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ESG Challenge: Dorothy Lund Interview — Transcript

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0:00according to
0:01this okay great so thank you Professor
0:05Lum so much for being with us today
0:07really appreciate it I'm going to read a
0:09quick bio and then we'll turn it over to
0:11you so Professor lond is the co-director
0:13of the Columbia Law school's irm
0:15milstein Center for Global markets and
0:17corporate ownership Professor lond
0:19teaches and writes extensively on
0:20corporate law corporate governance
0:22Securities regulation contracts and
0:24mergers and Acquisitions several of
0:27Professor L's articles have been voted
0:28among the top 10 corporate inst
0:29Securities Law articles of the Year her
0:31work has been published in Columbia
0:33Columbia Law Review Journal of
0:34Corporation law Stanford law review
0:36Texas law review University of Chicago
0:38Law review University of Pennsylvania
0:40Law review and Le Yale Law Journal Forum
0:44among others uh before entering Academia
0:46Professor ly clerk for chief justice Leo
0:49e strin Jr of the Delaware Supreme Court
0:51and judge Joel mlum of the US court of
0:54appeals for the seventh circuit she also
0:55practiced corporate law at Selvin and
0:57Cromwell in New York thank you so much
0:59for being with us today Professor ly
1:01thank you so much Kelly it's great to be
1:03here great so following on that intro
1:06could you tell us just anything else
1:07about yourself and tell a little bit
1:09about your research interest yeah sure
1:12um so broadly speaking uh my work
1:16touches on issues of corporate law and
1:18corporate governance um and and and big
1:21focuses for me are really issues
1:23involving corporate power uh so I have a
1:26strand of research that talks about the
1:29changing concentration of our Capital
1:32markets and how we are seeing increased
1:34concentration in the hands of
1:35institutional investors what that means
1:37for Corporate America and uh for
1:39corporate management and the broader
1:41economy I also have a bunch of papers
1:44that talk about um the role and purpose
1:48of corporations in society and evolving
1:50views about you know why we think
1:54corporations exist and whose interest
1:56they serve and these conversations
1:59intersect with important political
2:00conversations because I think there's
2:02been a real uh desire and and to rethink
2:07the corporation's role in society as
2:09we've confronted uh profound political
2:13dysfunction and so people are looking at
2:15corporations to to pursue broader
2:18interests including the public interest
2:20and not just maximize shareholder value
2:23and so a lot of my work sort of wrestles
2:26with that and and you know go all the
2:29way from you know how should we do this
2:31should we do this um how could we
2:33implement this to respond to some of the
2:35problems and so yeah broadly speaking
2:37that's those are my those are my
2:38research
2:40interests great thank you so much for
2:42that and Diving right into some of your
2:45recent research or forthcoming research
2:47you have a paper coming out called
2:48toward a dynamic view of corporate
2:50purpose in the paper you lay out two
2:52views of corporate purpose one of
2:54shareholder centrality and one of
2:56broader stakeholder welfare and and you
2:59explain why each may be appropriate in
3:01different e economic and Regulatory
3:03environments can you elaborate on your
3:04argument in that paper and why you think
3:06this is an important
3:07debate yeah so this this came out of
3:10some historical research because we
3:12right now are living in a a world of
3:15shareholder centrality um although you
3:17know there's been other views that have
3:18been offered and have been gaining
3:20ground I think if you asked most
3:23corporate managers what their their job
3:25is they would say well I need to
3:26maximize shareholder value if you ask
3:28most business school professor or law
3:30school professors what the role of the
3:31corporation is in society they would
3:33give you something some sort of similar
3:35answer but this wasn't always the case
3:37and throughout history this this sort of
3:38consensus view has shifted and so part
3:42of my project was just exploring when
3:45we've seen these this big shift this in
3:47the corporate purpose pendulum and what
3:50brought it about and then that got me
3:51thinking about the normative question
3:54which is well would it ever make sense
3:56for corporate purpose to to shift and
4:00and so um you know essentially the idea
4:05that that corporations should think only
4:08about their shareholders or really focus
4:09you know corporate management should
4:11maximize shareholder value and not think
4:13about employees creditors and other
4:15groups it's really grounded in this view
4:19that well you know the goal of corporate
4:22law and corporate governance is to
4:23promote social welfare of course but if
4:26we have the government there to do this
4:28in a in a way that's um
4:30you know politically accountable when we
4:32ask corporate management to take on this
4:34role you know it's essentially saying um
4:37to some group of Elites you know do the
4:39things that that couldn't get passed
4:41through Congress and so that's sort of
4:43this fundamental assumption in this
4:44classic Model and so then I basically
4:48ask in this
4:49paper you know if we relax that
4:51assumption that we think government is
4:53responding adequately to these these
4:55problems well then it's all up for grabs
4:58again and and again a sort of track what
4:59we see in in history the first corporate
5:02purpose pendulum swing happened in the
5:04wake of the stock market crash of 1929
5:06when there was huge inequality huge
5:09corporate concentration and not um a
5:12strong government that was you know up
5:14to the task of controlling uh
5:16anti-competitive corporate conduct uh
5:19pollution other corporate externalities
5:21so so this you know that that that
5:24historical pattern maybe Maps our
5:28intuition with when we think that this
5:30purpose shift should
5:33happen great thank you so much it's such
5:35important context about what's happening
5:37in the world or what's happening in a
5:38domestic context and what our perception
5:40is of corporate responsibility and
5:42government responsibility so given the
5:45implications of this view of corporate
5:47purpose what is the relationship with
5:49fiduciary duty and and corporate
5:52fiduciary duty in this Contex yeah it's
5:54a great question so one of the
5:57interesting things that happened for me
6:00in the project was to really you know
6:03for the past 100 years fiduciary duty
6:07hasn't really changed in the United
6:09States even have we we've seen these
6:11purpose Wings take place and that's
6:14because what food fiduciary duty
6:17requires you know it says you know the
6:20fiduciaries have a duty to manage uh the
6:23corporation in the best interest of its
6:24shareholders and you know the corporate
6:26entity um and so again that's sort of
6:30the law that is the law but how that can
6:34be implemented allows a huge amount of
6:37discretion and there's a really
6:38fundamental thing in corporate law
6:39called the the business judgment rule
6:41that basically says we can't second
6:44guess what management does um when it's
6:47a matter of their business judgment
6:48unless we have really egregious
6:50scenarios and
6:52so what this means in practice is that
6:56in thinking about the best way to
6:58discharge their fiduciary duty to the
6:59Corporation and its shareholders
7:01management has a lot of room and they
7:03can actually consider employees they can
7:06consider the environment they can
7:08consider the community
7:10um and and as long as this is you know
7:15there some rational basis to believe
7:17that this is tied to long-term value so
7:19if I was an executive of a company and I
7:22said I want to pay above you know uh
7:27minimum wage and the board said sure we
7:29let's let's let's you know the minimum
7:31wage is is $15 an hour there all of our
7:34competitors are paying $15 an hour but
7:37we want to go to 25 because we think
7:38that's going to be uh good for our
7:40company over the long term that would
7:44be impossible to be challenged okay so
7:47you could never get in trouble for that
7:48so this amount of discretion basically
7:51means that fidu shares have a lot of
7:54room to do to run the company in a way
7:57that's consistent with this cultural
8:00understanding of what Corporation is
8:01corporations are supposed to do in the
8:03world and again this has changed this is
8:06we've seen as this purpose pendulum and
8:08Swift again it shifted again the law
8:10hasn't changed but the way managers
8:13interpret their duties and the choices
8:15that they make change to um and so I
8:19think there's sort of this cartoonish
8:21view of fiduciary duty today which is
8:23that oh all you can do you know if there
8:26was any choice that would would uh you
8:29know uh be shifting profits out of the
8:33hands of shareholders and into the
8:34pockets of employees you could never
8:36make it that's con inconsistent with
8:38your duty but really that's not the case
8:40as long as you have some rationale that
8:42this is linked to some uh long-term
8:45shareholder value and of course we all
8:48know you know treating your employees
8:49well um minimizing environmental impact
8:53thinking about your community that's all
8:54really important um and that successful
8:57companies do all of that uh so so yeah I
9:01think this is actually closer the real
9:03the real world view of fiduciary duty is
9:06actually closer to what we see
9:08successful businesses
9:10doing great thank you so much for that
9:13and two things uh occurred to me here
9:15one is longterm um and and the other is
9:18is this it's not a cartoonish view or or
9:21version of fiduciary duty that we're
9:23dealing with now there's there's
9:24management has a lot of room to make
9:26decisions and flex and make decisions
9:28that are in the best in long-term
9:29interest of the company so what what
9:32would you say or what what are your
9:34thoughts around fiduciary duty and
9:37mitigating climate risks in particular
9:40for corporates yeah well there's been a
9:42lot of literature exploring the huge
9:45amount of risks um that you
9:49know our warming economy is going to
9:52pose to uh the entire market and there
9:56is a reason that shareholders I think
9:58are divers shareholders are thinking
10:00more more about the systemic risk that
10:03comes from climate change and and
10:05pushing companies to take action uh
10:08that's consistent with uh mitigating it
10:12so you know again I think I think if you
10:16were on the board of directors of a
10:18company or if you were advising a
10:20company that wanted to you know uh set a
10:25transition plan for the company um over
10:28time and even if this was going to you
10:31know say be a little costly it's you
10:34have to hire some lawyers you're going
10:35to have to hire some Consultants you're
10:37goingon to have to there could be some
10:38blowback there could be some uh you know
10:42I think that again this would be
10:46uh this would not only be not
10:48inconsistent with your fiduciary duty to
10:51think about how do we prepare for the
10:53future of this company into the long
10:55term in various scenarios that um seem
10:58you know like to happen in the near
11:00future uh and and it's
11:04also you know from the perspective of
11:06your Diversified shareholders really
11:08imperative because these Diversified
11:09shareholders might not just be thinking
11:11about their investment in your company
11:13but in all of their Investments across
11:15the broader
11:19economy absolutely it's such a great
11:22segue into our next question about asset
11:25managers as regulators and you have a
11:28paper with that title asset managers as
11:30regulators and in this you describe how
11:33asset managers in particular The Big
11:35Three that's Vanguard State Street and
11:37black rock the world's largest global
11:40global and diversified um asset managers
11:43how they have stepped into to play a
11:44regulatory role in the absence of
11:46government action especially on climate
11:49so could you talk to us a little bit
11:50about about this and the the role of the
11:53big three and perhaps how it's shifting
11:55in the context of the ESG
11:57backlash yeah so when I wrote this
12:01paper uh the backlash had not really
12:04manifested yet and so this was this
12:06moment of of Promise because you know
12:09the big the so-called big three of
12:11Vanguard stat tree and black rock are
12:14huge uh uh shareholders I mean they
12:17have large and near controlling Stakes
12:22across every company in the in the
12:24economy and so and and I'm I'm talking
12:25about them in the Aggregate and I'm
12:27using control we're not talking 50 % but
12:29we're talking about 10% 15% something
12:32like that which makes you really really
12:34influential and and they're really
12:36pivotal you know the way that they vote
12:39can make or break a pro you know proxy
12:42an activist hedge fund who's running a
12:44proxy fight they can um uh make or break
12:47the success of a shareholder proposal
12:50asking for a disclosure of of um you
12:53know climate change
12:54information and so or you know
12:56information about the company's business
12:58that would be needed to avert you know
13:00the two degree scenario this this is a
13:02this was a big proposal um when I wrote
13:05this paper these so-called two deegree
13:07scenario proposals and so the big three
13:10were stepping into this role and they
13:13were uh
13:16supporting ESG so-called ESG proposals
13:19um in record numbers and so this was a
13:22really interesting Dynamic and I was
13:24kind of in this paper trying to
13:26understand both like what is it that
13:28they're doing and why are they doing it
13:30and so I
13:31argued that when you have these large
13:34asset owners uh who have such
13:38significant Stakes across the whole
13:40Market they are playing a sort of
13:43regulatory role okay they're creating
13:45rules and and again this also goes to
13:49their uh capabilities as these large
13:52asset owners they don't have a lot of
13:53money like a government agency they
13:55don't have a lot of money resources time
13:57to think closely about every single
13:59company in their giant portfolios
14:01instead they're going out there and
14:02creating rules right like a government
14:04regulator would and they're saying
14:05things like we expect all of our
14:07companies to um uh have uh plans in
14:12place to address you know a two-degree
14:15scenario we expect uh you know a
14:18significant disclosure of greenhouse gas
14:20emissions used across uh our business
14:23across the portfolio company's business
14:26and so they're they're adopting these
14:27rules and then they're enforcing ing
14:29them not via you know the traditional
14:32tools of a government agency but their
14:34through their voting through their huge
14:36voting power and so you know if they
14:39adopt a rule and they say we're going to
14:40vote against
14:41you that is sufficiently scary enough
14:45that companies will listen and and
14:47there's really good empirical evidence
14:49showing the impact this has had on
14:51things like two degre scenario um
14:54planning um greenhouse gas emissions um
14:59also board diversity was another thing
15:01that they focused on and had a huge
15:02amount of impact um and so that was you
15:06know part of this was just like thinking
15:07about this framework for you know what
15:10is this and you know what do we think
15:12about having these sort of so-called
15:14private Regulators uh and then the other
15:16piece of it was well why do they choose
15:18the rules that they choose right what is
15:21it
15:22about these these um these these you
15:25know of all the things so another thing
15:27that I'm I'm very interested in is
15:28corporate political spending and and
15:30limits you know its problems and you
15:33know how it could potentially be limited
15:35and so they they haven't adopted
15:37policies involving corporate political
15:39spending although this would also I
15:40think drive a lot of shareholder value
15:42and be good for their portfolios so why
15:45pick one and not the other and so the
15:48the argument that I raised is that
15:50essentially these profit these
15:52institutions are all trying to make a
15:54profit the way that they do this is
15:56through having the most assets under
15:58management in their portfolio easiest
16:00way to do that is to have a cozy
16:03relationship with your clients and so
16:05you're going to go with the um the
16:08things that your clients are really
16:09pushing for so things that have sort of
16:11broad support across the client
16:14community and by the way clients are
16:15Pension funds individual investors um uh
16:20other
16:21institutions um those clients are going
16:24to to you know push the needle on this
16:28um
16:29and so let's get to your last question
16:31here about ESG backlash again when I
16:34wrote this it was it was all you know
16:36the promise of this and you know what
16:38what could what could go wrong I hadn't
16:40really thought about this ESG backlash
16:43although now it's it's actually very
16:45clearly part of the framework because a
16:48lot of the way that this ESG backlash
16:51just happened is that states and red
16:53States in particular have used their
16:56client power so they've said you know
16:59okay we're going to direct our state
17:01treasurer you know the Texas state
17:03treasurer to no longer invest our
17:06pension fund um in Black Rock because we
17:09don't like what they're doing and that's
17:10you know that's billions and billions of
17:12dollars that black Rock's now not
17:14getting and so now all of a sudden when
17:16the client preferences have shifted or
17:19or more specifically new clients are
17:22being vocal when they weren't being
17:24vocal
17:25before uh that's causing these asset
17:28managers to change their policies and
17:30they've really backed off of um ESG
17:34stuff as a
17:37result it's it's so interesting because
17:40your paper as you said sort of foretold
17:43what this would be it's the evidence
17:45supports the argument that you make in
17:46your paper which is that the asset
17:48managers are looking to their clients
17:49for direction and you briefly mentioned
17:53corporate spending um corporate
17:56political spending and the disconnect
17:58there and I'd really love for you to
18:00dive into that because on the one hand
18:01they're addressing client demands or
18:03what their Pension funds want what I
18:05don't know the state of Texas Direct and
18:07not losing that AUM on the other hand so
18:10whatever the clients are are looking for
18:12they're saying okay we're going to
18:13support what our clients want but then
18:15that can be at odds perhaps with their
18:17corporate political spending is that
18:19what you found in your
18:20research yeah so so uh you know a client
18:25of a
18:27um Al the other the other aspect of this
18:30this is that is sort of interesting is
18:32that a lot of corporations are actually
18:33clients of the big three as well and so
18:37this was the reason why when I thought
18:39about this it's like oh actually when
18:42you look at what they're doing even in
18:43their era of being like super
18:45Progressive of you know going pushing
18:47for board diversity pushing for uh you
18:51know stronger action by portfolio
18:53companies on climate they weren't going
18:56for um stuff that was really radical
19:00right like okay one female director on a
19:02board nobody's nobody's going to freak
19:04out over that right like that's we're
19:06not talking about parity which like
19:07maybe if you had if we really asked
19:09people what do you think the composition
19:11of a board of directors should be you
19:12might say hey 5050 right or like
19:14approximating the work for um or you
19:17know
19:19disclosing um your two deegree scenario
19:21plan you know a lot of other a lot of
19:24companies big companies had been
19:25targeted by shareholders already and
19:27they were being asked to do this so
19:29they're like yeah we don't mind that our
19:31now our competitors are also going to
19:32have to do this so it made me a little
19:34bit more cynical as well um and
19:37something that a lot of corporate
19:39management would probably not be as
19:42enthusiastic about is a limit on
19:44corporate political spending imposed by
19:46these asset managers so that was going
19:48to be that's a more controversial rule
19:50it's harder to sell and get consensus
19:51across this this broad swath of
19:54corporate and institutional clients
20:00that's interesting I I mean right now
20:02we're we're in quite a political moment
20:05um so so what what are you thinking now
20:09about what are you seeing in the
20:10landscape of corporate political
20:11spending and the current environment and
20:14how this is aligning or not with what
20:17you understand to be true fiduciary duty
20:20and your ideas about corporate
20:22purpose I think it's becoming
20:24increasingly clear especially in our
20:26highly partisan and sort of crazy
20:28political environment that political
20:30spending that is unprincipled creates
20:32huge amount of business risk we saw this
20:35in the wake of um January 6th and uh a
20:39lot of businesses faced a huge amount of
20:41backlash uh for spending in in support
20:45of election deniers campaigns and um
20:49this led a lot of companies to swear off
20:52political G giving and some um Twitter
20:54HP they' they've sworn it off entirely
20:56they don't do it anymore because they
20:57understand this risk is so great um so
21:01you know I
21:03think it's kind of a funny time because
21:07businesses are are picking this up and I
21:09think they're going to continue to learn
21:11this lesson the hard way which is that
21:14so long as your spending is unprincipled
21:16it's not consistent with your values
21:18that you're espousing and um which is
21:20which is really hard to pull off right
21:22because when you give there aren't
21:24single issue candidates so when you're
21:26giving to a candidate or a pack that
21:28supports you know a state um uh
21:31political committee election group or
21:34something like that you know you're
21:35you're supporting all sorts of stuff and
21:38so in that giving you're opening
21:39yourself up to all sorts of problems
21:42including you look hypocritical because
21:44you've spoken about the importance of
21:47diversity and uh support for
21:50lgbtq rights in your Workforce oh wait a
21:53second this this person that you
21:54supported was has made homophobic
21:56comments in the past and supported
21:58bathroom bill you know so you can look
22:00hypocritical you can look like you are
22:03um uh
22:04supporting um uh politicians that are
22:07sort of undermining our Democratic uh
22:11experiment um so it's it's it's getting
22:15harder and so you know I think
22:19for executives and directors that want
22:21to continue to give I think the best
22:23practice would be to swear off giving um
22:26for a number of reasons but if you want
22:27to continue to give you have to figure
22:29out a way to do it in a really
22:30principled way including full disclosure
22:32to shareholders ideally getting
22:34shareholder approval over your political
22:37spending plan so that there's some Buy
22:39in um from
22:41shareholders uh and and yeah I could go
22:44on and on about this
22:48but that's really helpful especially
22:50that all political giving can be risky
22:53and the the point about there are no
22:55single issue candidates is so important
22:57you know if you're if you're supporting
22:59a candidate you're supporting that
23:00candidate's entire repertoire as it were
23:03even historical anecdotal whatever it
23:05may be uh and in this day and age is's a
23:07lot of transparency around um humans the
23:09humans who are occupying political
23:11office that's really interesting thank
23:13you I guess I'll just also add you know
23:16a lot of corporate law is is focused on
23:19this sort of theoretical issue which is
23:21this idea of an agency cost problem that
23:23emerges from having you know
23:25shareholders who entrust their money to
23:27corporate managers um can't always watch
23:30or police what managers are doing and we
23:31might worry that managers are going to
23:33make bad choices benefit themselves Etc
23:37and I think corporate political spending
23:38is a really pronounced example of an
23:40agency problem because you have you know
23:43corporate Executives spending treasury
23:45dollars in ways that you know may or may
23:48not have anything to do with shareholder
23:51value or what the shareholders want and
23:52so again I think this is the the the
23:55right thing from a fiduciary duty
23:57perspective would to be
23:59very principled about this get
24:00shareholder Buy in get you know disclose
24:02what you're doing um and and but best of
24:05all just swear it off alog
24:08together and have there been has there
24:10been shareholder action around
24:11transparency in this space and are you
24:14seeing that from investors yeah no yeah
24:17there's been there's been a rising
24:18movement and this is actually very cool
24:21uh sort of shareholder movement um led
24:23by Bruce freed has a group um I'm
24:26forgetting the uh name um let me see
24:30it's it's out of Wharton um
24:34uh Center for political unacc
24:37accountability and they they bring
24:39shareholder
24:40proposals um to sort of promote
24:43disclosure and sort of the best
24:45practices from a corporate political
24:48spending standpoint um and and that's
24:51been that's been really huge and the and
24:53the herb um Institute by the way has
24:55also been driving a lot of positive
24:58impact in this in this area so it's you
25:01know sort of these I don't want to say
25:03Grassroots but sort of shareholder
25:05investor driven initiatives have um
25:09actually been moving the needle in a big
25:10way and you see a lot more companies
25:12voluntarily disclosing information and
25:14and sort of restricting what they're
25:16doing is a in a response to shareholder
25:19pressure that's so good to know and
25:21thank you for naming the institutes that
25:23we can have a closer look at including
25:24the herb Institute so shout out to them
25:26thank you for that um noticing we're
25:29coming and yep thank you for that uh
25:32we're coming up on time so I'll just ask
25:34if there's any final points that you'd
25:36like to leave um The Challenge
25:38participants with no but um everyone
25:42good luck it's important work that
25:44you're doing and I hope when you go out
25:46into the world and you know take this
25:49learning with you and and you know help
25:52uh help Drive businesses as a as a Force
25:55for good because that's where that's
25:57where
25:58I think that's where the world is really
26:00moving so uh thank you for having me be
26:03part of this and and I hope I hope you
26:05carry this with you and and all the
26:07great things that you go off to do
26:09afterwards thank you so much Professor
26:12take care best You by bye

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This page contains the full transcript of ESG Challenge: Dorothy Lund Interview by Alliance for Responsible Capitalism, generated from the public captions YouTube serves with the video. The transcript has 4,408 words across 666 segments, with the original timestamps preserved so you can click any line to jump to that moment in the embedded player.

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