Rethinking acting in concert: Activist ESG stewardship is shareholder democracy

In May 2021, Engine No. 1, an investment fund, was lauded by the responsible investment community for successfully placing three dissident independent directors on ExxonMobil’s board. It achieved this by being a catalyst for institutional investors to become backers of environmental shareholder acti...

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Main Authors: PUCHNIAK, Dan W., VAROTTIL, Umakanth
Format: text
Language:English
Published: Institutional Knowledge at Singapore Management University 2023
Subjects:
ESG
Online Access:https://ink.library.smu.edu.sg/sol_research/4383
https://ink.library.smu.edu.sg/context/sol_research/article/6341/viewcontent/SSRN_id4565395.pdf
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spelling sg-smu-ink.sol_research-63412024-02-08T07:55:56Z Rethinking acting in concert: Activist ESG stewardship is shareholder democracy PUCHNIAK, Dan W. VAROTTIL, Umakanth In May 2021, Engine No. 1, an investment fund, was lauded by the responsible investment community for successfully placing three dissident independent directors on ExxonMobil’s board. It achieved this by being a catalyst for institutional investors to become backers of environmental shareholder activism. The unprecedented success of Engine No. 1’s campaign has spurred calls for a new, more sustained, activist engagement model by institutional investors, now known as “activist stewardship”.However, there is a significant legal hurdle that has been almost entirely overlooked by those calling for this new approach for institutional investors to become activist stewards: acting in concert rules. As we illuminate in this article, the legal barriers posed by acting in concert rules in virtually all jurisdictions prevent institutional investors from engaging in collective shareholder activism with the aim or threat of replacing the board (i.e., “activist stewardship”). Perversely, the current acting in concert rules effectively prevent institutional investors from replacing boards that resist (or even deny) climate change solutions – even if (or, ironically, precisely because) they collectively have enough shareholder voting rights to democratically replace the boards of recalcitrant brown companies. This heretofore hidden problem in corporate and securities law effectively prevents trillions of dollars of shareholder voting rights that institutional investors legally control from being democratically exercised to change companies who refuse to properly acknowledge the threat of climate change.As we reveal, this perverse result has arisen because the legal rules concerning acting in concert were designed in a different age when contests of control – not activist ESG stewardship targeting the existential threat of climate change – formed the foundational rationale undergirding such rules. This has created a panoply of rules which disincentivize – and, in cases of mandatory bids and poison pills, may functionally disenfranchise – institutional investors from using aggressive tactics to drive climate change prevention initiatives supported by a majority of shareholders.As such, we argue that the acting in concert rules must be reformed around the world to promote shareholder-backed climate initiatives – while still maintaining the fair and effective markets for corporate control, which was the original impetus for creating them. By designing a workable model for reforming acting in concert laws, we provide a solution to the problem of brown boards being undemocratically shielded by acting in concert rules. 2023-09-01T07:00:00Z text application/pdf https://ink.library.smu.edu.sg/sol_research/4383 https://ink.library.smu.edu.sg/context/sol_research/article/6341/viewcontent/SSRN_id4565395.pdf http://creativecommons.org/licenses/by-nc-nd/4.0/ Research Collection Yong Pung How School Of Law eng Institutional Knowledge at Singapore Management University ESG shareholder activism stewardship acting in concert corporate governance Business Organizations Law
institution Singapore Management University
building SMU Libraries
continent Asia
country Singapore
Singapore
content_provider SMU Libraries
collection InK@SMU
language English
topic ESG
shareholder activism
stewardship
acting in concert
corporate governance
Business Organizations Law
spellingShingle ESG
shareholder activism
stewardship
acting in concert
corporate governance
Business Organizations Law
PUCHNIAK, Dan W.
VAROTTIL, Umakanth
Rethinking acting in concert: Activist ESG stewardship is shareholder democracy
description In May 2021, Engine No. 1, an investment fund, was lauded by the responsible investment community for successfully placing three dissident independent directors on ExxonMobil’s board. It achieved this by being a catalyst for institutional investors to become backers of environmental shareholder activism. The unprecedented success of Engine No. 1’s campaign has spurred calls for a new, more sustained, activist engagement model by institutional investors, now known as “activist stewardship”.However, there is a significant legal hurdle that has been almost entirely overlooked by those calling for this new approach for institutional investors to become activist stewards: acting in concert rules. As we illuminate in this article, the legal barriers posed by acting in concert rules in virtually all jurisdictions prevent institutional investors from engaging in collective shareholder activism with the aim or threat of replacing the board (i.e., “activist stewardship”). Perversely, the current acting in concert rules effectively prevent institutional investors from replacing boards that resist (or even deny) climate change solutions – even if (or, ironically, precisely because) they collectively have enough shareholder voting rights to democratically replace the boards of recalcitrant brown companies. This heretofore hidden problem in corporate and securities law effectively prevents trillions of dollars of shareholder voting rights that institutional investors legally control from being democratically exercised to change companies who refuse to properly acknowledge the threat of climate change.As we reveal, this perverse result has arisen because the legal rules concerning acting in concert were designed in a different age when contests of control – not activist ESG stewardship targeting the existential threat of climate change – formed the foundational rationale undergirding such rules. This has created a panoply of rules which disincentivize – and, in cases of mandatory bids and poison pills, may functionally disenfranchise – institutional investors from using aggressive tactics to drive climate change prevention initiatives supported by a majority of shareholders.As such, we argue that the acting in concert rules must be reformed around the world to promote shareholder-backed climate initiatives – while still maintaining the fair and effective markets for corporate control, which was the original impetus for creating them. By designing a workable model for reforming acting in concert laws, we provide a solution to the problem of brown boards being undemocratically shielded by acting in concert rules.
format text
author PUCHNIAK, Dan W.
VAROTTIL, Umakanth
author_facet PUCHNIAK, Dan W.
VAROTTIL, Umakanth
author_sort PUCHNIAK, Dan W.
title Rethinking acting in concert: Activist ESG stewardship is shareholder democracy
title_short Rethinking acting in concert: Activist ESG stewardship is shareholder democracy
title_full Rethinking acting in concert: Activist ESG stewardship is shareholder democracy
title_fullStr Rethinking acting in concert: Activist ESG stewardship is shareholder democracy
title_full_unstemmed Rethinking acting in concert: Activist ESG stewardship is shareholder democracy
title_sort rethinking acting in concert: activist esg stewardship is shareholder democracy
publisher Institutional Knowledge at Singapore Management University
publishDate 2023
url https://ink.library.smu.edu.sg/sol_research/4383
https://ink.library.smu.edu.sg/context/sol_research/article/6341/viewcontent/SSRN_id4565395.pdf
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