of my points about the SEC I’ve made, and Jay and I are friends, Commissioner Peirce, and we talk a lot about this. Ambassador Gray made the point that the EPA is our point person on disclosure on this stuff. I agree with that, Department of Labor. But the way it would work in the E.U. is that there’d be a mandate if you were a company of certain size, whether you had publicly listed shares or not, you would have some workforce disclosure standards.


And American companies have abided by this, and the same thing with the regulator. Where the SEC could come in is if we’re going to do double materiality, I agree with the commissioner that we should have the legitimacy of a congressional imprimatur. I would think the SEC would do it in concert with those agencies. But where you could do it is an annual form EESG.


And I will just finish with this. We are talking about only part of the economy here when we talk about public companies. And I think it’s very dangerous to just focus solely on public companies. We have to deal with private companies, and the SEC has lagged in that. The SEC has the authority because many of the private companies are funded through SEC disclosures to cover the whole economy. I think the SEC should not be put in an improper position of doing things beyond its ken—and Barbie—but I think it would be quite useful to have a coordinated approach to this.


And I’ll finish with this on the business community side of things. The business community would like to see the SEC step forward and try to wring some consistency out of the cacophony. And because we’re all in this about climate, and every company has a workforce, and that’s about as important a stakeholder group as you could find, if the SEC can work in an efficient way with other agencies, be appropriately modest about it, and put in place disclosure requirements that are useful and coordinate those with what’s going on through the OECD, I think a lot of companies will actually tell you they would love that noise reduction.


We’d have more comparability, and we could move forward in a saner way. That’s, to me, a much saner, more reasoned, bipartisan approach than unleashing plaintiffs’ lawyers to go to war on the companies that make useful products or services and employ millions of Americans.


Hon. Paul Atkins:  Well, thank you very much, Mr. Chief Justice. I know, Ambassador Gray, you have to leave at 1:00, so I wanted to let you, if you want to — there’s a lot to unpack in all that’s been said, and so I thought I’d give you the floor here if you want to respond to anything in particular for a few minutes.


Hon. C. Boyden Gray:  Sure. As I said at the outset, my main point is that these terms are so vague that they can mean anything anybody wants them to mean at any point in time. And that’s not a way to govern a society, in my view. It’s just not what’s typically associated with the rule of law, and it’s not typically associated with the way we have conducted our affairs in this country. So it’s the vagueness of it all.


The Chief Justice referred to a mandate, say, from the commission. Well, if there’s a mandate from the commission or a mandate from Congress, that is fine. I’m happy — I might not like it, and I might oppose something in the future, but if Congress wants to adopt certain principles that are intelligible and that guide the agency in a way that is most reviewable by a court, if necessary, and understandable, certainly, to all the stakeholders involved, that would be fine.


I’m not sure Congress is going to do that. They’ve tried to legislate on climate change and will have to try again because there are limits to what EPA can do, and there’s certainly no authority for the SEC to do any of this. So I hope that Congress will step into the breach. But many of our problems, in my view, stem from the fact that Congress has been kind of AWOL in most of the really big issues of the last two or three decades. So I would welcome Congress’s reappearance in the political process.


I’m not against European companies. I have investments in European companies. I wouldn’t have spent three years as Ambassador to the E.U. if I thought the E.U. was second rate. I worked tirelessly, and still do, to get the two continents to converse better together because we’re 40 percent of the world GDP, and $6 billion or $8 billion each spends on the other side for jobs. Many of the cars made in Spartanburg, South Carolina, by BMW are sent to Europe, so why do we have different standards? It all should be as similar as possible because a single market, if you can envision it, that consists of both continents would be the best possible antidote to the threats posed by China.


I want to also point out that this country has led, I think, all countries in the last decade or more in reducing greenhouse gasses. Now, that is primarily the result of Title VI chlorofluorocarbons, but more importantly, the emission of natural gas. And it’s not perfect, but the perfect shouldn’t be the enemy of the good. And it has been responsible for a dramatic reduction in our share of emissions.


The problem is that we can’t do this alone. We certainly need Europe to do it together, but we cannot leave out China and India. Kyoto, the first treaty on climate change, lost 97-0 in the Senate. Why? Because China was excluded. And if we don’t get China more included—they’re 10 years behind in what they have to do under the Paris Accord—you will simply ship more jobs over to China where it’s cheaper to manufacture. So the whole world has to get into this.


And a lot of effort that’s spent, say, against the oil companies, I think is misplaced. American Petroleum supports a carbon tax which is in the papers now because of the budget problems that are affecting all Americans and both sides. Politically, they’re not opposed to taking steps to deal with climate change, and I, for one, am not opposed to it. I don’t take a second place to anybody in terms of the number of times I’ve helped take out of the air with my various entries in the government. But I do think we need principles to guide us, principles that make sense that do apply across the board, that do apply equally.


And I’m not sure, actually, that there’s that much difference between any of the speakers that succeeded me. I’m not sure there’s really all that much difference if we had a couple hours to sit down and chit-chat it through. I’m not sure I’m in violent disagreement with anything that was said in the last 20, 30 minutes. But I do think we need a lot of clarity on what exactly is expected. ESG is too open-ended, too vague, too uncertain, too subject to whim and fad to serve my tastes.


Hon. Paul Atkins:  Okay. So why don’t we — maybe what we could do is focus a little bit on what the SEC’s mission is and what investment managers are really supposed to do, and that is look out for the best interests of their beneficiaries, their clients, and what not. And notwithstanding that, of course, the Biden administration has said that its going to depart from what the Trump administration guidance was at the Department of Labor.


Suffice it to say that the courts have repeatedly, over the last many years with respect to ERISA, have focused on that there is an absolute duty, of course, loyalty and care with respect from fiduciaries to their beneficiaries. And the rubric that courts use is the economic best interests of those beneficiaries. So investors, we take it, are not monolithic. They have all sorts of interests, and that’s one reason why judges have gone that way.


So let me pose this question to the panel. Back in 2018, a fellow named Jason Perez defeated the sitting president of CalPERS, running on an anti-ESG platform, basically saying, “I want to retire well, I want to have a good pension, and I don’t want to have my retirement plan be invested according to whims,” as some of the panelists had said, on an ill-defined ESG goal.


So let me pose that maybe first to Commissioner Peirce, and then the rest of you. But how should the SEC address this issue? You’re not at the Department of Labor, but maybe they as well. Is it time to maybe revisit this ERISA standard that the courts have maintained, or do you think that standard is still fitting?


Hon. Hester Peirce:  Well, let me just talk in the context of the SEC as opposed specifically to ERISA and some of the things that we’re looking at with respect to investment advisors. The best interest standard is the duty of care or duty of loyalty of part of the fiduciary duty of an investment advisor to its client.


Now, that’s not to say that an investment advisor can’t sell a product or a service that’s an ESG-based service where they’re saying, “Look, we’re going to try to achieve returns for you, but we also have these other objectives that we’re trying to achieve,” as long as that’s clearly disclosed and as long as the tradeoffs are clearly disclosed as well, or if you don’t think their tradeoffs then explain how it is you can achieve multiple objectives without having any discount in returns.


So I think that one of the areas we’re looking at is, are assent managers doing a good job when they’re selling their products and services of telling people what it is they’re actually getting and what strategy they’re employing? But I think if you’re telling people that you’re maximizing returns, and then you’re pursuing other objectives that are your objectives as an asset manager, that’s really problematic.


One of the areas where I have concerns is when I see a large asset manager talking about how it’s pursuing a strategy, a ESG strategy, for example, through voting where it is applying the same strategy across every fund that it manages. So then my question is, well, are the objectives of every fund that you manage identical, because if they’re not, why are you applying the same strategy, why are you applying an ESG strategy to your passive funds, which presumably shouldn’t have an ESG strategy if they’re just passive index funds.


So I think there are a lot of places where we need to hold asset managers’ feet to the fire and say to them, okay, we get that you want to offer these products and services, but you’ve got to apply the same kind of disclosure standards that we expect of you with respect to other types of strategies.


Hon. Paul Atkins:  Yeah. Mr. Berger, I was going to turn to you. You remarked that you thought that some of the smartest investors are supporting ESG. And of course, the one warning that is displayed on every mutual fund prospectus is that past performance is no indication of future performance. So with respect to some of these issues that Commissioner Peirce has raised, how do you square that, and what do you — as far as the duty of these managers goes?


David Berger:  Sure, great question. And really, I think there’s two answers to it. First, going to the heart of what Boyden was saying, he was talking about how ESG is too vague to be a rule of law. And of course, ESG is not rule of law. It’s not designed to be rule of law.


What ESG really is, it’s a response to the stockholder primacy philosophy that has dominated corporate governance for the last 40 years. And just as stockholder primacy is quite vague, actually, what we mean by it, and it’s subject to a lot of interpretations, and a lot of scholars have written about what stockholder primacy is and how to measure it and how to define it, has been very — it’s gone through a lot of iterations over the last 40 years, 50 years since it’s taken hold. ESG is, as well. And ESG covers a wide range of issues, but it is a notion. It is a concept that something other than short term or stock price alone should decide how you value a corporation or what a corporation’s responsibility is.


And the way it ties into the specific issue that you address, raise, is through risk management. And what’s critical about ESG is it looks at the broader risk management obligations of corporations.


And it’s not only risks internally that are immediately measured, but it is also to govern the issues of externality risks that Judge Strine raised so that these costs for society that corporations raise are just simply not put upon outside forces, and we allow them to be covered by government or by investors outside of their portfolios, but are, rather, if they’re costs of the corporation, if they’re risks created by the corporation by corporate activities, that they’re covered by the corporation. And you should not allow a corporation to escape those risks through whether it be lobbying or tax avoidance or other things. And that’s really what ESG focuses upon.


And just to go back to your original question on Mr. Perez, he too is very much focused on, at CalPERS, I think, risk management as an issue. And so to me, these issues are reconcilable, and I think the biggest question that we have to address is how do we make sure that corporations address the issue of risk management, and I think it’s done through the ESG rubric.


Hon. Paul Atkins:  Okay. Well, then, Mr. Chief Justice, I wanted to go to you too. I —


Hon. Leo Strine:  — Well, yeah. I would like to take on — I would like to say I was a little confused by the commissioner’s point about index funds because I think index funds are the ones — it’s just wrong when I hear professors say, “Oh, your only duty as an index fund it try to match the index.” That’s great. So the American economy turns to nothing because of climate change, and we’re having to build walls around everything and relocate people, and you’ve matched the index of 4.2 percent over the last 20 years. Great.


No, you’re supposed to use your stewardship consistent with your fiduciary duty to maximize the best interests of your beneficiaries. In the case of an index fund, that means to create corporate governance policies which are conducive to what? Well, let me explain. No one in an index fund is long one or two companies or one sector. You’re long the whole economy. Externality costs which increase the burden on other companies and on taxpayers and that drag down the whole economy hurt you as an investor.


You know when the index funds sold Enron? Anybody know, class? When it went out of the index, when people save — what I mean is they sold when the went out of the index, Paul, because they hold long term. That’s the whole point. And so the fact that the big three is actually now focusing on what they should be, which is are we creating growth net of externalities, is an appropriate exercise to fiduciary duties.


I agree with the commissioner on this. The funds should be thinking about a fund-specific way. I wouldn’t exclude index funds from their — and again, I agree that we should be focusing in a real way on what ESG is. The Engine No. 1 people do that, and if you read the report, they’re very much focused on the effect of companies and also on the reality that people invest in a diversified portfolio, and they need growth net of externalities.


But I would say that no one except me focused on the fact that index funds were voting like actively traded funds. I have called for years instead of — frankly, I’m not a fan of the proxy advisory service which was a byproduct of an overly broad regulatory mandate in the 1980s by the Reagan administration to make institutional investors vote on every single thing in the world, which tilted the corporate governance system toward activism. ISS was then regulatory insurance. I have said for years that ISS, for example, that you shouldn’t be able to rely on the ISS or Glass Lewis if you’re an index fund unless you’re getting index fund specific guidance that takes into account the situation.


For example, we have funds, and I don’t think the SEC has ever done anything about it, that have voted yes and no on the same merger because they own the buyer and seller in the same fund, and they don’t consider the combined effect on the investor. We had socially responsible funds that were voting the same way on all proposals because there’s too many votes.


There are a lot of things that I agree on in terms of having a more rational system. I think just think it’s a little odd that now when people focus on things like maybe we shouldn’t have externalities, maybe we should have a system that makes money the right way, that all of a sudden, all the institutional investors are out of bounds.


And when obvious departures from fiduciary responsibility and patterns of it, for example, frivolous litigation that continues to be brought by public pension funds for no reason, get ignored, when CalPERS — I had a case involving CalPERS, and they were running, Paul, a senior citizen housing project worth about a billion dollars. Now, they were running it. How could that be an appropriate exercise of fiduciary responsibility by one of the world’s largest pension funds? It does not scale. They don’t have the expertise. There’s stuff like this all around the country.


So the idea right now that there’s this big revolution and irresponsibility because people are taking into account externalities, I just have a hard time understanding this. And if we’re going to go back and look at this industry, warts and all, cover the advisors, make sure they operate in consistency with principles, I’m all for that. But it’s all got to be on the table.


And like you said about the climate change and about the other things the companies do together and about their role in the political process, if we’re going to put it all on the table, it can’t be just because some of the companies and some of the investors are not focused on issues that people find uncomfortable like the idea that billions of human beings engaged in intensive economic activity over centuries have now had an effect on our climate.


Hon. Paul Atkins:  Well, I think at the —


Hon. Hester Peirce:  — Can I just weigh in for a second in response? So I want to be clear, I don’t think that externalities are something that we don’t have to pay attention to as a government. But I would argue that the SEC’s primary role is not to regulate externalities when it comes to company activity.


Our responsibility is to help investors in companies understand those companies, the long-term financial value of those companies. There may be environmental regulation that comes in to try to address externalities in the environmental space, or you can think about other potential externalities where there might be a government regulator come in, but we’re not a substantive regulator. Now —


Hon. Leo Strine: — I didn’t say that. What I mean is, commissioner, is it wise and appropriate for an index fund to believe, when it’s invested in the whole economy, that it’s bad for diversified investors if we don’t move to address the economically huge consequences of climate change, and also to ask the SEC to require disclosures that are material to investors on companies’ impact on carbon. I agree with you, not the substantive regulator. But a lot of them would argue that knowing a company’s practices in this important area or in how they treat their workforce is something that’s relevant to them in making fiduciary investments. That’s all I’m saying.


Hon. Hester Peirce:  Yeah, but look, a lot of this ESG stuff is now — it’s now trendy to say that we care about ESG. But ESG principles, caring about your community in which you’re located, the workers that you rely on, when worrying about trying to make sure that you maintain good relationships with the consumers that you serve, these are not new concepts. These are the concepts that have made companies survive over history. I agree with you that companies need to think about that, and investors when they’re investing need to understand how companies are thinking about those things, but I don’t think it requires a whole new ESG framework.


Now, your point about index funds, I understand what you’re saying. But if I’m investing in a passive index fund, unless I’m told by the manager of that fund that it’s a passive fund, but we’re going to actively vote in accordance with these objectives, that’s fine. But if you’re not telling people that, then I think that is a problem. So my —


Hon. Leo Strine:  — Commissioner, they have to vote. They do vote. And what they’re saying, people like Mr. Fink and folks at State Street, is they believe for the investors they represent who own a broad swath of the economy and, by the way, who are stuck in, like even now, I’m, as decrepit as I am, I’m still three years away from Castro. What I mean by that is if I take my money out of my 401K, I get an excise tax on it. Most people who come into a job now, they start putting their money in in their late 20s. They can’t get at that until they’re 59.


And so what State Street and BlackRock are saying is it’s relevant to us how the whole economy moves forward. We want to have growth net of externalities, and for that, we would like some information about how particular companies are doing. That’s all I’m saying is that in that way, it is a very investor-focused thing. And I have a hard time understanding how that comes close to any breach of a fiduciary principle.


I don’t think any of them put out disclosures that say, “We don’t vote, we just don’t do anything at all,” because, by the way, the government will come down on them. The CII would come down on them. It would be a hysterical reaction at ISS because then their business would all go away.


And so I think they do these things, commissioner. I just think that some people object to now getting involved in these issues. And I just find it a little bit strange, given the — tell me how it is okay that there’s all this frivolous litigation, or the rapid portfolio turnover, and how that is consistent with what we know about appropriate investing for diversified investors. And I just don’t see any government action to deal with that.


Hon. Hester Peirce:  We bring enforcement actions all the time against a whole series of violations. But what I think is a concern is when you see — just as I said, I’m concerned about government trying to direct capital flows to solve problems in a way that the government thinks they’ll be solved because I think those solutions are likely to come from places that we as the government can’t figure out.


And I’m not sure that a handful of large asset managers are able to figure that out either, which is why I think we just need to be careful that we’re not forcing all the capital flows in one direction, and therefore preventing the ability for capital to flow to some of the smaller companies or companies that might, in European taxonomy, appear to be brown but actually might be the source of an amazing new battery technology or whatever, or a new way to purify water. There are a lot of things that we have to worry about, and I just think that centralized approaches to try to direct capital flows are very unproductive.


Hon. Paul Atkins:  If I could just interject. Boyden Gray is not here, but just further to the talk about index funds, and then, David, maybe you can talk about this as well and talk about Engine No. 1 and whatnot. So the reason why Engine No. 1 people are saying prevailed in that proxy fight at Exxon was because the big three shifted their votes in favor of that. And so who knows? There was no 13Ds filed to my knowledge, and so whether or not there was a violation of SEC rules and that, I can leave that for others to decide.


Hon. Leo Strine:  Paul, you know I’ve been calling for the SEC to do something about 13D for the entire damn century. And I’m hoping there’s actually maybe some consensus on the commission to finally get going on that because it’s kind of embarrassing.


Hon. Paul Atkins:  Maybe a good time to do that where suddenly these big funds shifted their votes in that regard and obviously have governments or the corporation. And who knows what was in the back as far as discussions go.


But as far as these index funds, are they now — I remember when I first started to work for Richard Breeden back in 1990, and individual investors were still well over 50 percent of the marketplace. Today, there are less than 20, so institution comes on. If you look at the Exxon vote, overwhelmingly individual investors voted on behalf of management. And it was on the institutions that —


Hon. Leo Strine:  — I agree with that, Paul. One of the things I — when they took away the broker nonvote, a part of it is we’ve got to deal with the system we have. And for an entire century, to be honest, I’ve been advocating Commissioner Peirce that the index funds step up because they’re actually more like center of the plate investors. The active funds would go with the activists in a lot of things, Paul, as you know. And I don’t think the index funds are perfect. I just think it would be strange to disqualify them.


And I think in terms of directing capital, again, I’m concerned. I told the people at Engine No.1 that this has to be a journey, that the idea that there’s going to be a smooth transition from where we are is just not clear. And where are you going to be in the next annual meeting, or the one down the road?


But I think in terms of directing capital flows, I think where I’m a little bit different than the commissioner is I understand the idea. The question is, are there going to be some reasonable backbone disclosure requirements in a couple of areas like climate and workforce, and that that would help direct future capital flows and allow the market to decide. I don’t view that the same as substantive regulation. I view it as disclosure.


I agree with the commissioner the SEC should not be doing it in isolation, but I think it would actually help the private sector, Paul, if there’s some coordination because there’s a lot of whipsawing going on with — as you know, Commissioner Peirce, people get 40 different questionnaires in the spring as a company, and it’s very difficult to do this. And so I think if — as I understand the debate, it’s more about information disclosure and then allowing the market to decide. I get the fact that there’s a lot of populism on both sides around these things, but I think some basic information might be useful. And I think the commission should have the support of other agencies.


And I also agree with you, everybody, to the extent that Congress has unfortunately been on the sideline over a lot of issues like 13D, other kinds of things.


I also just want to say this. I believe the commission clearly has the authority to focus on what’s material to investors and to require disclosure. I also believe they have wide authority to start dealing with big, private companies. And they haven’t also been dealing with the fiduciary question of pension funds representing ordinary people in making stupid investments in private investments without adequate disclosure.


And I think that’s something the commission, to deal with the economy we have, if we’re going to have a level playing field, and we’re actually going to protect investors, I think that’s a core commission mandate, Paul, to deal with the actual markets we have, which increasingly — people don’t have money to do retail investing. You don’t fill up your 401K.


Hon. Paul Atkins:  Okay, thanks. And the whole private part, I think that would be a really good thing for litigators to argue over if the SEC tries to spread its wings. David, let me turn it over to you.


David Berger:  Yeah, just very briefly, I think the commissioner has raised some very interesting points about the notion of the government directing capital flows. But I actually — I don’t see that. The government is already in many ways directing capital flows. It does this through the tax breaks and the tax code that we have in place already. So we’ve seen government directing capital towards fossil fuel industry through tax breaks for that industry. It does it in a variety of other industries.


The SEC is in the unique position to govern disclosure. I don’t think those disclosures govern capital flows. I think what the disclosures are designed to do, and I think what they do and can do even more effectively, is to allow people to fully understand the costs of the externalities that are not part of the system now.


And that’s really what ESG is designed to — is the role for the SEC with respect to ESG, it is allowed — it is to push companies to disclose the externalities in their business so that investors—and now we have the large investors who are really making the decisions in the market—understand what it is that those costs are and those externalities are. And in that way, they’re the ones who are driving the market and how the investments work long term. And I think it’s a very simple issue for ESG in that direction.


Hon. Hester Peirce:  Just one quick response there. I think one of the arguments, and Judge Strine mentioned this as well, the notion that companies are getting lots of different requests from lots of different places, and I do hear from companies who are very frustrated by trying to answer all of these different questionnaires. The difficulty comes, and I think this is something, David, that I understand your point about wanting to get the information out there, but the notion that we can come up with metrics that are applicable across every company and every industry across time and that really do result in comparable, accurate information, I think it’s overstated.


And I’ll be interested to see as we’ve gotten some good feedback already in response to a request for comment that a colleague of mine did. And when we put out a proposal, I’ll be very interested to see how people react to specific metrics that we put out, to the extent there are going to be such metrics, because I think it’s a difficult exercise.


David Berger:  I agree with you 100 percent. It is a very difficult situation to get the right metrics and to figure out exactly the right disclosures across industries and across companies.


I think one of the real benefits that you produce when working closely with the European countries, which I think the SEC is trying to do, is to get disclosures that work globally. Europe is ahead of us on ESG disclosures right now. American companies, U.S. companies are making those disclosures in Europe. They’re generally making them relatively — it’s not easy, but it is clear to what U.S. companies have to disclose in Europe. And I think the notion of getting cross-border cooperation for disclosures is something that we could greatly benefit from, and it would make our disclosures a lot easier if U.S. companies could make one global type of disclosure.


Hon. Hester Peirce:  I think one of the difficulties there is that Europe has taken a pretty aggressive approach to, as I alluded to, developing a taxonomy to try to label things and really trying to drive investors to adopting a sustainability objective alongside a financial return objective. And so while we certainly talk to our European counterparts all the time, and this is an issue that we talk about, I am concerned that we may be just trying to do two different things here in the U.S. and Europe.


Hon. Paul Atkins:  We just got an interesting question from the audience that I’d like to pose to you, and especially Chief Justice Strine, your being from Delaware, which has the public benefit corporation recognized there. So if there be, in fact, a big investor demand for ESG focused firms, should we expect to see a growth in corporations that are formally chartered, as in Delaware, for example, as public benefit corporations? So would it make sense to — would that meet a market demand?


David Berger:  I think there already is a growing move towards that. Delaware actually reduced the threshold to convert to a simple majority. Until it did that, it was really implausible, Paul, as you know, for any public company to seek a vote. You’re not going to seek a supermajority vote.


And we saw the conversion of a company called VIVA with the support of mainstream investors. Many healthcare workers — my wife’s an occupational therapist, and a lot of them love a company called Allbirds because their shoes are really quite comfortable, and they’re also made with sustainable products. They’re going public. Warby Parker’s going public. And so this is catching on. So I do think that they’re — and in many ways, the benefit corporation model is still very conservative. It only gives rights to stockholders but brings us a little bit more in line with the OECD.


I want to echo Commissioner Peirce — can I also just mention something about what Commissioner Peirce was saying? I think her point on appropriate modesty in industries is really critical. And party of why I think the SEC should just focus on climate and workforce is those issues affect every company, not in the same way, particularly climate, but certainly in workforce. I think they need to be very careful to start addressing other stakeholder issues across the board because it just doesn’t work that way. And I think if the SEC could take a leaner approach, do something achievable, that might strike the right balance and be a starting point, and maybe that’d be a point of agreement among all of us.


Hon. Paul Atkins:  I wanted to follow up on that public benefit corporation. If we now have 80 percent of the market or more held by institutions, and we have the big three with their index funds controlling maybe on average, or whatever, 20 percent of companies, and now with Delaware lowering the standard to go to a public benefit corporation to majority rather than the supermajority, how about this? How should an index investor then vote on a thing like that? Maybe it depends on the facts and circumstances, but doesn’t that go to the heart of what they’re trying to do, especially if they’re managing money or people are using those funds in pension funds? Commissioner, do you have a —


Hon. Hester Peirce:  — I’m not going to weigh in to say how the voting should happen, but it should certainly happen in alignment with what the asset manager said it would do in such circumstances.


Hon. Paul Atkins:  Exactly. So then, Chief Justice, how would somebody square that?


Hon. Leo Strine:  Let me just say again if these institutional investors have invested in German companies and Scandinavian companies —


Hon. Paul Atkins:  — They’re not public benefit companies.


Hon. Leo Strine:  Well, no, no. But hear me out, Paul. They have a stakeholder mandate in Germany and Scandinavia, and the same thing in the Netherlands. And there’s a substantial portion of the board which is actually comprised of people elected by the workforce. So if you think it’s a good company, and you think you can make money, then it would be very odd to take a Delaware benefit corporation, which only gives right to stockholders, is still a for-profit corporation, and to say you couldn’t invest if you think it’s a good company.


I would also say a majority of American states — and this seems to have just been ignored, like the whole world has ignored, so we would ignore all our OECD colleagues and the companies that people invest in. We ignore the fact that how many American states have constituency statutes? Thirty-three. You know what a constituency statute is? It says the board doesn’t have to govern to maximize results for stockholders. It can balance the interests of all the constituencies. Thirty-three.


And so if what we’re saying is that no one can invest in a Pennsylvania company which has a constituency statute, or a Georgia company, or those ones with all the anti-takeover thing, then when we squeeze out all that stuff, then I’d worry about the benefit corporations. If you get all the protection of Delaware law, it’s only stockholders who can vote, it’s a for-profit corporation, and so the underlying thing — I think the commissioner’s right. You don’t just invest in any public benefit corporation. You don’t support the conversion of just any company. But if you think it’s a good company and it’s going to make you money, then that form of governance should not deter you any more than it would deter you to invest in a high-quality Scandinavian company or a company from Pennsylvania or Georgia.


Hon. Paul Atkins:  But there’s a big difference between for-profit and not. Let me just correct —


Hon. Leo Strine:  — Well, no, no, there’s not. Paul, it is a for-profit corporation. It is a for-profit corporation. That is what it is. It is not a charity.


Hon. Paul Atkins:  Well, exactly. But so — whatever.


Hon. Leo Strine:  Well, that’s not whatever. Are you aware that there are 33 states with constituency statutes? And that —


Hon. Paul Atkins:  — I’m not sure how that actually —


Hon. Leo Strine:  — Well, why? Because you know what they say? They say that you may not — you do not have to govern the corporation to maximize return for stockholders. You may take into account the best interests of other constituencies. So when you’re talking about this — and that’s existed for 30 years.


Hon. Paul Atkins:  But why further clarification? In Germany, the entire workforce doesn’t vote. The mitbestimmung allows a certain number of employees —


Hon. Leo Strine:  — The German workers all vote, and there’s also works councils throughout Europe. The non-German workers don’t vote —


Hon. Paul Atkins:  — supervisor board.


Hon. Leo Strine:  — And there are works councils throughout all of the E.U. with worker representation. And again, American institutional investors have long invested in those and believed that in the appropriate situation, those can be good investments. And that’s all I’m saying is you’ve got to make the ultimate determination. But the fact that there’s a model of corporate governance that’s more in align with the overall world capitalist economy shouldn’t preclude American investors from being able to do that.


Hon. Paul Atkins:  I think we’re arguing on that point. If somebody thinks that there’s a consistent investment that’s consistent with the principles in a fund, and for an ERISA fund, if somebody makes a determination that it’s in the best interests of the beneficiaries and their economic best interest, then I think that sounds like the law.


David, did you have —


David Berger:  — Well, I did. And I know we’re getting close to our end period, and we’ve gone through these discussions, but the other point — I think Judge Strine makes a good point about Europe because I think with French companies and the rest also look at these things differently.


But it’s also, I want to point out, this is historically—and this is what I started out in response to Boyden’s article—historically, the notion of stockholder primacy, which is really what I think you’re talking about, the notion that everything must be focused on stockholder returns, regardless of externalities, or regardless of anything else, is an ideological system that has been in place for since about the mid-1970s.


Milton Friedman’s article has always looked at as seminal. Friedman was writing saying we need to have more stockholder primacy. And if you look at it, it was in the ’70s. Michael Jensen wrote shortly thereafter, and that’s when all of this came to be. For the post-war period, post-World War II, through the early 1970s, we had, even though it was not the name of it, we had what is, in essence, a stakeholder capitalist model that provided for the — and if you look at the leaders of all the largest corporations, they viewed stockholders as if you were part of the stakeholders and not that all profit should go exclusively or primarily to stockholders.


And I think what you’re seeing now is a trend — I don’t want to say it’s a throwback to the past, but it is a trend looking, again, at whether we’ve gotten too far down the stockholder primacy model so that the profits of a corporation — and by profits, you include in the costs of externalities, how those profits should be divided.


And that’s really the fundamental issue that ESG is driving at. It is asking a corporation to disclose for the SEC’s perspective and for investors to look at how those profits are divided, including externalities, and looking at how they treat their workforce. And investors want to know this issue because it’s important to stockholders. It’s important to the actual people investing because they — as Leo said, these people are investing for 40 years, and they want to know what the economy is going to look like when they retire. And these things about climate change, about how they’re going to be treated as workers, they matter to them. So I think that’s where it comes from.


Hon. Paul Atkins:  Okay. Well, we’re over time, so I — we could go on. This is such a — this has been a really lively, great discussion, and maybe we’ll have to petition The Federalist Society to do an encore and go on. But I wanted to thank you all very much for this. We’ve only scratched the surface, but I really appreciate your participation. So I really want to thank very much our panelists, Ambassador Gray, David Berger, Commissioner Peirce, and Chief Justice Strine. I really enjoyed all of this and very much look forward to doing it again, if that’s possible. Thank you all.


Nick, I don’t know if you have anything more.


Nick Marr:  Just a quick thanks on behalf of The Federalist Society, especially to you, Mr. Atkins, for moderating this panel, and to our great panel, and to all of our audience who dialed in and for your great questions. Please keep an eye on your emails and our website for announcements about upcoming events like this one, and we’ll see if we can’t get an encore of this program. Thank you all for joining us today. We are adjourned.



David Berger


Wilson Sonsini

C. Boyden Gray

Founding Partner

Boyden Gray & Associates

Hester M. Peirce


United States Securities and Exchange Commission

Leo E. Strine, Jr.

Of Counsel

Wachtell, Lipton, Rosen & Katz

Paul Atkins

Chief Executive Officer

Patomak Global Partners LLC

Enforcement & Agency Coercion
Financial Services & Corporate Governance

Federalist Society’s In-House Counsel Working Group

The Federalist Society and Regulatory Transparency Project take no position on particular legal or public policy matters. All expressions of opinion are those of the speaker(s). To join the debate, please email us at [email protected].

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