Equality by lot

Luigi Zingales (University of Chicago), Oliver Hart (Harvard University), and Helene E. Landemore (Yale University) write on the Harvard Law School Forum on Corporate Governance.

It is interesting to note how in this context the authors are able to enunciate proposals and arguments that are more systematic and thorough than sortition advocates usually manage to achieve in the context of national or local government.

How should asset managers make decisions in today’s world?

Large asset managers, like Blackrock, Vanguard, and State Street, have been quick to recognize the catch-22 they are in: good old value-maximization in the name of a restrictively understood “fiduciary interest” is no longer cutting it. But in turn any explicitly moralized or political use of their concentrated power puts a political target on their backs and subjects them to public opprobrium. Further, while asset manangers can provide expertise on how many dollars will be lost by pursuing an ethical or environment-friendly strategy, they cannot provide any insights, nor do they have any legitimacy, concerning whether the trade-off is worth it, i.e., whether the moral gains exceed the monetary losses, or whether the moral dimension trumps the financial one altogether.

One obvious way out is to offload the moral and political responsibility for value-values tradeoffs to investors themselves. In 2022, BlackRock launched Voting Choice, a program to transfer the right to cast corporate ballots from asset managers back to investors.

However, [such] programs are affected by significant problems. First, the options themselves remain defined and shaped by asset managers, thus only part of the decision is outsourced. Second, it is impractical for small investors to vote on every resolution involving the 500 companies underlying the S&P 500 index. Thus, the funds offer investors a limited set of choices based on either companies’ management recommendations or proxy advisors’ guidelines. Finally, the take-up rate has been modest. The situation may improve over time as more bespoke guidelines become available, but there remains the concern that a majority of investors will be too busy to choose among the options offered, leaving the final decision once more in the hands of asset managers.

We think there is a better way, and it builds on a political science idea that is gaining momentum: citizens’ assemblies. Citizens’ assemblies are relatively large bodies of individuals chosen at random (technically through stratified random sampling) from the larger population. Think of very large juries aiming to capture the full diversity of a population and, in the ideal scenario, offering an accurate demographic mini-portrait of it.

We propose to apply this idea to investors. We claim that a legitimate, politically uncontentious, and very practical way to settle the value-values tradeoff is to let a representative sample of investors deliberate on ethical guidelines via an investor assembly.

How would an investor assembly work? A representative sample of, say, 150 investors from all the investors of the mutual fund will be drawn via a lottery. Before this lottery , each investor is offered the opportunity to opt out and choose pass-through voting instead as the way to express their views. All the remaining investors will be assigned a number of lottery tickets proportional to their investment in the fund. From this pool, 150 of these tickets will be drawn; thus, larger investors are more likely to be drawn.

Once the investors are drawn, the representatives all have equal voting power and status in the assembly. As soon as they have been selected, each representative investor receives information about the issue(s) to be discussed and how the assembly will be organized.

This idea may appear fanciful, but in early 2024 a first proof of concept was established. A Dutch pension fund organized an investor assembly to discuss responsible investments. 50 investors from the pension funds were randomly drawn and brought to the city of Utrecht for three different days, during which they approved 49 proposals for responsible investment to submit to the board.

The world is changing, and business as usual is no longer feasible. To maintain their freedom to operate and their independence, asset managers must open up a space for real corporate democracy and give voice over ethical decisions to their investors. This brief proposal provides a simple way to achieve this goal.

Filed under: Academia, Proposals, Sortition |