Lawsuit against Meta invokes modern portfolio theory to protect shareholders
corpgov.law.harvard.edu
corpgov.law.harvard.edu
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 batteries, could shareholders sue because the company is devaluing an asset most of them own?
This totally smells like a lawyer trying a random, BS theory in the hope that something "sticks" in order to make their mark.
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 the Pepsi stock?
If, however, Coca Cola's actions harmed Pepsi specifically but benefited the overall portfolio, then no damages would be pursued.
So Coca Cola is welcome to take market share from Pepsi so long as doing so is a net benefit to a diversified portfolio, as opposed to doing so in a way that harms a diversified portfolio.
It would be the end of innovation.
What would no longer be rewarded is parasitism.
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.
Even if it's a tossup, does that mean there's a 50% chance of the inventor of such a cure being liable for that crash?
The issue here is that it's not a tossup. The probability is >=2:1 hence the liability, even if that is alive after the plunge.
The specific complaint is that Meta ignored the concerns raised by its shareholders about the impact of its actions on the broader portfolios held by its shareholders.
Once again I do not think this case has merit, and lawsuits of this nature almost always fail, but we should at least take some time to understand what is actually being pled so that we can object to it with a firm standing.
The idea is deeply deeply broken, essentially, "everyone should care about everything according to some notion of a portfolio i think is normal".
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.
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
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.
It's a very interesting legal approach, but that doesn't make it right. Externalities are very tricky.
Should I as a shareholder of both Apple, Meta and Google be able to sue Apple for their changes?
IANAL, but I don't think this will hold up.
[1] https://www.economicshelp.org/blog/glossary/pigovian-tax/
Taxes are regularly used to encourage or discourage investments. The fact that no government does is a political one.
Governments do sometimes impose pigovian taxes and as you say, this can be politically unpopular which is why they don’t always stick. For example, in the UK there was the “fuel price escalator” which was a direct response to climate change. The government decided to impose a tax on retail petrol and diesel prices that would rise in line with inflation or faster to encourage people to move away from fossil fuels over time. It led to a weird uprising where truck drivers picketed oil depots and the country ran out of fuel so the escalator was abandoned.[1]
[1] https://en.wikipedia.org/wiki/Fuel_protests_in_the_United_Ki...
[1]: https://corpgov.law.harvard.edu/2019/03/11/the-strategies-of...
https://www.morningstar.com/articles/1061237/how-facebook-si...
Suing Zuckerberg on the basis that FB has made the world a worse place is one thing, suing him on the basis that a corporate dictatorship has disrupted their portfolio is a joke. They'd be better off suing the SEC or FTC for failure to regulate effectively.
But to bring it back to the context here. The shareholders can fire a CEO, but he runs the company. If you don't know who that person should be, or what traits they should have differently, I don't think it would be that valuable to have voting rights.
He may have legs, but I'm not the same can be said of his strategy. While I give FB credit for things like Pytorch and other innovations, I can't remember the last time the firm produced anything interesting on the product side. I only maintain an FB account because of a few friends and family members who use it as their preferred platform.
Quest 2, which has outsold Xbox Series X|S?
Bringing E2EE to the masses via WhatsApp?
Turning Instagram from some niche hipster pictures app to one of the biggest social platforms in the world?
1 - https://medium.com/@alt.cap/time-to-get-fit-an-open-letter-f...
Basically this is investors saying they are concerned that they are having to bear some of the externalized costs of Facebook’s business.
Traditionally, businesses have been more careful to target those externalities at folks in the third world, or at the very least in poor parts of the state, and avoided impacting the investing classes.
I'm not sure the extent but majority owners/majority voters can't loot the company.
Show me an investor complaining about Facebook’s corporate governance
And I’ll show you someone who doesn’t think investment decisions through
I see posters here brushing off talk about mental health and political impacts from decisions corporate directors make. Well if there is a measurable harm that can be traced back to a given company why shouldn't they be sued?
It's a meme, but we live in a society. Companies don't exist in isolation, neither do profits.
Say I overhear my neighbors talking with each other. Despite my not knowing them, if based on listening to their conversation I decid to go kill some people at my place of employment - that is on me. My neighbors do not bear any responsibility. At some point there is the concept of personal responsibility. Honestly, this should be obvious.
Instead, the lawsuit is trying to expand the concept of "fiduciary duty" to other aspects of shareholders lives. That is the part that a lot of us think is insane.
It seems like it is though? From the text of the article:
> These activities pose risks to political stability, public health, and rule of law, threatening the intrinsic value of the global economy and thus the value of diversified portfolios.
The argument they seem to be going after is that we live in a highly connected society and powerful companies with outsized influence can disrupt the global economy which therefore hurts their investments. Whether or not Meta has _actually_ done that is another question, but I think that this line of thinking is interesting.
They can be sued if there is a specific, measurable harm. And there are plenty of existing laws which facilitate this.
Not aware of any evidence this applies to Meta.
Years back, they did A/B testing to see if they could make users happy or sad.
Turns out they could. They published a blog post about it.
All subsequent mental harm their platforms do is squarely on them.
They know. They admitted it.
They should be sued out of existence.
Because Mark Z. is not diversified (wealth is in Meta) and has total control over the company, his decisions create a conflict of interest to the modern investor.
Yet the article doesnt mention how his decisions directly impacted the economy. Maybe the lawsuit does, but Im not going to read that...
>the fiduciary implication of the fact that modern investors are generally diversified, so that their interests extend beyond (and may be in opposition to) the maximization of the value of future cash flows to be received from owning a company’s shares.
So it's fighting monopolistic behavior?
Nothing directly about monopolistic behavior here, though true monopolies end up harming global economy in their pursuit of benefits. Which is why they are regularly broken up, or merge prohibited I suppose.
It claims that it hurt a typical diversified portfolio. One that FB shareholders should have, according to the Modern Portfolio Theory (MPT). It notes that the MPT is not only commonly accepted, it is in fact used to write laws and regulations: "Before the advent of MPT, “legal lists” prohibited many fiduciaries from owning common stock".
So if the MPT is indeed a cornerstone of modern economics, and modern laws, the natural conclusion is that it should be considered when looking at the fiduciary consequences of a company decision.
Facebook case shows the problem very clearly, because both of the scale of the impact of the company on the World in general, and the structure of its governance, where the majority vote holder interests are not diversified, which makes them diverge significantly from all the other shareholders interests.
As I understand it, it's a bit of legal jiu-jitsu: it takes the MPT, which so far has been used to allow more actors to invest in stocks, and so accepted readily by business and legal actors. It then uses it to extend the responsibility of companies to some externalities.
It may or may not succeed, but it doesn't seem completely insane. At the very least the discovery process could be used to show to which extend Facebook knows about features that have a clearly negative effect on society in general, and chooses to implement them anyway.
It does say something about the current state of AI that at least 2 people had the same thought.
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.""
I realize in this case it's effectively one subset if shareholders trying to get paid at the expense of other shareholders but it feels like there should be a higher bar for this type of litigation.
I think their goal is to prove that Meta’s negative impact was so broad that most investors had some sort of negative impact outside of their Meta holdings.
So if Meta is liable then surely every company involved in the foundation of the internet is as well e.g. Google, Microsoft, Cloudflare, ISPs etc.
I doubt they’ll win this one but if they do it would be hilariously amusing.
What I gathered, is that the facebook decisions impacted non-facebook stocks, facebook not only should have known but also are responsible as fiduciary to the stock holders.
In short, besides you, I bought your competitor, you should have known I bought them, your actions now crushed your competitor, I lost a boatload on them, you are responsible.
> 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. In particular, the complaint identifies press reports establishing that the company knew that its conduct was leading to mental health issues for millions of users and increasingly negative political rhetoric, while facilitating ethnic cleansing, drug cartels, modern slavery, and vaccine disinformation. These activities pose risks to political stability, public health, and rule of law, threatening the intrinsic value of the global economy and thus the value of diversified portfolios. (As diversified portfolios represent a slice of the economy, reducing the value of the global economy inevitably reduces portfolio value.
That's sort of the same as what I said. The claim is that Meta did things to make money that caused investors to lose money in other stocks & investments, and that Meta is responsible for those losses.
Anybody can sue everybody for anything, as long as they have the money and the time. This is how civil courts work.
> The idea that one company's decisions would have such tangible and personally-harmful effects due to "negative political rhetoric, while facilitating ethnic cleansing, drug cartels, modern slavery, and vaccine disinformation" would open up every company to diffuse claims of responsibility.
Kinda scary we’re tacitly saying that IFF a company is responsible for this then it’s ok? If a person was responsible for all (any) of that, most of society would hold them in pretty low regard.
If that became the standard, everyone could sue everyone else on the thinnest of connections.
There are laws, regulators, governments, and other entities to hold such corporations to account, but it is not the individual citizen who can show a direct and concrete connection (for those kinds of harms).
I would like to sue Donald Trump for diminishing the US's standing in the world and causing my portfolio to drop as well.
> 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. In particular, the complaint identifies press reports establishing that the company knew that its conduct was leading to mental health issues for millions of users and increasingly negative political rhetoric, while facilitating ethnic cleansing, drug cartels, modern slavery, and vaccine disinformation. These activities pose risks to political stability, public health, and rule of law, threatening the intrinsic value of the global economy and thus the value of diversified portfolios.
Is there any company in existence that would clear this bar?