The Coming Shift in Shareholder Activism: From "Firm-Specific" to "Systematic Risk" Proxy Campaigns (and How to Enable Them)

29 Pages Posted: 21 Aug 2021 Last revised: 26 Aug 2021

See all articles by John C. Coffee

John C. Coffee

Columbia Law School; European Corporate Governance Institute (ECGI); American Academy of Arts & Sciences

Date Written: August 26, 2021

Abstract

This article distinguishes two types of shareholder activism: (1) firm-specific activism, which has a long history and focuses on changes at a specific target company, and (2) systematic risk activism, which seeks to reduce the systematic risk in a portfolio and thereby benefit diversified investors. Typically, such a systematic risk campaign may force a portfolio company to internalize negative externalities to benefit the other companies in the portfolio (such as by reducing carbon emissions or undertaking climate risk reforms). But, systematic risk activism faces an inherent difficulty: the party that leads this campaign and invests in the target company may incur a significant loss when the target company’s stock price falls. This will be particularly difficult for activist hedge funds to accept, because they have small portfolios and cannot recoup their losses on the target firm by gains at the other portfolio companies. Properly understood, the recent campaign by Engine No. 1 with respect to ExxonMobil exemplifies these problems and suggests that activist hedge funds make ill-suited leaders for this form of activism. If so, there may be a strong demand for systematic risk activism among diversified investors, but potential campaigns could remain headless, as diversified investors will themselves be reluctant to lead such a campaign. This article surveys possible answers to this problem (some of which are suggested by the Engine No. 1 campaign). Nonetheless, this problem surrounding the incentives of hedge funds is aggravated by the traditionally independent stance of diversified investors, who are reluctant to join groups or expend funds, and by the inability of potential campaign leaders to charge adequately for their services. This article suggests several means of which to enable such campaigns.

Keywords: Climate Change, Corporate Governance, Diversified Investors, Fiduciary Duty, Hedge Fund, Index Fund, Institutional Investors, Proxy Contest, Systematic Risk.

JEL Classification: G30, G32, G38, H23

Suggested Citation

Coffee, John C., The Coming Shift in Shareholder Activism: From "Firm-Specific" to "Systematic Risk" Proxy Campaigns (and How to Enable Them) (August 26, 2021). Available at SSRN: https://ssrn.com/abstract=3908163 or http://dx.doi.org/10.2139/ssrn.3908163

John C. Coffee (Contact Author)

Columbia Law School ( email )

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American Academy of Arts & Sciences

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