Fordham Law School Professor Jill E. Fisch has spent much of her career studying issues of corporate governance, shareholder activism and securities litigation. The Securities Fraud Monitor spoke with Fisch recently about her latest research, forthcoming in the Vanderbilt Law Review, “On Beyond CalPERS: Survey Evidence on the Developing Role of Institutional Investors in Corporate Governance.”
Co-written with Stephen J. Choi of New York University School of Law, the study found that the majority of public pension funds engage in only a limited spectrum of governance-related activities, and only a few have followed the model of targeted activism championed by the California Public Employees’ Retirement System.
Securities Fraud Monitor:As director of Fordham’s Corporate Law Center, you have long focused on corporate governance issues and securities regulation. What prompted your latest research, and did you go into it anticipating a particular result?
Jill Fisch: We had seen what some of the most active funds, like CalPERS and SWIB (State of Wisconsin Investment Board), had been doing, and we were curious as to how deep that level of activity went, whether it was typical or not, and what some of the smaller and less visible funds were doing.
SFM: What was the level of activity?
JF: We were surprised that they seemed to be doing a lot less than what we expected. We already knew that most funds weren’t being confrontational with companies, or nominating competing sets of directors. But we were particularly surprised how few were involved in informal governance – communicating or negotiating informally with companies.
SFM: Was the size of the fund a factor in its involvement?
JF: When it comes to non-litigation governance, such as sponsoring shareholder proposals or nominating director candidates, we found that size does indeed matter. For example, we only found separate governance budgets at some of the larger funds.
But when it came to litigation, size was not very significant. That’s probably due to a combination of factors, but certainly law firms are making it easier for smaller funds to participate in litigation.
SFM: Your study indicates that securities litigation may fall into a different type of decision-making process than other corporate governance or investment activities. Our experience also shows that some funds simply choose to become more involved in securities litigation than others, for example.
JF: That’s definitely true. One of the things that we’re thinking of studying next is to try to get a sense of the political dynamic and the extent to which politics affects a fund’s involvement.
SFM: So an attorney general might get involved in an action for reasons that go above and beyond strict fiduciary considerations. Is that a negative?
JF: Not at all. But for an empirical study, it’s hard to separate that out in a way that makes sense. One possible view is that public pension funds are more active in litigation because they are more responsive to the public interest. You can’t determine causation by doing empirical research, and the vast majority of the results that we report are not based on interviews, but are based on a written survey that we sent to public funds.
SFM: How many investors responded to your survey?
JF: Overall, the research is based on the responses of 40 public pension funds. We started by interviewing a number of different institutions – three or four public pension funds, some mutual funds, a foundation, a religious fund and a few university endowments. But there were very real differences in the structure of the funds, so it became logical to concentrate, at least initially, on a single type of institution. It really didn’t make sense to compare what a Fidelity was doing versus what a CalPERS was doing.
SFM: Moving beyond this study, we saw you sided with investors in an amicusbrief in the Stoneridge case that is now pending before the U.S. Supreme Court. What led you to weigh in on the case?
JF: The issue of the scope of liability for secondary actors is something I have focused on for quite a while. I’m also concerned about the pressure that securities litigation is facing at the Supreme Court – that the Court will cut back too far on the scope of private litigation. I don’t think the Supreme Court fully appreciates the fact that private litigation, as long as it is appropriately tailored, is beneficial to business and not detrimental. Without strong capital markets, business is not going to be able to function.
SFM: Where do you think the Stoneridge case will land and were you surprised to see the federal government come down where it did?
JF: I think it is going to be a pro-defendant decision. I was surprised that the federal government conceded that this was deceptive conduct, yet nevertheless came down in favor of the defendants. I was also surprised and somewhat troubled by the way the solicitor general framed the reliance argument. It’s very dangerous to try to use reliance as yet another gate-keeping device to cut back on the scope of litigation.
SFM: You and the same group of professors also submitted an amicusbrief in Tellabs, another key case before the Supreme Court this year. In our view, the decision was much less of a pro-defendant decision than the popular press reported. Would you agree?
JF: Most of the plaintiffs’ firms are saying that – and I think they’re probably right.
SFM: The Supreme Court has had a flurry of cases recently involving investors’ rights. Why so many all of a sudden?
JF: For a long time, the court didn’t take on any business cases at all. From an academic standpoint, I think it’s wonderful that they are now. I might not agree with all their outcomes, but I am glad the the Court is taking business law seriously.
SFM: As you state in your paper, much of the activism of funds stems from the Private Securities Litigation Reform Act of 1995. How is it that the PSLRA changed the landscape for securities litigation? And is it an unintended consequence that funds have gotten involved at all?
JF: I don’t think that Congress intended or anticipated the kind of involvement that we’re seeing, but I do think that public pension funds have gotten involved in a way that’s consistent with the structure of the statute. I don’t think that people thought that institutions would respond in this way – but I certainly think it’s a good thing.
SFM: It really took the accounting scandals at Enron, WorldCom and Global Crossing, to name a few, for funds to respond.
JF: Obviously, those misconduct scandals were a factor. But I think another big factor was just that institutions had to get a few years of learning under their belts. They had to see what would happen in the first few cases, what sort of discovery they would be subjected to, the degree to which the courts would accept them as lead plaintiffs and defer to their choice of lead counsel, and so forth.
For many institutional investors, the real turning point was the Cendant case because it was so successful in terms of the quality of the settlement. [Eds note: Considered the first “mega-settlement,” the Cendant case settled for more than $3 billion in 2000.]
SFM: You found that most public pension funds were largely unaware of the activities of their peers.
JF: You’re talking about organizations that don’t have a lot of time to think about all of these issues. They’re lucky if they can go to a few programs a year on corporate governance. Generally, it’s not a very well financed, coordinated or thought-out effort.
SFM: We’re seeing that start to change somewhat now. The National Association of Public Pension Attorneys, for example, has tried to put together some best practices for securities litigation to help their membership. And funds are increasingly using email groups to talk among themselves about lead plaintiff petitions.
JF: Coordination among funds for litigation makes a lot more sense than coordination for other areas of corporate governance. But if you’re going to really expect institutional investors to take an active role in corporate governance, you need to have a structure in which people are responsible for doing that. Some sort of budget and staffing is a prerequisite.
SFM: Many institutions are now contemplating opt-out suits as yet another way to become involved. Have you looked at the effect of these cases?
JF: I think the opt outs are incredibly important and very under-analyzed because it’s hard to get the information. How would you go about trying to get statistics so you could understand how long they take and what the results are? I have seen media reports, but it’s hard to know how accurate they are. It would be useful for the institutions to have more information on the frequency of opt outs and the outcome of those cases.
SFM: Do you see any risks with these cases?
JF: If the best-informed institutions are opting out, then they’re abandoning their potential role as lead plaintiff in serving the interests of the investor class. They’re getting their own recovery and leaving the small investor to fend for itself.
SFM: Do you have any final thoughts on the state of investors’ legal rights today?
JF: I don’t think you can keep cutting back on the scope of liability exposure without corporate consequences. And you can swing the pendulum too far in either direction.
My concern is that the Supreme Court hasn’t quite gotten hold of that, although Tellabs is a somewhat balanced opinion. I don’t think we in this country have the appetite to do away with private litigation and substitute some pumped-up SEC with the resources and the manpower to identify and pursue every case of securities fraud. I don’t think that’s desirable either.
As long as you’re going to keep private litigation, you need some type of a balance to make sure there really is some kind of accountability.