Universal Owners, Shareholder Primacy, and Stakeholderism

• Citation: Vol. 10 No. 1
• Publication year: 2022

Universal Owners, Shareholder Primacy, and Stakeholderism

Daniel Irvin
dirvin12@gmail.com

UNIVERSAL OWNERS, SHAREHOLDER PRIMACY AND STAKEHOLDERISM: HOW SHOULD UNIVERSAL OWNERS VIEW CORPORATE PURPOSE?

Daniel Irvin

ABSTRACT

The rise of massive asset owners like large pension funds and sovereign wealth funds has created interest in the phenomenon of Universal Owners. The climate crisis, environmental degradation, and worsening inequality have also led to challenges to the current models of corporate governance, with a particular interest on the idea of corporate purpose. This paper fills a gap by addressing the intersection of these two trends, proposing a framework by which Universal Owners should view corporate purpose. I argue that from a returns-maximizing perspective, Universal Owners should prefer a flavor of shareholder primacy that believes the corporation's purpose is to contribute to sustainable economic growth. In the course of answering this question this paper also advances our understanding of Universal Owners by clarifying the difference between ESG investors and Universal Owners, and arguing for large index funds to be treated as a type of Universal Owner. This paper also contributes to the literature on heterogenous shareholder interests by identifying the potential conflict between Universal-Owners and non-Universal Owners as another example of this conflict, and one where current corporate law resolves against Universal Owners.

TABLE OF CONTENTS

INTRODUCTION.......................................................................................... 104

I. WHAT IS A UNIVERSAL OWNER?..................................................... 107

A. Definition ............................................................................... 107
B. History of the Concept ............................................................ 110
C. Externalities and Portfolio Returns ......................................... 112

1. Environmental Externalities.............................................. 116
2. Climate Change ................................................................ 116
3. Drug Pricing..................................................................... 117
4. Research and Development............................................... 118

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II. WHO ARE THE UNIVERSAL OWNERS?.............................................. 118
III. SHAREHOLDER PRIMACY VERSUS STAKEHOLDERISM...................... 123

A. Sustainable Growth Primacy................................................... 123
B. Divergences and Overlaps with Stakeholderism ...................... 126
C. Divergences and Overlaps with Traditional Shareholder Primacy.................................................................................. 127

IV. IMPLEMENTATION ISSUES AND POSSIBLE TOOLS FOR UNIVERSAL OWNERS TO OVERCOME THEM....................................................... 129

A. Heterogenous Shareholder Interests........................................ 129
B. Heterogenous Shareholder Interests and Universal Owners .... 134

V. CURRENT STATUS AND FUTURE DIRECTIONS.................................. 140

CONCLUSION............................................................................................. 143

INTRODUCTION

This paper sets out to explain how a Universal Owner should think about corporate purpose. Thus, it sits at the center of two ongoing issues in corporate governance and corporate law: The debate over shareholder primacy versus stakeholderism, and the rise of massive institutional investors as the dominant force in public markets. In Section II, I define Universal Owners, give some examples of issues they should care about, and explain who in the real-world matches the definition. The two key takeaways from this section are the distinction between the perspectives of an ESG investor and Universal Owner, and the categorization of the largest index funds as a type of Universal Owner, albeit one whose ownership is not quite as "universal" as the largest pension funds or sovereign wealth funds. In Section III, I suggest that the Universal Owner, while agreeing with the traditional shareholder primacy view on the question of to whom management should be accountable, have a unique view on corporate purpose. For the Universal Owner, the purpose of any one single firm in the economy is to contribute to sustainable, long-term growth, broadly defined. In Section IV, I address how Universal Owners may be able to implement this vision of corporate purpose. In particular I focus on a barrier that is barely addressed in the literature—that of fiduciary duties owed by management to non-Universal Owners in the firm. Thus, the overall contribution of this paper is to map out a suggested vision for corporate purpose from the Universal Owner perspective, and to flag an important barrier to implementing the Universal Owner perspective at firms.

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In answering the core question, this paper also explores several corollary issues. First, it explains the difference between ESG investors'¹ (another trend that some hope will lead to a more sustainable economy) and Universal Owners' perspectives on firms' production of negative environmental externalities. Section II.C.i explains that the ESG investor's value proposition with respect to negative externalities is that these are risks which will eventually be internalized through mechanisms like reputational harm, government regulation, or changing societal norms. In contrast, for the Universal Owner negative externalities are not a risk, but an existing cost which they already (and will continue to) incur due to their ownership of the assets which directly bear the cost of externalities. Second, section II.D considers the Universal Owner concept in light of the rise of massive index funds, owned by asset managers like Blackrock. It concludes that index fund operators like Blackrock can be considered a type of Universal Owner, but they do not fit as neatly into the concept as the archetypical Universal Owners, public pension funds.

Section III answers the core question of the paper. It concludes that what the Universal Owner should prefer is a type of shareholder primacy, which I refer to as "Sustainable Growth Primacy." In their ideal model of corporate purpose, corporate managers and directors would remain solely accountable to shareholders, but they would manage the firm not to maximize profits as such, but to contribute to long-term sustainable growth across the Universal Owner's portfolio, i.e., the economy. In other words, the purpose of firms for Universal Owners is to contribute to the maximization of the Universal Owner's portfolio. Certainly, all investors want firms to contribute to portfolio maximization. But the non-Universal Owner either can avoid firm-produce externalities in part or entirely, and so in practice "maximizing portfolio value" almost always means "maximize firm value." In contrast, because the Universal Owner cannot escape externalities, maximizing portfolio value does not always entail maximizing firm value.

Finally, Section IV examines the problem of heterogenous shareholder interests in the context of Universal Owners and Sustainable Growth Primacy. This issue is one that the Universal Owner literature has in large part ignored. Corporate governance literature and courts have tried to deal with the problems engendered by conflicts between shareholders over the future direction of the firm, such as in the case of preferred versus common stockholders. Because

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directors and managers owe fiduciary duties to the firm (and not directly to shareholders) directors are essentially obligated to resolve conflicts in favor of the shareholders whose interests are most coextensive with the firm's. Regardless of the resolution of the dispute, in an efficient market one would expect all shareholders' expectation about the short- and long-term of the firm to be reflected in the stock price. Section IV examines how the Universal Owner's ability to implement their vision of corporate purpose at individual firms will be stymied by the current structure of fiduciary duties. Additionally, "efficient markets" is not a suitable consolation price for Universal Owners because even a perfectly efficient market may not incorporate unpriced externalities, as by definition, they do not harm firm value. It concludes by proposing several solutions for Universal Owners, including focusing on policy changes at the governmental level and adopting greater use of alternative corporate forms like the Delaware Public Benefit Corporation. Counterintuitively, alternative corporate forms' alteration of fiduciary duties to allow management to balance profitability with other concerns can actually be in the interest of Universal Owners as it allows managers to adopt the same broad perspective as Universal Owners.

Thus, the paper contributes to the literature around Universal Owners by suggesting a viewpoint on corporate purpose for Universal Owners and flagging an important barrier to the implementation of Universal Owner concepts. It also contributes to corporate governance literature generally, by pointing out the conflict between Universal Owners and other shareholders at firms is an extreme example of the conflict between heterogenous shareholder interests.

The paper proceeds as follows. Section II defines the Universal Owner, including tracing a brief history of the concept, and explains what makes Universal Owners unique as well as who should be considered a Universal Owner. Section III argues that Universal Owners' view on corporate purpose should be a unique flavor of shareholder primacy. Section IV discusses implementation issues as well as argues that the framework of Sustainable Growth Primacy can help explain certain actions taken by Universal Owners.

Two caveats are worth raising at the start of the paper. First, when the "interests" of Universal Owners are...