3min chapter

Stephen Davis: On the Rise of Investor Stewardship.

Boardroom Governance with Evan Epstein

notes

CHAPTER

What Do You Think About Dual-Class Share Structures?

In Silicon Valley, a lot of the action is in private markets and startups. When these private markets have become too big to go public, they've had dual-class share structures. But this has also been a big topic outside of the United States,. In Brazil, in China, in the UK, there's been a principle of one share one vote.

00:00

Transcript

Episode notes

0:00 -- Intro.

2:12 -- Start of interview.

3:00 -- Stephen's "origin story". His start with IRRC in Washington, DC (1988). His focus on international corporate governance.

7:01 -- The anti-Apartheid divestment campaign in South Africa. "Most people don't quite realize that in the U.S. the real corporate governance movement -what we might call today the ESG movement- stems from the campaign for anti-Apartheid sanctions and divestment." (early 1970s).

10:27 -- On the historical background of investor advocacy, and his book on Isaac Le Maire "the first short seller and shareholder activist." The conflict with the Dutch East India Company (VOC) in the early 1600s (the first joint-stock company in the world).

15:19 -- On the evolution of U.S. corporate governance and the rise of institutional investors since the late 1980s (particularly the big four: BlackRock, Vanguard, State Street and Fidelity). "[F]or most of the time (from late '80s to about 7 years ago), corporate governance has been more or less an exercise in throat clearing, a box-checking exercise, a compliance/legal matter that had to be done because of the DOL Avon Letter in 1988 [pointing out that proxy voting, like buy/hold/sell decisions, is a fiduciary act, and must be for “the exclusive benefit of plan participants."] "There was a lot of corporate governance talk, but it was at the margins."

19:27 -- What changed in large asset managers to go from "passive investors" to more active with investment stewardship. Some factors (in the last decade): 1) Influence from Europe, where they insisted that these large funds sign up for commitments such as the UN Principles for Responsible Investment, and "to demonstrate bona fides when it comes to ESG factors," 2) Many of their institutional clients were becoming more aware of the importance of ESG factors; 3) Biggest factor: rising class of millennial investors, who have a different set of expectations on their financial agents.

25:54 -- On the new policies such as from BlackRock and Vanguard to pass-through voting power to beneficial owners.

28:50 -- "One of the most exciting development in the capital markets is that in the last few decades we made a lot of progress on 1) management accountability to boards; 2) boards better equipped to oversee management; and 3) boards responsiveness to institutional investors. But the last piece of the puzzle is the accountability of institutional investors to the real sources of capital (beneficial owners) - the governance of institutional investors or stewardship governance." [see article Agency Costs of Agency Capitalism, by Gilson and Gordon (2013)] Citizen investors initiatives (to give them a voice), for example Tumelo (in the UK) or Say Technologies in the US (purchased by Robinhood).

32:30 -- On proxy advisors and the Best Practices Principles for Shareholder Voting Research and its Oversight Committee (where he was the founding Chairman until 2022). This is an example of "monitored self-regulation." Konstantinos Sergakis is now the Chair.

38:34 -- On the practice of dual-class share structures (supermajority voting structures). "A perennial issue in corporate governance." The case of Elsevier and Robert Maxwell.

42:25 -- On "corporate governance with Chinese characteristics."

44:37 -- Challenges and opportunities of corporate governance in regions such as the Middle East and Africa (where he has been active). "There has been progress at a pace that in my wildest dreams I would have not anticipated." The sovereign wealth funds are the next stage of progress, where they will go from passive to more active. Examples of stewardship from Malaysia, Singapore, Norway and South Africa.

50:25 - The books that have greatly influenced his life:

The Battle for the Soul of Capitalism, by John Bogle (2005) (and others by John Bogle)
Presidential Power and the Modern Presidents, by Richard Neustadt (1991)
The Torah.

51:44 - His mentors, and what he learned from them.