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As the author of an article entitled “Systematic Stewardship,” I read Professors Kahan and Rock’s article “Systematic Stewardship with Tradeoffs” (K&R) with considerable interest. I acknowledge the limits on deep asset manager engagement with sources of systematic risk in light of present institutional arrangements and the politics of the moment. Yet I think the most important move in the K&R analysis — the privileging of a “single firm focus” in corporate law instead of a “portfolio firm focus” — simply doesn’t account for the evolution that has already occurred in law and practice.

Long before the development of index funds, the ownership of public firms has been characterized by a division between diversified and undiversified owners. The interests of these shareholders are not uniform. One particularly important kind of undiversified owner is a controller. Courts have permitted significant accommodation to the interests of controllers. Although blatantly redistributive measures are not permitted, e.g., Hollinger International v. Black, the law commonly permits controllers to obtain various pecuniary and non-pecuniary benefits in a way that is inconsistent with the demands of single-firm-focus as K&R describe them. If directors can run the firm to accommodate the interests of one class of investors, the controllers, for their particular benefit, why would it not be permissible to accommodate the interests of another class of investors, the fully-diversified?


Business Organizations Law | Law | Securities Law