Law professor calls for 'risk-related activism' to avoid new financial crisis

Thursday, April 21, 2016

LAWRENCE — Since the financial crisis of 2008, debate has raged over how to prevent the next one. A University of Kansas professor has published a study arguing that institutional investors, like mutual funds and pension funds, need to be part of the solution.  

Virginia Harper Ho, associate professor of law, Docking Faculty Scholar and Webb Hecker Jr. Teaching Fellow at the KU School of Law, has published “Risk-Related Activism: The Business Case for Monitoring Nonfinancial Risk” in the Journal of Corporation Law. The article calls for leading investors to engage in risk-related activism — the use of shareholder power to promote firm management, mitigation and disclosure of risk.

Harper Ho argues that there are potential economic payoffs to investors, firms and capital markets when leading investors pay closer attention to nonfinancial or “environmental, social and governance” (ESG) risks, like those associated with executive compensation practices, global supply chains and climate change. Financial risks are typically hedged, but many of these nonfinancial risks may not even be on companies’ radar screens.

A recent example of risk-related activism cited in the paper is the “boardroom accountability” campaign kicked off in 2014 by New York City ’s public pension funds. The campaign targeted 75 major public companies and pushed for proxy access — corporate bylaw changes that would open certain corporate board seats to candidates nominated by shareholders. Its backers hoped shareholder nominees might take their concerns about ESG risks more seriously, and the campaign has been a clear success. During the 2015 proxy season, more than 70 percent of proxy access proposals were approved, creating momentum for more companies to adopt proxy access this year. 

Although large institutional investors haven’t played a real monitoring role historically, Harper Ho argues that New York City’s campaign and others like it show that they can and many already do. In fact, Harper Ho says, asking whether investors should play a role or not in monitoring corporations is the wrong question. The reality is that in “the post-financial crash landscape, investors have more power to influence corporate practice not just because of their voting power but because Congress has given them more of a voice,” she said. “The real question now is how investors should use that power.”

Her article goes on to argue that more investors should push for better risk management and oversight from the firms they invest in. As Harper Ho writes, enterprise risk management, known as ERM, and risk oversight is already a top priority for publicly traded firms, and many recognize the importance of looking at risk broadly, but she notes “investment advisers and the legal community will remain skeptical, or even hostile, toward risk-related activism and related responsible investment practices so long as they believe them to be value-depleting, risk-enhancing or otherwise at odds with investors’ fiduciary duties and economic interests.”

Harper Ho’s article responds by countering potential objections from conventional finance theory and presenting evidence that institutional investors can improve and protect portfolio value if they pay more attention to nonfinancial risk. For example, she points to a wide range of studies showing that lowering ESG risks can lower companies’ cost of capital and also protect portfolio value in volatile markets. The business case for ESG investment strategies, she argues, also explains why more investors might reap financial rewards from engaging in risk-related activism or voting in favor of those who do.

Harper Ho also outlines steps institutional investors and policymakers can take to reorient how corporate boards address nonfinancial risk, but she acknowledges that market-driven investor oversight alone cannot prevent excessive risk-taking by corporate managers. She argues instead that a sustainable financial system, in every sense of the word, will also mean taking seriously how institutional investors’ own behavior contributes to excessive risk-taking by corporate managers and may even pose systemic threats to modern financial markets.  

Her article points to steps the United Kingdom, the European Union and other leading markets are taking to improve investor monitoring of portfolio firms, and she calls for regulators in the United States to adopt similar policy guidelines. Such measures could encourage institutional investors to monitor the companies they invest in and would also have the added benefit of requiring greater accountability from investors for how they use their power.

“Although this article offers starting points that could facilitate risk-related activism, ESG integration and better institutional monitoring, the real barriers to these reforms are not regulatory, but conceptual,” Harper Ho writes. In the end, simply realizing that nonfinancial risks are real, and that they matter to investors, might be a great place to start.

KU law students bring home championship in Moot Court competition

The University is used to acknowledging all sorts of championships in various sports, but another University team just brought home a championship in something a little less known.

Law students Ashley Akers, from Casper, Wyo., and Maureen Orth, from Prairie Villiage, earned first place last weekend at this year’s National Native American Law Students Association Moot Court Competition, which took place at Michigan State University.


Week puts focus on openness

"Sunshine Week, March 13 to 19, is a time to celebrate the Kansas Sunshine Laws. Under these laws, state and local governments generally must open their meetings and records to the public. Under the Sunshine Laws, Kansans have a right to know how officials are exercising their power and find out what the government is up to.

However, the Sunshine Week celebration this year coincides with rising concern about whether government in Kansas is sufficiently transparent. Open-government advocates are calling upon the Legislature to enact improvements in the Sunshine Laws."

Kansas Supreme Court decision could affect drunk driving cases

"The Kansas Supreme Court ruled last week that criminal punishment for refusing a sobriety test violates both the fourth and the fourteenth amendments of the United States Constitution.

'The Kansas Supreme Court took the position that a warrant is necessary if you're going to impose a criminal sanction for objecting to law enforcement when it seeks to take a blood test or a breath test,' said Mike Kautsch, law professor at the University of Kansas."

Judge would be first Indian-American named to Supreme Court

"Sri Srinivasan, a federal appeals judge who was born in India and grew up in Kansas, would be the first foreign-born justice to serve on the Supreme Court in more than 50 years.


'I think any objection to Sri would have to be based on notions that he’s either not conservative enough or not liberal enough,' said Stephen McAllister, a law professor at the University of Kansas. 'It could not be intellectual ability, could not be writing ability, it could not be his general competence in the law,' McAllister said. 'He’s just extremely talented in all respects.'”

Kansas legislature attempts to redefine public record

"Under Kansas Senate Bill 361, the definition of the term 'public record' would change, possibly blurring the line between public and private.

'{Under the new law} a public record is recorded information that a public employee makes or keeps or possesses pursuant to his or her officials duties and that relates to the public business of a public agency,' said Mike Kautsch, law professor at the University of Kansas.

Native American judge considered for Supreme Court nomination

"The first Native American woman to be appointed to the federal bench is being discussed as a possible nominee for the Supreme Court. In 2014, Diane Humetewa was unanimously confirmed to become a judge for the U.S. District Court for Arizona.

If nominated, Humetewa would become the first Native American in the Supreme Court, a change that one University of Kansas law professor says would be helpful with the type of cases the court hears.

Your Turn: Independent judiciary serves all

"To some of us, whether we are in government or as citizens, the Kansas Supreme Court’s recent actions striking down the 2015 school-finance scheme could be seen as a wrongful power grab. Nothing could be further from the truth. The independence of the judiciary is not maintained for the benefit of the judges. It is for us — free citizens of a democratic republic governed under rule of law — for whom the courts stand open as fair and impartial tribunals."


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