In a shareholder-first world, Professor Dorothy Lund thinks creatively about equitable solutions, publishing research in top legal journals
As corporations continue to prioritize shareholder interests, with institutional shareholders dominating corporate governance, Associate Professor Dorothy S. Lund predicts that a shift will not occur – despite growing awareness of the system’s shortcomings – “absent a major shock.”
Still, Lund, who joined USC Gould School of Law in 2018, wields her knowledge of the dynamics inherent in the modern corporate governance structure to research solutions, and whether the system, which pressures managers to prioritize shareholder wealth, can and should change.
In a recent paper published by the Columbia Law Review, “The Corporate Governance Machine,” Lund and co-author Elizabeth Pollman from the University of Pennsylvania Law School describe the turn toward shareholder wealth maximization that occurred in the past century.
Up to the 1970s, corporations were seen to exist for the benefit of the public; by the late 1980s, shareholder interests were the priority. At the same time, institutional shareholders better equipped to advocate for increased shareholder rights and power held influence over corporate governance.
“Corporate governance is conventionally seen as a neutral system of processes and procedures that serve the greater good,” Lund says. “But we show that it has, in fact, become part of the shareholderist agenda.”
In an article forthcoming in the University of Pennsylvania Law Review, “Asset Managers as Regulators,” she views with distrust the accumulation of power by institutional shareholders that represent half of American households via their 401(k) plans, and count corporations as their clients.
“They are hugely influential and have begun to usurp regulatory functions,” she says.
Two areas where institutional shareholders have wrought change are the environmental performance of corporations and board diversity. While Lund acknowledges that these mandates offer benefits, she sees the rules as tepid solutions to pressing global problems.
“And there’s another risk,” she says. “If institutional shareholders are perceived as taking care of these problems, does that take the pressure off the government to regulate? Does it maybe even worsen the dynamic of a dysfunctional government?”
Following the Great Recession that ended in 2009 and now the COVID-19 pandemic, many people have grown skeptical of the shareholder primacy view. And while value-oriented environmental, social and governance (ESG) funds have taken off in recent years, they don’t appear to be effecting change.
“Many good-hearted, public-spirited investors are paying more for ESG products that aren’t necessarily delivering what they want,” Lund says. “Economic research has shown that if I stop buying tobacco or oil shares, it’s not going to have an impact on that company as long as other people are willing to purchase their shares.”
In another paper in the Columbia Law Review, “Corporate Finance for Social Good,” Lund argues for a change of perspective, away from shareholders and toward people on the outside.
To side-step the shareholder paradigm and empower external stakeholders in very specific scenarios, she proposes the creation of corporate social responsibility bonds.
“Corporate executives can talk the talk all they want about their consideration for society, but at the end of the day all market forces are still pushing them toward maximizing shareholder value,” she says. “We have to rethink how we finance corporate social responsibility.”
She proposes making corporate social responsibility pay the way important pilot projects are financed. As an example, a big-box retailer may continue selling guns, despite protests, because the profits outweigh any benefit of pulling out of the market. Lund imagines “a group of parents not just protesting but creating a bond and saying, ‘Stop selling guns, and we will pay you the difference.’”
While Lund realizes that bonds “wouldn’t solve every problem,” she sees their potential as immediate and wide-ranging. If a corporation could be convinced to close a polluting factory with such bonds, there could be a tangible benefit for communities and the environment.
“In a time of partisan politics and regulatory ossification, bonds could even be a substitute for more stringent environmental regulation,” she says.
Lund’s hope lies especially with younger generations.
“Millennial investors have demonstrated that they’re willing to pay more for investment vehicles that match their social preferences,” she says. “Many of them care about more than financial returns and are willing to put their money where their mouth is.”
Lund sees it as “important that we talk about the role of corporate power in society” even though a fundamental shift is dependent on companies, and there are limits to what we can expect from them.
“But we can still think creatively about solutions,” she says.