A Welfare Function for Shareholder Engagement: Recognizing Profit for What It Is
5 Pages Posted: 15 Mar 2021
Date Written: March 14, 2021
This paper is a comment on Madison Condon’s Externalities and the Common Owner, which plays an important role in the growing literature around shareholder activism aimed at increasing portfolio returns, regardless of individual firm effects. The article raises important questions of political economy, power distribution, and anticompetitive activity. In this comment, I introduce key terminology for discussing these issues, and then reframe several issues raised by the article. With increasingly indexing markets, concentration and externalized social and environmental costs rising, distinguishing common owners’ promotion of responsible practices from welfare-shrinking price collusion is critical for economics, law and finance. Condon's article is an important contribution to the field.
First, the article asserts the need to assess the costs of shareholder primacy when discussing whether and how to remedy its excesses. It also discusses the need to assess the benefit of allowing the power of universal owners to countervail the power of corporate managers. It then frames the question whether the management technique of ESG integration—using a social and environmental lens to increase financial returns-- can effectively meet systemic threats and systematic risk. In framing the issues, the article highlights the importance of distinguishing among beneficiaries, shareholders, and the trustees between them. In light of the foregoing questions, the article asks whether guardrails—shareholder-mediated limits on corporate behavior—are a viable method for reducing negative social and environmental corporate impacts. Finally, the article questions whether antitrust concerns justify limiting the possibility of those asset managers coordinating to preserve social and environmental systems.
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