Latest / Salem Podcast Network / Meeting of Minds Podcast - The Manhattan Institute’s James Copland: the future of shareholder advocacy

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Meeting of Minds Podcast - The Manhattan Institute’s James Copland: the future of shareholder advocacy · Salem Podcast Network

0:03
Speaker 1: Hi, I'm Jerry Boyer. Welcome to Meeting of Minds. The
0:08
Speaker 1: mind that we're meeting today is that of my friend
0:09
Speaker 1: Jim Copeland from the Manhattan Institute, author of The Unelected. Well, basically, Jim,
0:16
Speaker 1: everything that you were talking about in that book is
0:20
Speaker 1: now kind of coming into fruition. And you're talking about
0:24
Speaker 1: all the different sorts of people who are not elected
0:27
Speaker 1: by us but still have tremendous power.
0:28
Speaker 2: Over our lives.
0:30
Speaker 1: Two particular groups would be corporate executives. They're not elected.
0:34
Speaker 1: They were censoring content. They're taking things down. They're maybe
0:38
Speaker 1: doing some debanking or some other things. But I think
0:41
Speaker 1: a lot of your focus has been on unelected bureaucracies,
0:48
Speaker 1: regulatory bureaucracies, the administrative state that create rules, but they're
0:54
Speaker 1: not legislatures, enforce rules, but they're not judges. You want
0:58
Speaker 1: to talk to us about that? Because it seems to
1:00
Speaker 1: me there's a consistency to your career in focusing on
1:03
Speaker 1: that particular problem.
1:04
Speaker 2: Yes, exactly. I mean, I think, listen, it's been six
1:10
Speaker 2: years since my book came out, and there's been a
1:11
Speaker 2: lot of shifts, and a lot of shifts in a
1:13
Speaker 2: positive direction, in the sense that when I was writing
1:17
Speaker 2: my book, it was the case that You had these
1:23
Speaker 2: independent agencies and indeed an agency with just one titular
1:27
Speaker 2: head that could operate independent of the elected executive, the president.
1:34
Speaker 2: That's no longer the case. It was the case then
1:38
Speaker 2: that the case law was such that, oh, if Congress
1:41
Speaker 2: writes an ambiguous statute, we're just going to let the
1:45
Speaker 2: regulators kind of do what they want as long as
1:47
Speaker 2: it's arguably legal. consistent with the statute. That's no longer
1:51
Speaker 2: the case. So you've seen trends in this area away
1:57
Speaker 2: from some of the things that I pointed to, but
2:00
Speaker 2: you still have a whole lot left of that apparatus
2:03
Speaker 2: where we've evolved since the 1930s into a situation, and
2:08
Speaker 2: this was somewhat by design, right? The progressive movement under
2:11
Speaker 2: Woodrow Wilson, and then taking further root and deeper root
2:15
Speaker 2: under the Roosevelt administration, the Franklin Roosevelt administration, really sort
2:20
Speaker 2: of entrenched this rulemaking apparatus. And while some of the
2:24
Speaker 2: rulemaking apparatus makes sense, it makes sense not for Congress
2:29
Speaker 2: to do every detail and to allow these regulators to
2:33
Speaker 2: fill in the gaps, to adjust as things change. What
2:39
Speaker 2: we've seen happen over the last several decades is a
2:42
Speaker 2: White House comes in and they say, oh, well, we
2:45
Speaker 2: want to... affect a policy change. We can't get anything
2:49
Speaker 2: through Congress. So we're going to do it through the
2:51
Speaker 2: rulemaking apparatus. And it could be rulemaking. It could be enforcement,
2:57
Speaker 2: criminal or civil, from these agencies. And we're going to
3:01
Speaker 2: get our way. Now, the problem with that is, A,
3:06
Speaker 2: you know, we made it hard to change rules, to
3:11
Speaker 2: change laws for a reason. The bicameral legislature with a
3:16
Speaker 2: presidential veto makes it very hard to change the rules.
3:21
Speaker 2: That is an implicit conservatism that is a feature, not
3:26
Speaker 2: a bug of our constitutional system, right? Because it requires
3:30
Speaker 2: some broad consensus to change the rules. And it means
3:33
Speaker 2: that in the business setting, individuals and businesses who are
3:38
Speaker 2: investing have some certainty about what the rules tomorrow might
3:42
Speaker 2: look like, because it's going to take a lot to
3:44
Speaker 2: change them. If a presidential election allows those rules to
3:48
Speaker 2: be flipped every four years, whether you like or dislike
3:54
Speaker 2: the change that's coming, it means that there's a lot
3:57
Speaker 2: less reliability and predictability, which means that ultimately as an investor,
4:04
Speaker 2: you're going to be more skittish about putting your money
4:06
Speaker 2: up because four years from now or two years from now,
4:09
Speaker 2: it could change and change radically. And so I think
4:13
Speaker 2: it's a salutary move away from that. But while there's
4:19
Speaker 2: been legal doctrine that has shifted in a positive direction,
4:22
Speaker 2: this vast rulemaking and enforcement apparatus still exists. And so
4:26
Speaker 2: that's sort of the world we're operating under. Right. Yeah.
4:29
Speaker 1: We haven't gotten rid of it yet, although the trends
4:31
Speaker 1: have been more in the direction of your book and
4:33
Speaker 1: probably because people who are making the trends have read
4:36
Speaker 1: your book. Or we hope.
4:40
Speaker 2: I'm not sure about that, but we hope.
4:43
Speaker 1: Maybe their staff read your book and then told them,
4:46
Speaker 1: this is how you can get rid of this stuff.
4:49
Speaker 1: So I suppose, for some reason, I was just thinking
4:53
Speaker 1: about Ludwig von Mises' short book, Bureaucracy, in which he's
4:58
Speaker 1: dealing with the argument that, well, we need to have
5:00
Speaker 1: this bureaucracy established because Congress lacks the expertise to write
5:05
Speaker 1: sufficiently detailed laws to address these issues. And his answer is, well,
5:10
Speaker 1: if they lack the expertise, they shouldn't legislate in that area.
5:14
Speaker 1: I mean, you shouldn't make laws in some... If you
5:17
Speaker 1: don't know enough to make a law and have it
5:20
Speaker 1: detailed enough to detail out how it's enforcement, then you
5:23
Speaker 1: don't know enough to make a law. So if the...
5:29
Speaker 1: That if you have to raise the issue of having
5:31
Speaker 1: to have an army of experts to enforce something, then
5:35
Speaker 1: essentially you've already grown the government too large. That's the
5:38
Speaker 1: sign that you've grown the government too large.
5:41
Speaker 2: And that's certainly my leaning. That's certainly my general sense
5:48
Speaker 2: of it. Now, where the Supreme Court has gone... It's
5:51
Speaker 2: a little bit halfway, right? I mean, the strong form
5:55
Speaker 2: would be, and I wrote about this in chapter one
5:57
Speaker 2: of my book, but the strong form of this would
5:59
Speaker 2: be the non-delegation doctrine. Well, you know, Congress can't delegate
6:03
Speaker 2: its lawmaking capacity to the regulatory state at all. And,
6:09
Speaker 2: you know, that traces to Locke and Montesquieu and all
6:11
Speaker 2: the folks that our founders were focused on. It traces
6:14
Speaker 2: to the early days of the republic. But the Supreme
6:17
Speaker 2: Court hasn't quite gone that far. What they've said, though,
6:21
Speaker 2: they've carved out this sort of major questions doctrine. It
6:25
Speaker 2: sort of percolated up through the lower courts first. And
6:28
Speaker 2: it's basically if Congress is going to do if the
6:30
Speaker 2: administrative agency is trying to do something really, really big,
6:34
Speaker 2: Congress needs to have said something pretty clear about. to
6:37
Speaker 2: direct them to do that and not say, oh, well,
6:40
Speaker 2: the president wants to do it. Congress hasn't said anything,
6:43
Speaker 2: but they've got this old statute which has some open-ended language,
6:47
Speaker 2: and we're going to use that to drive a major change,
6:52
Speaker 2: be it on tobacco regulation, be it on climate change,
6:56
Speaker 2: or what have you. Even though Congress has been debating
6:59
Speaker 2: this for years and hasn't come up with any actual law,
7:03
Speaker 2: And has decided not to act or they haven't developed
7:06
Speaker 2: a majority behind the proposal the president wants. The president's
7:09
Speaker 2: going to take some old statute and move there. And
7:12
Speaker 2: basically where the Supreme Court now is, is, well, no,
7:16
Speaker 2: Congress needs to say it clearly if it's big. If
7:18
Speaker 2: it's small, if it's around the margins, you know, Congress
7:21
Speaker 2: can leave details up to others. You know, it seems
7:24
Speaker 2: like a relatively reasonable position to me. How it's going
7:27
Speaker 2: to all shake out in practice, it's still relatively new,
7:30
Speaker 2: remains to be seen.
7:31
Speaker 1: Yeah, I mean, I think we are where we are.
7:33
Speaker 1: We're not in a Mesean or Lockean libertarian paradise right now.
7:37
Speaker 1: So you probably need some kind of enforcement mechanism, an
7:41
Speaker 1: expert class, etc. So it might be helpful to kind
7:45
Speaker 1: of go back to first principles here, as found in
7:48
Speaker 1: the Constitution, which is we're talking about how government regulates
7:52
Speaker 1: things and who specifically does that and the difference between
7:55
Speaker 1: legislative branches, executive branches, etc. judicial and quasi-judicial, quasi-legislative, essentially
8:03
Speaker 1: the bureaucracy. In the reading of the Constitution in terms
8:11
Speaker 1: of the intent of its framers, where do you see
8:14
Speaker 1: it granting regulatory power and what kind of regulatory power
8:19
Speaker 1: do you see them envisioning?
8:20
Speaker 2: For the government? I think Congress has a pretty broad
8:24
Speaker 2: grant of regulatory power. I mean, the Constitutional Convention was
8:28
Speaker 2: designed to expand Congress's power vis-a-vis the Articles of Confederation,
8:32
Speaker 2: which limited, in terms of process in particular, the ability
8:38
Speaker 2: to get anything done through the legislature at the federal level.
8:42
Speaker 2: But it's still a government of limited powers. I still
8:46
Speaker 2: think the Supreme Court probably allows too many degrees of
8:48
Speaker 2: freedom when it comes to what can be wrapped into
8:53
Speaker 2: the regulation of commerce among the several states, the Interstate
8:57
Speaker 2: Commerce Clause, and allows Congress, if it touches the economy
9:02
Speaker 2: in some way, with a little bit of a fig leaf,
9:07
Speaker 2: then they're going to be able to go in there
9:09
Speaker 2: and regulate. It probably gives Congress too much authority in
9:14
Speaker 2: that level. But the basic premise here is, Because of
9:19
Speaker 2: bicameralism and presentment, where you need a majority of two houses,
9:24
Speaker 2: one of which is based on the total population and
9:26
Speaker 2: regularly reelected, one of which is staggered terms and is
9:30
Speaker 2: based on state representation. And you need a majority of
9:33
Speaker 2: both of those. And if you don't have the president
9:35
Speaker 2: with you, you need a super majority of both of those.
9:38
Speaker 2: That is designed to make it hard to change the
9:41
Speaker 2: rules of the game. And, you know, for all the
9:44
Speaker 2: reasons I mentioned earlier, I mean, that predictability is a virtue.
9:50
Speaker 2: It doesn't mean that we want everything to be totally static.
9:55
Speaker 2: There are times, for goodness sake, I mean, our country's
9:59
Speaker 2: been through a long process of transformation in the early days.
10:04
Speaker 2: There were a lot of things very wrong with the
10:06
Speaker 2: way our country was designed, and some through constitutional amendment
10:10
Speaker 2: and some through action of the legislature under the original
10:14
Speaker 2: constitutional design. We've moved in positive directions on that. but
10:18
Speaker 2: it shouldn't be a sort of yo-yo flip-flop based on
10:20
Speaker 2: each election. I think this is one reason our electoral
10:24
Speaker 2: politics have become so divisive and so aggressive. It's that
10:29
Speaker 2: each election can radically shift. Right.
10:32
Speaker 1: There's more at stake now with each election when the
10:35
Speaker 1: state is both more, is both larger and has more
10:39
Speaker 1: degrees of freedom.
10:41
Speaker 2: Correct. And both are important. And, and, um, You know,
10:45
Speaker 2: I mean, originally, if you have everything has to go
10:48
Speaker 2: through Congress, you know, the presidency matters. It matters for
10:51
Speaker 2: foreign policy. It matters for direction of how the executive
10:56
Speaker 2: is run. But it wasn't involved in a lot of
10:59
Speaker 2: rulemaking before the 20th century and the late 19th century,
11:04
Speaker 2: almost none in terms of actually like setting down rules
11:08
Speaker 2: of behavior that individuals and businesses had to follow for
11:11
Speaker 2: potential penalty of going to prison if you don't follow them.
11:14
Speaker 2: That wasn't something that was common in the early days
11:17
Speaker 2: of the Republic. It's something that's the norm now. And
11:19
Speaker 2: that's what we're trying to wrestle with is how to
11:21
Speaker 2: derain that.
11:21
Speaker 1: So in the Constitution, you've kind of alluded to this,
11:24
Speaker 1: that regulation is a matter of interstate commerce, right? That's
11:27
Speaker 1: sort of the justification. And you're pointing out that that
11:31
Speaker 1: can be so overread that something, you know, whether I
11:36
Speaker 1: mow my lawn, you know, under a statute in my borough,
11:44
Speaker 1: Somehow that affects the economy somehow, and therefore the federal
11:48
Speaker 1: government can regulate it. That doesn't seem to be what's envisioned,
11:52
Speaker 1: but becomes basically a ticket.
11:55
Speaker 2: You mow your own lawn, and that means that there
11:59
Speaker 2: is a reduction in the market demand for contracted lawn
12:05
Speaker 2: mowing services. And because of that, Congress can regulate how
12:09
Speaker 2: you mow your own lawn. I mean, that is unbelievable. Basically,
12:12
Speaker 2: the current doctrine, with the caveat they can't force you
12:16
Speaker 2: to buy something, that was the Obamacare case, right, the
12:19
Speaker 2: NFIB-Visibelius case. They can't force you to actually buy something
12:24
Speaker 2: because of interstate commerce. That's the sort of firewall the
12:26
Speaker 2: Supreme Court put in at the very outer edge. But
12:30
Speaker 2: beyond that, they could say, no, we don't allow you
12:32
Speaker 2: to mow your own lawn because we.
12:33
Speaker 1: Want more lawn mowing services. That's the only limiting principle.
12:36
Speaker 1: That's not a lot of limiting. And I think the
12:38
Speaker 1: other thing is, as I recall in previous studies, that
12:42
Speaker 1: kind of the sense of the word regulate has changed.
12:46
Speaker 1: But if you just listen to it, regulate, regularize, as
12:51
Speaker 1: opposed to manage and control. And you can see how
12:55
Speaker 1: that would work with interstate commerce. that if you've got
12:58
Speaker 1: essential understood rules of commerce, 210, net 30, or whatever,
13:03
Speaker 1: they're part of the rules of the game. Well, somebody
13:06
Speaker 1: in one state can't basically kind of screw over somebody
13:09
Speaker 1: in another state by not enforcing contracts in understandable ways,
13:15
Speaker 1: et cetera. So essentially, the idea is not putting a
13:18
Speaker 1: thumb on the scale so much as creating predictability when
13:24
Speaker 1: you're selling or buying across the state line. Under the
13:27
Speaker 1: Articles of Confederation, there was a favoritism towards the local, right?
13:32
Speaker 1: And what you didn't want is for commerce to be
13:35
Speaker 1: able to reflect that favoritism, and that was by creating
13:38
Speaker 1: essentially the federal government has a role in regularizing commercial
13:41
Speaker 1: dealings across those lines. So it's not controlling per se.
13:45
Speaker 1: Regulating seems to be sort of a narrow idea of
13:50
Speaker 1: making more regular rather than making it just whatever we
13:53
Speaker 1: want it to be for certain social ends.
13:57
Speaker 2: The premise here is you don't want state governments behaving
14:02
Speaker 2: the way the federal government's behaving with foreign trading partners.
14:07
Speaker 2: You don't want New York and New Jersey. You don't
14:09
Speaker 2: want New Jersey to say you can't run your steamship business.
14:15
Speaker 2: or your sailing business across the river to New York City,
14:19
Speaker 2: and we're going to control that, and it's going to
14:22
Speaker 2: impede that flow of commerce, or, you know, we're not
14:25
Speaker 2: going to allow.
14:26
Speaker 1: We're not going to write off debts incurred in one
14:29
Speaker 1: state because now someone's in this state. Someone flees to Pennsylvania,
14:34
Speaker 1: their debts can't be forgiven, for example.
14:36
Speaker 2: Exactly. So it was really designed to prevent that sort
14:40
Speaker 2: of beggar thy neighbor policy and create a national market
14:44
Speaker 2: that The national market is way more national and integrated
14:48
Speaker 2: than it was in the early days, which does create complications.
14:52
Speaker 2: But I don't know that it necessarily creates a justification
14:57
Speaker 2: for a command and control from the center sort of
15:01
Speaker 2: federal operation. What you do want is the federal government
15:06
Speaker 2: to say, well, you know, California may want to do this,
15:10
Speaker 2: but they shouldn't be able to impose their will on
15:13
Speaker 2: Alabama or Iowa.
15:15
Speaker 1: California's Prop 12 can't tell pig farmers in Iowa how
15:19
Speaker 1: to raise pork. That's a big controversy right now, right?
15:23
Speaker 2: It is. And to some degree, the Supreme Court allows that.
15:26
Speaker 2: At the same time, they allow the Congress to go
15:28
Speaker 2: way beyond what it should be able to do.
15:32
Speaker 1: I could see an argument for, as you say, we
15:34
Speaker 1: have a much more national market for almost everything. Um, and, uh,
15:40
Speaker 1: in a case like that, you might have more regulation
15:43
Speaker 1: because you have more interstate commerce, more genuinely interstate commerce,
15:47
Speaker 1: not the strained version.
15:49
Speaker 2: Right.
15:49
Speaker 1: So, and it seems even appropriate. Like if there's more
15:52
Speaker 1: interstate commerce, you need more guidance on interstate. If someone
15:56
Speaker 1: wants to sell, there are huge benefits to selling into
15:58
Speaker 1: a national market or buying from a national market. So
16:01
Speaker 1: the price of that is that the feds have to like, okay,
16:04
Speaker 1: on the, If you drive on the right in Pennsylvania,
16:06
Speaker 1: you're also going to drive on the right in New
16:08
Speaker 1: Jersey and even in Louisiana, even if they're more European.
16:11
Speaker 1: So to kind of on the interstate road system, et cetera.
16:17
Speaker 2: All right.
16:17
Speaker 1: So I think because I think it makes sense to
16:20
Speaker 1: start with what the Constitution says before you then get
16:23
Speaker 1: into what it doesn't say.
16:24
Speaker 2: Right.
16:25
Speaker 1: And I think one of the big things going on
16:26
Speaker 1: right now is an area that you and I are
16:28
Speaker 1: both involved with, which is the administrative state and regulation insecurities.
16:34
Speaker 1: So the Securities and Exchange Commission under the Chairman Paul
16:38
Speaker 1: Atkins has been on a very reform arc, been taking
16:43
Speaker 1: away a lot of regulations, regulations that I happen to
16:46
Speaker 1: think should be taken away. So not everyone's going to agree,
16:50
Speaker 1: but like mandating quarterly reporting for everybody. It's a whole
16:54
Speaker 1: lot of mandating of disclosures, some of which are not
16:56
Speaker 1: business relevant. They're rolling back a lot of that stuff,
17:00
Speaker 1: which I think makes sense. And one of the things
17:02
Speaker 1: that they're considering rescinding, and we're in the comment period
17:05
Speaker 1: on that, is a rule which has, I would argue,
17:11
Speaker 1: given large subsidies to political activists with small numbers of
17:17
Speaker 1: shares to be able to essentially hijack corporate annual meetings
17:22
Speaker 1: and swaths of land on the corporate proxies of companies.
17:27
Speaker 1: We'll get technical for a second. It's called 1488. Okay, fine.
17:31
Speaker 1: We're not going to keep using code names and everything,
17:33
Speaker 1: but just... So someone said, what does that have to
17:36
Speaker 1: do with me? A lot of the stuff that people
17:38
Speaker 1: don't like, the middle America doesn't like about corporate America,
17:41
Speaker 1: you wonder how corporate America got there. Part of it
17:44
Speaker 1: was that activist pressure was brought on them and prior
17:48
Speaker 1: securities and exchange commissions seemed to enable that activist pressure.
17:52
Speaker 1: The current SEC... Ayude, is that pronounced that right? And
17:58
Speaker 1: Atkins in particular and Pierce, they've wanted to go in
18:02
Speaker 1: a different direction and have a lighter touch. In general,
18:07
Speaker 1: do you think they're right to do that?
18:10
Speaker 2: The answer is yes. And the answer is yes in
18:12
Speaker 2: terms of law and in terms of policy. So in
18:16
Speaker 2: terms of law, I mean, the predecessor to this rule
18:20
Speaker 2: dates all the way back to 1946, right? I mean, it, it, it,
18:24
Speaker 2: germinated up in the early, maybe not the early New Deal,
18:30
Speaker 2: but in the Roosevelt-Truman years. I guess the original promulgation
18:36
Speaker 2: was like 42, and then they came in in 46.
18:40
Speaker 2: And the premise there was, well, shareholder democracy is something
18:45
Speaker 2: we like, and we want shareholders to be able to
18:48
Speaker 2: have a voice. And If you own a share in
18:52
Speaker 2: a company under state law, you can go show up
18:56
Speaker 2: at the annual meeting and get a discussion about it.
19:00
Speaker 2: The reality is that's not exactly true. It wasn't true then.
19:03
Speaker 2: It's not true now. In other words, I've been a
19:05
Speaker 2: director of privately held corporations. And no, you don't have
19:10
Speaker 2: to allow shareholders to be able to speak at your meeting.
19:15
Speaker 2: You don't have to entertain what they say. That's not
19:19
Speaker 2: a general rule under most states and not a general
19:22
Speaker 2: rule under Delaware, which for a variety of weird reasons
19:25
Speaker 2: is the dominant state in corporate law for publicly traded corporations.
19:31
Speaker 2: You don't have to allow that. So we have this
19:34
Speaker 2: two-tiered regulatory system when it comes to corporations. So the
19:38
Speaker 2: corporation law is still state law. And the federal law
19:43
Speaker 2: with some exceptions, especially after Sarbanes-Oxley. But federal laws, by
19:47
Speaker 2: and large, a disclosure law, which allows investors to be
19:52
Speaker 2: able to trade securities on national markets and have a
19:56
Speaker 2: common basis of comparison. You want to be able to
19:59
Speaker 2: compare the net income of Apple and Google or of
20:04
Speaker 2: Exxon and Chevron. You do not want it to depend
20:07
Speaker 2: on varying state laws between the two, you want to
20:12
Speaker 2: be able to do that as an investor. You want
20:14
Speaker 2: to have a good basis of information.
20:16
Speaker 1: So that's the regularize thing, consistent.
20:20
Speaker 2: Yeah, it is. And my former professor, Roberto Romano, law professor,
20:27
Speaker 2: calls this the genius of American corporate law because- In theory,
20:32
Speaker 2: Delaware has a dominant position for a variety of historical
20:36
Speaker 2: reasons over state corporate law, but if Delaware started going crazy,
20:40
Speaker 2: companies could shift their incorporation into other states, whether they
20:44
Speaker 2: move their headquarters or not, and get a different body
20:48
Speaker 2: of law from different states, which means that it's a
20:52
Speaker 2: constraint on using that power of where the company has
20:57
Speaker 2: its charter incorporated. it's a constraint on the power of
21:01
Speaker 2: the state to do things to manipulate what's going on
21:05
Speaker 2: with the company. And the federal, again, the federal government's
21:08
Speaker 2: gone further than they probably should at this point, but
21:11
Speaker 2: the federal overlay is to say, but the investors need
21:14
Speaker 2: to know what net income is from company A, B,
21:17
Speaker 2: and C, and have a comparable basis to compare these
21:21
Speaker 2: sorts of things. So that's sort of the basic understanding
21:25
Speaker 2: that we have. The rule about shareholder communications is, as
21:33
Speaker 2: you might think, it's classically in that state nexus, right?
21:37
Speaker 2: It's classically how corporations deal with their own investors vis-a-vis
21:44
Speaker 2: the board of directors and take guidance is a question
21:47
Speaker 2: of state law. It's not about disclosing that income, right?
21:51
Speaker 2: But the federal government, because they require various quarterly and
21:55
Speaker 2: annual reports, and then also require these proxy statements that
22:00
Speaker 2: allow individuals to send someone their vote. They don't have
22:04
Speaker 2: to show up at the annual meeting for a big
22:05
Speaker 2: publicly traded company. Nowadays, it's mostly online anyway. But it
22:12
Speaker 2: facilitates the annual meeting process by getting a document out
22:17
Speaker 2: there to vote on. And so because of the control
22:19
Speaker 2: of that, the federal government has long required a situation
22:25
Speaker 2: where shareholders can speak and require votes from other shareholders
22:32
Speaker 2: on the ballot item in the proxy statement for the
22:35
Speaker 2: corporate annual meeting. And they've done this for very small shareholders.
22:39
Speaker 2: So a shareholder with $ 2, 000 or $ 3, 000 of stock, which
22:43
Speaker 2: for a company like Apple or Google or General Electric
22:47
Speaker 2: is a pittance.
22:49
Speaker 1: Shareholders with a billionth. Of the market capitalization, right? With
22:55
Speaker 1: less than a billionth get to speak at the annual meeting.
22:58
Speaker 2: Right, it's the equivalent of saying... that you or I
23:02
Speaker 2: could get a national referendum item on the ballot for
23:05
Speaker 2: a national election. We elect the president, we elect our senator,
23:09
Speaker 2: and we get to vote on the Boyer or the
23:10
Speaker 2: Copeland proposal.
23:11
Speaker 1: Well, I don't know. I'm liking the sound of that.
23:15
Speaker 2: You like the sound of it until you think there's
23:17
Speaker 2: like 349 million other people.
23:19
Speaker 1: Oh, everyone can do it. I'm sorry. I thought it
23:21
Speaker 1: was just the Copeland.
23:22
Speaker 2: And so that's sort of the world that we've lived in. And,
23:27
Speaker 2: you know, basically where the SEC looks to be going now,
23:31
Speaker 2: based on the public comments of the chairman, Paul Atkins,
23:35
Speaker 2: is to say, no, this is really a question of
23:37
Speaker 2: state law. Congress could give us this power, but it
23:41
Speaker 2: hasn't clearly given us this power. We're going to allow,
23:44
Speaker 2: you know, state law to determine whether something gets on
23:48
Speaker 2: the ballot or whether it doesn't in terms of this
23:50
Speaker 2: proxy process. We're not going to, because they had a
23:52
Speaker 2: whole apparatus of staff trying to judge whether these ballot
23:56
Speaker 2: items could or couldn't get on the ballot. They had
23:59
Speaker 2: a whole list of guidance and rules saying, this gets on,
24:04
Speaker 2: this doesn't get on. In the early days, political stuff
24:06
Speaker 2: couldn't get on. And then in the 1970s, the DC
24:09
Speaker 2: Circuit in the middle of the Vietnam War and Napalm
24:14
Speaker 2: threw a sort of bomb at the SEC. They didn't
24:16
Speaker 2: actually direct it, but they invalidated a no action letter
24:22
Speaker 2: from the SEC, which said that the company could exclude
24:25
Speaker 2: a ballot item and they wanted the SEC to go
24:27
Speaker 2: back and reanalyze it. And the SEC said, fine, we're
24:30
Speaker 2: just going to let them all on. Right. And that's
24:32
Speaker 2: basically the world we've lived in now for 50 years.
24:36
Speaker 1: So it seems to me that what happened is the
24:39
Speaker 1: Securities and Exchange Commission created not only an entirely different
24:46
Speaker 1: set of rules, an entire parallel system of shareholder engagement,
24:51
Speaker 1: But a parallel system that so favored small shareholders that
24:57
Speaker 1: the parallel system essentially cannibalized the entire system. And it became,
25:03
Speaker 1: for the most part, the only functioning system of shareholder engagement. So,
25:07
Speaker 1: I mean, once in a while I'll see a based
25:10
Speaker 1: on state law from the floor proposal.
25:14
Speaker 2: Rarely.
25:15
Speaker 1: So basically you had a federal system and then some
25:18
Speaker 1: adjudication from the federal government, a state system, adjudication from
25:22
Speaker 1: the federal system under Supreme Court pressure. And then that
25:27
Speaker 1: grew and grew and grew and became this whole body
25:29
Speaker 1: of law and kind of precedence and everything else. And
25:33
Speaker 1: it replaced state law.
25:36
Speaker 2: All right.
25:38
Speaker 1: That means a couple things.
25:39
Speaker 2: Without Congress saying to do it.
25:41
Speaker 1: Without Congress saying to do it.
25:42
Speaker 2: Exactly.
25:43
Speaker 1: So a couple of observations on that, a little bit
25:45
Speaker 1: on the other side. The other systems atrophied severely. And
25:52
Speaker 1: that's one of the things you and I and Larry
25:54
Speaker 1: Cunningham were on a panel. And what Larry said is
25:57
Speaker 1: basically whatever the law says, I can tell you that
25:59
Speaker 1: people are really flummoxed by this because they don't know
26:01
Speaker 1: how the new system is going to work because they're
26:03
Speaker 1: not used to it. Is the Delaware court system ready
26:06
Speaker 1: for all this litigation, blah, blah, blah? All right, practical question.
26:09
Speaker 1: You don't have to take that into account in law,
26:10
Speaker 1: but at least think about it a little bit. But
26:13
Speaker 1: the other thing, so there's that. But the other thing
26:17
Speaker 1: I'm wondering is, is there any federal, this is the
26:21
Speaker 1: thing I said I might bring up, might not. You
26:23
Speaker 1: can go for it or not. Is there any regulatory,
26:27
Speaker 1: regularizing role? If the system is going back to the states,
26:32
Speaker 1: is it origin in the states, adjudication in the states,
26:36
Speaker 1: enforcement in the states? no voice at all at the
26:40
Speaker 1: federal level, even though they're spying and selling securities across
26:45
Speaker 1: state lines and therefore engaged in interstate commerce. And if
26:50
Speaker 1: they're saying, if they put out a DEF 14A, the
26:53
Speaker 1: proxy statement, it says, these are our rules and these
26:57
Speaker 1: are our bylaws, then they have now publicly said something
27:05
Speaker 1: in a national market under disclosure rules, and therefore are
27:09
Speaker 1: obligated to follow those, you know, and that that obligation might,
27:14
Speaker 1: that federal regulators might have some role in ensuring that
27:19
Speaker 1: they follow what is in those public statements.
27:24
Speaker 2: I mean, statements bleed very, very closely into disclosure, right?
27:32
Speaker 2: And so, 10B5 and other of these rules and the
27:36
Speaker 2: sort of apparatus around enforcing, you know, truthful statements to
27:42
Speaker 2: the market, you know, the federal government has a role,
27:46
Speaker 2: has long had a role. You know, we can debate
27:50
Speaker 2: whether there should be a, what's called a private right
27:52
Speaker 2: of action, the ability for individual investors to sue under that,
27:56
Speaker 2: but there's clearly a federal role under that. When it
28:00
Speaker 2: comes to, you know, What is the balance of power
28:06
Speaker 2: between shareholders and directors? I mean, that absent congressional action,
28:10
Speaker 2: I think this is where the SEC is going. It's
28:13
Speaker 2: a question of state law. You know, is Delaware well
28:16
Speaker 2: equipped to handle this? I don't know. I think, listen,
28:20
Speaker 2: I think the Delaware legislature will react. I think the
28:23
Speaker 2: Delaware courts will react. And the short term, you know, chaos,
28:28
Speaker 2: and there will be some sort of chaos because it's
28:30
Speaker 2: a major shift in the way things have been going
28:33
Speaker 2: for 50 years. will shake out relatively quickly, assuming that
28:41
Speaker 2: this rulemaking takes root and assuming you don't have another
28:44
Speaker 2: presidential election and a new SEC that totally reverses back.
28:47
Speaker 1: Right, and the whole thing's tied up in litigation for
28:49
Speaker 1: two years, so nothing actually changes. Right, that could happen.
28:51
Speaker 2: Right, so I mean, that is always a possible outcome.
28:55
Speaker 2: which is part of the problem with doing this through
28:57
Speaker 2: rulemaking in the first place. But what we have here
29:00
Speaker 2: is an original rulemaking that was suspect, right? It's an
29:03
Speaker 2: original rule from the SEC that didn't really follow state
29:07
Speaker 2: law and purported to, and has just sort of created
29:11
Speaker 2: this entire apparatus around the proxy advisory firms that advise
29:17
Speaker 2: institutional investors on how to vote, the big institutional investors,
29:21
Speaker 2: And then other interested parties, the little corporate gadflies that
29:25
Speaker 2: do this, and the individuals right, left, and center that
29:29
Speaker 2: try to play in this. Now, I will say, I mean, traditionally,
29:34
Speaker 2: the left-wing activists got way out in front of this,
29:37
Speaker 2: totally dominated this, pushed the companies. totally in a certain direction.
29:42
Speaker 2: And the reaction from the, and I say right, but
29:45
Speaker 2: it's really the more free market oriented or the, we're
29:48
Speaker 2: not going to make our corporations be woke ink companies,
29:54
Speaker 2: forces and you were a major leader in this, took
29:58
Speaker 2: a while to react to this, and it finally started to,
30:01
Speaker 2: you know, rein it back in the direction of some normality.
30:07
Speaker 2: But this entire apparatus just grew up. Now, so the
30:10
Speaker 2: question then becomes, after this, and there will be lawsuits,
30:14
Speaker 2: there will be fights, there will be uncertainty, you know,
30:17
Speaker 2: what does shareholder engagement look like in, you know, shareholder
30:21
Speaker 2: engagement 2.0? After... the rule as we've known it goes away.
30:29
Speaker 2: And I don't have a clear answer to that. I mean,
30:31
Speaker 2: I have hypotheses. I have hypotheses. A, hypothesis A is
30:36
Speaker 2: that the left will continue to have a fairly dominant
30:39
Speaker 2: role here because I think they've got a big apparatus
30:43
Speaker 2: around both the proxy advisory firms and the big institutional
30:48
Speaker 2: investors where they've embedded themselves in these institutions in a
30:52
Speaker 2: way where they're going to continue to push. So I
30:58
Speaker 2: think they're going to continue to have a dominant position.
31:00
Speaker 1: And they'll do it through board election decisions and engagement, right?
31:06
Speaker 2: They may be able to do it through board election decisions,
31:09
Speaker 2: whether it's a much heavier cudgel to try to say,
31:14
Speaker 2: we're going to try to change the board based on
31:18
Speaker 2: woke item a b or c.
31:20
Speaker 1: No i don't see what i see it.
31:22
Speaker 2: Happened at exxon they got two directors but but that
31:24
Speaker 2: was an anomaly that almost proves how rare.
31:27
Speaker 1: It is yeah so i see it more like this
31:30
Speaker 1: um you know an iss or glass lewis or black
31:33
Speaker 1: rock um or state street uh etc basically say you
31:39
Speaker 1: know um you're not a really very diverse board we
31:44
Speaker 1: think should be a more diverse board So we might
31:49
Speaker 1: recommend a no vote on your nominating committee chair or
31:54
Speaker 1: a no vote on your corporate executive compensation plan because
31:58
Speaker 1: it does not include all the risks, including climate change risks.
32:03
Speaker 1: So I think it's more a matter of jawboning and
32:06
Speaker 1: mau mau-ing sort of thing rather than a board challenge
32:09
Speaker 1: because that's what happened before. I talked to these issuers
32:12
Speaker 1: and yeah, ISS said this, Glass-Lewis said this, BlackRock said that.
32:16
Speaker 1: And this might be an unintended consequence of getting away
32:20
Speaker 1: from the shareholder thing because now probably a majority of
32:24
Speaker 1: the ENS proposals are anti-ENS at this point, that by
32:28
Speaker 1: taking that away, we're giving it back to ISS, Glass-Lewis, BlackRock, Vanguard,
32:31
Speaker 1: State Street.
32:35
Speaker 2: Yeah, maybe. I mean, there's obviously an executive order.
32:38
Speaker 1: Not the shareholder proposal process. It'll just be their annual
32:42
Speaker 1: meeting with the company in which they– kind of come
32:44
Speaker 1: in and say, this is what we'd like to see.
32:47
Speaker 2: Right. And it's, it's, it's, there is another executive order
32:52
Speaker 2: out there on proxy advisory firms, which includes 14-8 in it.
32:57
Speaker 2: There are ongoing discussions. You know, I led, I led
33:00
Speaker 2: a discussion in June. I'm on the investor advisory committee
33:02
Speaker 2: to the SEC. I led a discussion in June on,
33:05
Speaker 2: you know, how do we think about these big institutional
33:08
Speaker 2: investors that are mostly passive? In in terms of their
33:13
Speaker 2: investment strategy, but then they're putting a big thumb on
33:16
Speaker 2: the scale when it comes to voting on questions in
33:21
Speaker 2: front of the companies. Now, with the 14A8, with these
33:26
Speaker 2: shareholder proposals not on the ballot, the rationale for them
33:31
Speaker 2: engaging in quite that way may shift. The imperatives may
33:36
Speaker 2: well shift. And then the question is, you know, the
33:40
Speaker 2: people who've been batting above their weight as a counterweight here,
33:44
Speaker 2: you being chief among them to some degree, you know,
33:47
Speaker 2: how are you going to engage with a different world
33:52
Speaker 2: where these ballot items aren't going to necessarily be put
33:55
Speaker 2: on that? Listen, I say they're not going to necessarily
33:57
Speaker 2: be put on. They're not going to be put on
33:59
Speaker 2: under an SEC rule. It doesn't mean that companies won't
34:05
Speaker 2: include ballot items ever because they're A, institutional investors may say,
34:10
Speaker 2: we want them. B, states, Delaware may say, we want
34:14
Speaker 2: to create their own process. And Delaware will be cabined
34:17
Speaker 2: by that. They'll be constrained because Texas and other states
34:21
Speaker 2: would love to grab their business. But they still may
34:25
Speaker 2: do it. And they may do it if they've got
34:27
Speaker 2: a lot of pressure from their institutional bar, from the
34:30
Speaker 2: institutional investors, the finance community that resides there in Delaware.
34:34
Speaker 2: I mean, they make about one third of their state
34:37
Speaker 2: revenues From.
34:39
Speaker 1: Being a domicile, yes.
34:41
Speaker 2: They don't want to lose it, so they've got a
34:44
Speaker 2: strong incentive to try to get it right. But it
34:46
Speaker 2: may not go away. It may just look very different.
34:50
Speaker 1: Getting it right is kind of manager-friendly rather than necessarily shareholder-friendly, right?
34:57
Speaker 1: Because it's generally the managers who are driving the domicile decision.
35:01
Speaker 2: I don't view those as necessarily in the same tension
35:05
Speaker 2: that some do. In other words, I think... Most shareholders
35:09
Speaker 2: want to empower their managers. Most shareholders are not at
35:14
Speaker 2: all equipped to tell managers how to run a business better.
35:18
Speaker 2: Most shareholders want to invest money, get a reasonable return,
35:23
Speaker 2: have that money be relatively safe, safe for retirement. And
35:27
Speaker 2: then you've got a small number of activist hedge funds
35:30
Speaker 2: that are doing real heavy research and want to turn
35:33
Speaker 2: around the way businesses are run. And we want to
35:36
Speaker 2: empower those folks because they clearly add market value in
35:40
Speaker 2: the aggregate. But that's quite different from these sort of
35:45
Speaker 2: social activists that are taking diversified positions across the entire market,
35:53
Speaker 2: if it's a big passive index fund vehicle like BlackRock
35:56
Speaker 2: or State Street, and or are just a single purpose
36:03
Speaker 2: sort of, social fund that's focused on the environment or this, that,
36:07
Speaker 2: or the other social issue, and we're going to buy
36:09
Speaker 2: shares in the stock, and the main reason we're buying them,
36:12
Speaker 2: we may diversify our portfolio so we can get a
36:15
Speaker 2: decent market return, but the main reason we're doing all
36:17
Speaker 2: this is to try to influence companies not to make
36:20
Speaker 2: more money, but to hit their political goals.
36:22
Speaker 1: Yes, precisely.
36:23
Speaker 2: Right.
36:24
Speaker 1: They want access to more companies because they're pushing a
36:26
Speaker 1: political agenda, and most shareholders don't want that.
36:30
Speaker 2: Right. And if they do want it, they don't they, they,
36:35
Speaker 2: they probably don't act like it, even if they might
36:36
Speaker 2: say they do. Right. In other words, you don't, you're
36:39
Speaker 2: not going to see, we've seen a lot of money
36:41
Speaker 2: flowing to ESG, but it's still a relatively small percentage
36:45
Speaker 2: of the market. And, and most people aren't going to say, well,
36:48
Speaker 2: we're going to sacrifice our investment returns or pay much
36:50
Speaker 2: higher fees for it. Right. So they may say we kind.
36:53
Speaker 1: Of like it, but they're not going to actually.
36:54
Speaker 2: Right.
36:54
Speaker 1: And a lot of money flowed out of the ESGs too,
36:56
Speaker 1: when they found out that, oh, wait, fossil fuels can
36:58
Speaker 1: make a profit.
36:59
Speaker 2: And, uh, Yeah, after oil rebounded after COVID, it changed
37:04
Speaker 2: a lot of the calculus. The notion that there was
37:08
Speaker 2: a free lunch and ESG went away.
37:10
Speaker 1: Yeah, it became a negative alpha situation. It's hard to
37:15
Speaker 1: know where all this is going. I think the apparatus
37:21
Speaker 1: as it is now has done tremendous harm. I'm all
37:27
Speaker 1: for getting rid of it. especially the parts that do
37:32
Speaker 1: tremendous harm. What I'm wrestling with, and it might seem
37:34
Speaker 1: like I'm talking my book. I'm not really. Our business
37:37
Speaker 1: will do fine. We can pivot to different strategies. I'm
37:40
Speaker 1: talking more, you know, what's best for shareholders is if
37:46
Speaker 1: a company puts a 14A out, they put a proxy
37:48
Speaker 1: statement out and they say, if you put in a
37:51
Speaker 1: shareholder proposal that has, if you own this much and
37:54
Speaker 1: you put this proposal in by this date, that'll be
37:56
Speaker 1: considered a valid proposal or under under 14A4, if you
38:00
Speaker 1: do this proposal by this date, et cetera, that'll be
38:03
Speaker 1: considered a valid shareholder proposal. And then they don't do
38:06
Speaker 1: it and say, come sue us, individual shareholder. It's hard
38:13
Speaker 1: for me to imagine that the SEC has nothing to say,
38:16
Speaker 1: would not properly have something to say about a public
38:20
Speaker 1: declaration in an SEC-filed document that outlines the conditions under
38:26
Speaker 1: which proposals will be accepted. and then ignores those conditions
38:31
Speaker 1: and essentially saying, well, you can always sue because a
38:35
Speaker 1: right that you have to sue to get is not
38:38
Speaker 1: genuinely a right, or at least not a right for everybody.
38:43
Speaker 2: Right, because it costs way more to bring the legal
38:47
Speaker 2: action than it's worth, which is, you know, which is,
38:51
Speaker 2: it's an inherent problem in our American litigation system generally
38:55
Speaker 2: where we we don't shift fees so that the winner
39:02
Speaker 2: recoups their fees, right? So it's a problem in tort
39:05
Speaker 2: litigation because it means plaintiff's lawyers can bring a bunch
39:11
Speaker 2: of bogus cases and pile them all together and force
39:14
Speaker 2: a settlement because it's more expensive to defend against them.
39:18
Speaker 2: And it's also a problem in these situations where it's
39:21
Speaker 2: a problem like in the insurance industry where the insurance
39:23
Speaker 2: company knows like, You know, are you really going to
39:25
Speaker 2: fight us on this? We're going to fight you to
39:27
Speaker 2: the nth degree. And so it becomes very expensive to
39:32
Speaker 2: try to, you know, recover under a policy that might
39:34
Speaker 2: be valid or what have you, right? I mean, it's
39:36
Speaker 2: a problem in both directions. So that's true. Whether the
39:42
Speaker 2: SEC will devote its scarce enforcement resources to this I'd
39:47
Speaker 2: be skeptical, but there may be outer bound cases where
39:51
Speaker 2: they would. And all they have to do is do
39:53
Speaker 2: it in one or two outer bound cases and companies
39:55
Speaker 2: will get the point.
39:56
Speaker 1: Precisely. Because if the idea, going back to Purcell in 1946,
40:02
Speaker 1: is to essentially see that state law is followed in
40:06
Speaker 1: national markets. And it's interesting, some congressman said, yeah, but
40:10
Speaker 1: what about the man of nuisance or the communist? And
40:13
Speaker 1: Purcell basically said, oh, don't worry about that. And that's
40:15
Speaker 1: exactly what happened. The man of nuisance and the communist,
40:19
Speaker 1: in fact, abused 1488 exactly like– Well, originally.
40:26
Speaker 2: They said that couldn't happen, right? Then it did happen.
40:30
Speaker 2: It's like if it's an item of general political or
40:33
Speaker 2: social or economic significance, the company can exclude it. And
40:37
Speaker 2: that was their original rule. And then when they shifted
40:40
Speaker 2: it in the 70s, it opened up the entire apparatus
40:42
Speaker 2: that we've seen.
40:43
Speaker 1: And then Biden shifted it even more with Rule 14L. Basically,
40:48
Speaker 1: if it's a matter of general social concern, put it
40:51
Speaker 1: on the ballot, which basically made corporate ballots into op-ed pages,
40:56
Speaker 1: letters to the editor.
40:57
Speaker 2: To be clear, it wasn't a rule. It was a
41:02
Speaker 2: staff legal bulletin.
41:03
Speaker 1: It was guidance.
41:05
Speaker 2: So you couldn't even challenge the rule. If it had
41:08
Speaker 2: been adopted as a rule, you could have sued and
41:10
Speaker 2: challenged it, but you couldn't even do that. Very good point.
41:12
Speaker 1: Very good point. But that's been reversed. And by the way,
41:17
Speaker 1: it was, and wisely so. But the unintended consequences, by
41:20
Speaker 1: the way, is that there was a surge of proposals
41:22
Speaker 1: from the right, just based on broad social concerns.
41:27
Speaker 2: When I really aggressively tracked this for seven or eight years,
41:34
Speaker 2: the number of right-leaning proposals was a pittance. Now, like
41:38
Speaker 2: you say, it's not a majority of all the proposals,
41:44
Speaker 2: but of the more socially oriented proposals, it may be
41:49
Speaker 2: a majority or it's pretty close. There's a lot of them.
41:55
Speaker 2: Where you've lagged is getting The proxy advisory firms and
41:58
Speaker 2: the big institutional investors. Yeah, no surprise.
42:01
Speaker 1: Proxy advisory firms are ideologically captured. But what's interesting is
42:08
Speaker 1: that has not stopped the success rate in any reasonable degree.
42:12
Speaker 1: Because the issuers are already jaded about the proxy advisory services.
42:15
Speaker 1: I mean, they don't care. I mean, they don't think
42:18
Speaker 1: ISS or Glass-Lewis get it right. They might give in
42:21
Speaker 1: to them sometimes because they're going to vote no on
42:23
Speaker 1: their comp plans. They might have a certain amount of power. which,
42:25
Speaker 1: by the way, is diminishing rapidly. So when Exxon says,
42:31
Speaker 1: I don't care what you say, we're domiciling, or when
42:34
Speaker 1: Elon said the same thing, basically, and when Jamie Dimon said,
42:39
Speaker 1: you know what, we're going to ignore ISS and Glass-Lewis,
42:42
Speaker 1: we're going to do our own voting, it's almost like
42:45
Speaker 1: Superman can bleed. People were terrified of the proxy advisory
42:49
Speaker 1: services for so long, and it just took a few
42:51
Speaker 1: to say, I don't care what you think. And then
42:54
Speaker 1: once you do that and you still survive, then a
42:57
Speaker 1: lot of others are going to re-domicile, they're going to
42:59
Speaker 1: do whatever. So I'm finding.
43:02
Speaker 2: That the opposite. Although those are very deep-pocketed companies. But yes,
43:08
Speaker 2: you're right. And I think the ideological capture there is
43:16
Speaker 2: very real. It's a problem. It's what sort of underlay
43:20
Speaker 2: the president's EO on this. vis-a-vis proxy advisors. And it's
43:25
Speaker 2: going to be interesting to see how that shakes out
43:27
Speaker 2: in a post without these shareholder proposals. I mean, there's
43:30
Speaker 2: still a place for advice. But, you know, it'd be curious.
43:34
Speaker 2: I wonder, I don't know exactly how the staffing is
43:37
Speaker 2: allocated at those places among these types of ballot items
43:41
Speaker 2: versus others. But my guess is it's a big chunk
43:44
Speaker 2: of their staff that may be all of a sudden
43:47
Speaker 2: at risk. And it's going to really Well, yeah.
43:51
Speaker 1: There are going to be layoffs in the Philippines for sure.
43:55
Speaker 1: That's where a lot of the staff dealing with ENS
43:58
Speaker 1: proposals are, offshore.
44:01
Speaker 2: And, of course, the ownership is offshore too. These are
44:04
Speaker 2: proxy advisory firms that are not American.
44:06
Speaker 1: They are foreign-owned. I think for things like the big-ticket
44:10
Speaker 1: items like Nelson Pell's Takeover, you know what I mean?
44:13
Speaker 1: They do a lot in Rockville, Maryland or whatever. But
44:16
Speaker 1: ENS stuff, I think, is largely offshore.
44:18
Speaker 2: They do... They do much better on those. I mean,
44:22
Speaker 2: when I wrote a report now like eight years ago
44:25
Speaker 2: with David Larker and Brian Payne of Stanford, the evidence
44:29
Speaker 2: is when they get real takeover bids, the proxy advisory
44:33
Speaker 2: firms tend to be pretty good.
44:34
Speaker 1: Yes.
44:35
Speaker 2: All that. Yes. Because the stakes are high.
44:38
Speaker 1: And that's why, but I agree with that. But I
44:41
Speaker 1: think a mirror voting rule on active, following active investors,
44:49
Speaker 1: Not on everything. I mean, because here's the thing. The
44:52
Speaker 1: active investors, they vote for a lot of ESG stuff.
44:55
Speaker 1: They're not even paying attention, okay? But on these specific
44:59
Speaker 1: high-stakes items where they've got skin in the game would
45:03
Speaker 1: probably be better than a proxy advisor role. Because I
45:06
Speaker 1: think the proxy advisors have to make a credible effort
45:09
Speaker 1: towards genuine analysis, whereas an active hedge fund manager has,
45:15
Speaker 1: I mean, this is their living.
45:17
Speaker 2: Right?
45:18
Speaker 1: So they have to put a lot.
45:20
Speaker 2: If they get it wrong, they're not going to always
45:23
Speaker 2: get it right. But if they get it wrong more
45:26
Speaker 2: often than they get it right, they're going to end
45:29
Speaker 2: up closing shop and sending their capital out. I mean,
45:32
Speaker 2: they're only going to make it in the long run
45:34
Speaker 2: if they're generally adding value to the companies that they're
45:38
Speaker 2: investing in. Right.
45:40
Speaker 1: And if the proxy advisory services, ISS and Glass-Lewis with
45:43
Speaker 1: their whatever 95 or 97% market share is If they
45:47
Speaker 1: get those wrong mostly, but they're credible and it's serious analysis,
45:52
Speaker 1: but falls short, I don't think there are real consequences
45:55
Speaker 1: for them on that. So I think they just have
45:59
Speaker 1: to be able to do something presentable and solid, whereas
46:04
Speaker 1: a hedge fund manager has real career on the line
46:08
Speaker 1: in a way that some analyst in Rockville, Maryland probably doesn't.
46:12
Speaker 1: If they say, it'll be really bad for shareholders if...
46:15
Speaker 1: Exxon re-domiciles, and Exxon re-domiciles, and from the time of
46:19
Speaker 1: the announcement to the, you know, to it passing, the
46:22
Speaker 1: stock slightly overperforms, right? Then, as far as I know,
46:27
Speaker 1: no one lost their job on that, right?
46:29
Speaker 2: Right.
46:30
Speaker 1: So, but you might if you're a portfolio manager for
46:34
Speaker 1: a hedge fund.
46:36
Speaker 2: Right, exactly.
46:37
Speaker 1: So it really comes down to this, incentives and liberty,
46:41
Speaker 1: property rights, the basic principles, foundation of the constitutions.
46:48
Speaker 2: Absolutely. And the problem in all that we're discussing with
46:54
Speaker 2: corporate governance and securities in this part of securities law,
46:57
Speaker 2: where we're talking about voting, which is really corporate governance,
47:02
Speaker 2: is the incentives are off. And they're off because our
47:10
Speaker 2: voting decisions are aren't very material for vast majority of owners.
47:15
Speaker 2: The same way it's true, there's a vast literature on
47:19
Speaker 2: voter ignorance in terms of regular voting.
47:21
Speaker 1: Rational ignorance, yeah, I get that.
47:23
Speaker 2: Yeah, it's rational ignorance. And there, it works kind of
47:28
Speaker 2: only because we have directional voting, because we know the
47:31
Speaker 2: Ds are kind of here and the Rs are kind
47:33
Speaker 2: of here. And so it's kind of like if we're
47:36
Speaker 2: mad at the R's because of what they're doing, we'll
47:38
Speaker 2: vote D on the margin and vice versa. So it
47:41
Speaker 2: kind of works. But when it comes to running companies.
47:44
Speaker 1: That doesn't even work.
47:46
Speaker 2: It doesn't work at all.
47:47
Speaker 1: So I remember I was in a situation with a
47:50
Speaker 1: general counsel of a publicly traded company, came in super snarky,
47:56
Speaker 1: and said, well, I looked at all your votes, and
48:00
Speaker 1: you got really low vote counts for all your proposals. Well,
48:02
Speaker 1: that wasn't true.
48:02
Speaker 2: Yeah.
48:03
Speaker 1: Decent vote council on some of them, but he listed
48:06
Speaker 1: the numbers. And I said, well, honestly, I think that
48:10
Speaker 1: does not, so investors don't like what you propose. I said, honestly,
48:14
Speaker 1: I think the vast majority of investors, meaning the people
48:17
Speaker 1: whose money it is, not the aggregators, have no idea
48:22
Speaker 1: that that even happened.
48:24
Speaker 2: Right.
48:25
Speaker 1: And he disputed that and he said, well, I think
48:27
Speaker 1: the investors pay attention. I said, great. How did you
48:30
Speaker 1: vote on these? And he said, what do you mean?
48:33
Speaker 1: This isn't about me. I said, you're there with a
48:36
Speaker 1: publicly traded company. You're general counsel. You've been there whatever,
48:38
Speaker 1: six years. I assume you're in the 401k plan, which,
48:42
Speaker 1: and if you're in a diversified portfolio, you own all
48:45
Speaker 1: the companies that you just listed. How did you vote?
48:51
Speaker 1: And he said, well, you know, this isn't the place
48:53
Speaker 1: for conversation about rational ignorance. And I said, it's exactly
48:56
Speaker 1: the place for the conversation about you. You are a
48:59
Speaker 1: general counsel. And investor relations, you are a person who
49:03
Speaker 1: meets with people like me. You did the research to
49:06
Speaker 1: find out how people voted on this. You've got staff
49:09
Speaker 1: that you devoted to this. And you even don't know
49:12
Speaker 1: how you voted on our proposal. So don't tell me
49:15
Speaker 1: it reflects the will of the investors. It reflects the
49:18
Speaker 1: the consensus of proxy advisory services um and you know
49:22
Speaker 1: that that did not go over well with him but
49:25
Speaker 1: they did put it on the ballot um you know
49:28
Speaker 1: that was his argument for keeping it off the ballot
49:30
Speaker 1: and they did put it on the ballot um so
49:34
Speaker 1: All right, Jim, anything else you want?
49:35
Speaker 2: Well, you've got an advantage in the way you do
49:38
Speaker 2: this relative to most of the people in this space
49:41
Speaker 2: that have done this in that your proposals are good
49:46
Speaker 2: for the shareholders. Because of that- you've got an advantage.
49:51
Speaker 2: It doesn't mean that you're going to get the votes, but,
49:54
Speaker 2: you know, it's harder to argue against things that are
49:56
Speaker 2: good for the shareholders.
49:57
Speaker 1: Yes, because in this particular case, it was a technology
50:00
Speaker 1: firm that had net zero commitments as part of its
50:03
Speaker 1: corporate CEO executive comp plan. So basically we're saying we're going,
50:08
Speaker 1: even though you run on electrons, we're going to give
50:11
Speaker 1: you a bonus for using the fewer of the fossil
50:15
Speaker 1: fuels that create electrons. I mean, to me, That's a
50:18
Speaker 1: pretty good prima facie case that if you're putting shareholder
50:22
Speaker 1: return first, shareholder return is the only thing that's rewarded
50:25
Speaker 1: in the executive comp plan. It's not diluted with social goals.
50:29
Speaker 2: Exactly.
50:31
Speaker 1: All right. The book is The Unelected. You could have
50:35
Speaker 1: read it six years ago and you would have known
50:36
Speaker 1: a lot about what would have happened over the next
50:38
Speaker 1: six years. and it's still continuing. Jim Copeland always, I'm
50:42
Speaker 1: not sure there's anybody in the field who knows as
50:45
Speaker 1: much about this as you do, and I want to
50:46
Speaker 1: thank you for sharing your expertise with us.
50:49
Speaker 2: Well, thank you so much, Jerry. You've been a champion,
50:52
Speaker 2: and it's always a pleasure to talk.
50:53
Speaker 1: And thank you for all of you for joining us
50:55
Speaker 1: for this edition of Meeting of Minds podcast.
50:58
Speaker 2: Signing off.