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Lawsuit against Meta invokes modern portfolio theory to protect shareholders

corpgov.law.harvard.edu

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Re: Lawsuit against Meta invokes modern portfolio theory to protect shareholders

#51

Post by ISL »

anigbrowl wrote: post #14

Anyone who invested in Facebook directly (rather than via a managed or exchange-traded fund of some sort) did so with the expected awareness that all the voting stock was controlled by Zuckerberg personally. Effectively, FB is a corporate dictatorship and it's hard to have sympathy for people who put money into it during the good times and are now surprised to discover that they made a bad investment decision. https:…

Largely agreed. The normal way for shareholders to express their distaste for choices made by the board/executive is to vote them out. Shareholders here literally can't do so, but they've known that from the day they bought their shares.

Re: Lawsuit against Meta invokes modern portfolio theory to protect shareholders

#52

Post by Kranar »

donmcronald wrote: post #38
Kranar wrote: post #20

Earlier quoted context omitted.

I don't think this lawsuit has much merit, but the lawsuit is arguing against damages to an overall portfolio. If a diversified portfolio consisting of Coca Cola and Pepsi was on the whole damaged due to the actions of Coca Cola against Pepsi, then the plaintiffs argue that Coca Cola would be liable for some part of that damage. If, however, Coca Cola's actions harmed Pepsi specifically but benefited the overall port…

That’s insane! Imagine if a small company invented a cure for cancer. Would they be liable for the losses of all the pharmaceutical companies? It would be the end of innovation.

I know I should interpret every comment in good faith, but it really is hard to understand how you can read my comment and make such a reply. It feels like you didn't actually take the time to understand what I said or even read the article before commenting.

At any rate, if a company found a cure for cancer the stock market would absolutely skyrocket in a way almost never before seen. It's unbelievably hard to imagine how a company finding a cure for cancer would be to the detriment to a diversified portfolio.

Re: Lawsuit against Meta invokes modern portfolio theory to protect shareholders

#53

Post by evrydayhustling »

Kranar wrote: post #20
jbombadil wrote: post #15

Earlier quoted context omitted.

> This seems totally insane to me. The lawsuit is arguing that directors not only have a fiduciary responsibility to shareholders to increase the value of their Meta holdings, but also of other stocks they may own. This is my thinking as well. If I own stock of Coca Cola and Pepsi. Coca Cola comes up with a great product that eats a huge amount of market from Pepsi. According to this I sue Coca Cola for my losses on…

I don't think this lawsuit has much merit, but the lawsuit is arguing against damages to an overall portfolio. If a diversified portfolio consisting of Coca Cola and Pepsi was on the whole damaged due to the actions of Coca Cola against Pepsi, then the plaintiffs argue that Coca Cola would be liable for some part of that damage. If, however, Coca Cola's actions harmed Pepsi specifically but benefited the overall port…

What is a diversified portfolio? Most indices are weighted by market cap, since everything else requires trading. So do we all the owe the most protection to the largest companies?

The idea is deeply deeply broken, essentially, "everyone should care about everything according to some notion of a portfolio i think is normal".

Re: Lawsuit against Meta invokes modern portfolio theory to protect shareholders

#54

Post by contravariant »

gregw134 wrote: post #32
socialismisok wrote: post #28

Earlier quoted context omitted.

This is where capitalism naturally goes. Growth is the most important thing. We start to codify the expectation of growth into board responsibilities. Then we all accept that as normal. Once we've built the mental model there, it's not really that far to say they shouldn't hurt other companies if it costs them nothing.

Except, we should want companies to compete with each other and eat each other's profits. Wars between companies are good for consumers.

Competition is good, wars are only good if they don't end up producing a victor.

Re: Lawsuit against Meta invokes modern portfolio theory to protect shareholders

#55

Post by kmeisthax »

hn_throwaway_99 wrote: post #7

This seems totally insane to me. The lawsuit is arguing that directors not only have a fiduciary responsibility to shareholders to increase the value of their Meta holdings, but also of other stocks they may own. The consequences of that line of thinking are scary. I'm sure the vast majority of shareholders of most US companies own ICE cars. If a company decides to put a lot of effort into, for example, cheaper batte…

Alternatively it could be an argumentum ad absurdum against the concept of shareholder primacy.

Re: Lawsuit against Meta invokes modern portfolio theory to protect shareholders

#56

Post by JohnJamesRambo »

Kranar wrote: post #20
jbombadil wrote: post #15

Earlier quoted context omitted.

> This seems totally insane to me. The lawsuit is arguing that directors not only have a fiduciary responsibility to shareholders to increase the value of their Meta holdings, but also of other stocks they may own. This is my thinking as well. If I own stock of Coca Cola and Pepsi. Coca Cola comes up with a great product that eats a huge amount of market from Pepsi. According to this I sue Coca Cola for my losses on…

I don't think this lawsuit has much merit, but the lawsuit is arguing against damages to an overall portfolio. If a diversified portfolio consisting of Coca Cola and Pepsi was on the whole damaged due to the actions of Coca Cola against Pepsi, then the plaintiffs argue that Coca Cola would be liable for some part of that damage. If, however, Coca Cola's actions harmed Pepsi specifically but benefited the overall port…

>The complaint alleges that the Meta directors failed to consider that shareholders with diversified portfolios may be subject to net losses from Meta’s pursuit of a business model that maximizes advertising revenue without regard to the harms it inflicts on the rest of their portfolios.

This is one of the craziest stances/lawsuits I’ve ever read. Boglehead thought has taken over so much that the shareholders are referring to a nebulous diversified portfolio as something that somehow must be protected by law. That’s too far out there.

Re: Lawsuit against Meta invokes modern portfolio theory to protect shareholders

#57

Post by Ice_cream_suit »

"Distinguishing the Complaint From Models Based on Either Stakeholder or Enterprise Value

It is important to note two things that the complaint does not claim. First, it does not claim that stakeholders (e.g., users of its platforms or citizens of destabilized countries) are owed fiduciary duties, or that harm to these stakeholders in and of itself constitutes a fiduciary breach.

Secondly, the complaint does not allege that this conduct was bad for Meta’s own finances.

Instead, the complaint alleges that the conduct revealed by Haugen threatens the global economy, and consequently the portfolios of the Company’s diversified shareholders. The complaint explains:

Meta is the largest social media network company in the world, with 3.5 billion users—43% of humanity. Its business decisions inevitably create financial impact well beyond its own cash flows and enterprise value and have significant impacts on the global economy. While defendants have a duty to operate the Company as a business for the financial benefit of its stockholders, those stockholders are often diversified investors with portfolio interests beyond Meta’s own financial success.

If the decisions that maximize the Company’s long-term cash flows also imperil the rule of law or public health, the portfolios of its diversified stockholders are likely to be financially harmed by those decisions.""

Re: Lawsuit against Meta invokes modern portfolio theory to protect shareholders

#58

Post by pevey »

hn_throwaway_99 wrote: post #7

This seems totally insane to me. The lawsuit is arguing that directors not only have a fiduciary responsibility to shareholders to increase the value of their Meta holdings, but also of other stocks they may own. The consequences of that line of thinking are scary. I'm sure the vast majority of shareholders of most US companies own ICE cars. If a company decides to put a lot of effort into, for example, cheaper batte…

I think what they are really trying to do here is come up with a legal theory that internalizes what economists call "externalities." One economic actor, in doing what is in its individual best interest, creates negative effects that may be much, much larger than the positive effects.

We're not talking about Coke taking market share from Pepsi, which is analogy I saw elsewhere. A better analogy would be Company A that doubles its own profit by, say, destroying the public shared water source 5 other companies rely on, with total profits 10x the extra profits for Company A. So the overall portfolio effect of the actions is very negative.

For many years, economists have just sort of accepted that externalities are a thing, and are bad, and there is not much you can do about them. By definition, you can't hold companies accountable for these costs. If you could, they would not be externalities. This suit is trying a new legal theory to change that.

IANAL

Re: Lawsuit against Meta invokes modern portfolio theory to protect shareholders

#59

Post by syrrim »

dpatterbee wrote: post #46
syrrim wrote: post #26

Earlier quoted context omitted.

It's an interesting perspective. There's probably a sense in which overall improving a diversified portfolio maps to improving society or the economy as a whole, rather than harming society to make a dollar. So whereas the lawsuit likely has no grounds, it might actually be a good thing if this was the way things worked.

I think equating (or even correlating) the market value of some stocks with "improving society" is a pretty big reach.

At the very least, it maps a lot more closely than does the market value of a single stock.

Re: Lawsuit against Meta invokes modern portfolio theory to protect shareholders

#60

Post by civilized »

pevey wrote: post #58
hn_throwaway_99 wrote: post #7

This seems totally insane to me. The lawsuit is arguing that directors not only have a fiduciary responsibility to shareholders to increase the value of their Meta holdings, but also of other stocks they may own. The consequences of that line of thinking are scary. I'm sure the vast majority of shareholders of most US companies own ICE cars. If a company decides to put a lot of effort into, for example, cheaper batte…

I think what they are really trying to do here is come up with a legal theory that internalizes what economists call "externalities." One economic actor, in doing what is in its individual best interest, creates negative effects that may be much, much larger than the positive effects. We're not talking about Coke taking market share from Pepsi, which is analogy I saw elsewhere. A better analogy would be Company A tha…

It's nice that the lawyer may have good intentions, but the legal theory is still crackpot.

I don't cheer for silly legal theories to prevail just because of good intentions. The unintended consequences of silly legal theories prevailing are likely to be higher than any good achieved in this one instance.

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