Who actually decides what a company does?
In May 2021, a hedge fund almost no one had heard of did something that, on paper, should have been impossible.
It was called Engine No. 1. It had existed for months. And it owned about one two-thousandth of one percent of ExxonMobil — one of the largest oil companies on earth.
On the strength of that vanishing stake, Engine No. 1 nominated four outside directors to Exxon's board, on one argument: the company was destroying its own future by ignoring the energy transition.
It won three of the twelve seats.
No new law. No boycott. No takeover. A rounding-error shareholder reshaped the board of an oil major with a single ordinary instrument — the shareholder vote. It did not need its own shares to win. It needed everyone else's, and the giant index funds that hold Exxon looked at the case and voted with the insurgent.
Governance is not a third silo beside E and S. It is the machinery that turns preferences into what the firm actually does.
That is the thesis. Environmental and social outcomes are not wished into being — they are produced by a mechanism. Understand the mechanism and you understand when ESG preferences become corporate action, and when they evaporate into press releases.
So we spend our time on the machine: how it is built, how power flows through it, where preferences are carried faithfully, and where they are gamed, rewired, or broken.
The agency problem
The people who own the firm are not the people who run it.
Berle & Means named it in 1932 — the separation of ownership and control: ownership dispersed across millions of small holders, control held by managers who own little. Jensen & Meckling priced the gap JFE 1976: whenever an agent acts for a principal, the relationship leaks agency costs — of three kinds.
“Corporate governance deals with the ways suppliers of finance assure themselves of getting a return on their investment.”— Shleifer & Vishny, Journal of Finance 1997
Six mechanisms manage the gap.
The thread through all six: every one runs on shareholders choosing to use it. The Exxon insurgents reached for two — voting and the market for control — and a mechanism only ever counts for as much as the other owners willing to back it.
Should a firm put more women on its board?
A board that is ninety percent male, and a proposal to add several women. The question divides people instantly — so be honest about your own answer first.
Diversity reliably raises monitoring — but not value.
The cheerful correlation was selection — good firms were the ones adding women. Isolate the cause and the average effect is ~0 to negative, turning positive only where governance was weak to begin with. A blanket quota can destroy value in firms that did not lack oversight in the first place.
Are CEOs paid for luck?
An oil company's share price doubles — not from strategy, but because the world price of oil doubled. The CEO did nothing.
Shareholders & voting: the heart of the machine
The owners with the most votes are precisely the owners who cannot walk away.
The Big Three — BlackRock, Vanguard, State Street — now cast a huge share of U.S. votes, and they are mostly index funds. An index fund holds the market by construction, so it cannot sell its disapproval. Its only lever is voice, not exit.
One detail to hold for later — eligibility to vote is fixed on a single record date, but shares trade every day. The set of people allowed to vote can differ from the set who own the firm a week later. It looks like a technicality. In Part Four it becomes the whole story.
When an activist arrives, is value built or stripped?
A fund quietly takes a six-percent stake in an underperforming company, files the disclosure that announces it, and demands change.
How much does ISS really move a vote?
A dispersed owner cannot research the thousands of items it votes on each year, so it buys advice. Two firms dominate, and ISS alone covers some forty thousand meetings. The worry: unelected kingmakers. But you cannot just compare votes ISS opposed with votes it supported — it opposes the troubled proposals to begin with.
Where preferences become action — or don't
Do “ESG” funds actually vote their values?
A fund that markets itself as an environmental champion, and a climate proposal coming to a vote.
Does quiet engagement pay?
The private channel: a large investor pressing management behind closed doors, with no proxy fight.
The frontier: shareholder democracy
People trade before they vote.
Shares change hands right up to the record date, so the set of owners at the moment of the vote is not given from outside — it is chosen in the market. The electorate is endogenous Levit, Malenko & Maug, JF 2024. And it runs in a loop:
So outcomes can be self-fulfilling, and a high price need not mean happy owners.
If shares sort by belief around a vote, then once a contentious meeting resolves, the losers should no longer wish to hold a company run against their preferences.
A live question: dual-class sunsets
When Snap went public it sold shares carrying no votes at all. Founders at Google, Meta and Snap keep voting control while holding only a small slice of the cash flows. The dual-class share forces apart two things that usually travel together — and separating them is the key.
Ownership aligns; control insulates — and the structure is now in nearly 30% of U.S. IPOs.
Value peaks around a 25-point wedge, then falls: a little founder control helps, too much destroys. So the question is not “ban or allow,” but how to make control expire — a sunset. Here the lecturer's own work begins, on a real puzzle:
Can a rule meant to protect the minority end up hollowing it?