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 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.
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.
You could make this argument that Apple has done this with their IDFA changes. Wipe out the public water source (data attribution) to benefit their internal apple ads (new DSP + Apple app and search ads). Overall portfolio effect of that IDFA change has been extremely negative for every company but Apple.
Should I as a shareholder of both Apple, Meta and Google be able to sue Apple for their changes?
All of these arguments pretty much point to the absurdity of this lawsuit. It's not hard to pull lots of different second order consequences out of your ass and then point to some big, societally impacting company as the source of whatever consequence (good or bad) you can dream up.
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.
I haven't given it a lot of thought, but I tend to agree with you. The sister comment to your comment (about AAPL and it's tracking/privacy changes and the effects on other companies) is a good example why. Some externalities may be realized as effects on other companies that may be part of a portfolio, but some may not be. For example, what about how users value their privacy?
It's a very interesting legal approach, but that doesn't make it right. Externalities are very tricky.
Normally the lawyers in these cases have one of either 2 motives - 1) idealogical (will pursue theses cases to push a political point so as to influence/intimidate others and to develop a political policy down the line) or 2) Financial. And if all things go well they get both done. Whether or not these intentions are good probably depends on whether you think freer markets should be allowed or not. Or whether they should be governed by idealogy pushing the money to one side of the political spectrum or another.
How nice would it be if corporations were held accountable for externalities? You'd almost immediately have all the big fossil fuel companies, automotive manufacturers, and likely banks sued into oblivion for defrauding shareholders.
There is a theory in economics that the government could do this by imposing taxes on negative externalities.[1] The purpose of these "Pigovian taxes" is to make society whole for these negative externalities and ensure that over time the prices of goods reflect their total marginal costs, not just the direct costs to the producer. Of course there are practical problems in estimating the right level for these taxes accurately.
It’s not a theory for any meaningful sense of the word theory. The government could indeed price in externalities through taxes if it so desired. Also it’s not “Pigovian taxes”, it’s just Pigovian taxes. That’s exactly what a Pigovian tax is. No need for quotes here.
Taxes are regularly used to encourage or discourage investments. The fact that no government does is a political one.
To be clear, when I say theory, the theoretical part is not that these taxes could exist but that the tax could adequately price in negative externalities, which is hard because generally price discovery is hard to do and in particular one of the things about the negative externalities of lots of activities is they are not fully known at the time the goods are produced. eg when the would was going ham producing asbestos it was probably not fully appreciated quite how harmful that was. So lots of the information which would be the raw material for that price discovery is unavailable.
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]
There is a documentary called "Duty of Care" about lawsuits along these lines. Governments are getting sued for endangering their own citizens through inaction on climate change. Similar lawsuits are being brought directly against oil companies.
> 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 the Pepsi stock?
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 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.
No, because they would present massive gains to every industry that loses employees to cancer. That's all of them, by the way. There would be no net loss, and innovation would continue to be rewarded.
If companies were that concerned about loosing employees, companies like deliveroo and amazon would not be destroying their health. Coal minin conoanies would not need health and safety regulation - they used to literally kill their workers
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.
What's to say the stock market would skyrocket? Especially if this cure is accessible to everyone and published freely online, the only direct effect is pharma companies stocks crashing because of a loss of oncology drug revenue. Who's to say what the rest of the stock market would to to react?
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?
It doesn't work like this. If it's a tossup (ie probability =~1:1) then there's no legal liability. Importantly, whether the cat's dead or alive is irrelevant.
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.
Legit question: is it "detriment to a generic diversified portfolio" or "detriment to a specific diversified portfolio"? (As in if my portfolio is diversified and it got decreased in value I have grounds to sue)
The complaint in the article says that Meta is required to consider the impact of its actions on the diversified portfolios held by its shareholders. The plaintiff asserts that it's not about having a detrimental impact on a generic diversified portfolio but rather the various diversified portfolios held by its shareholders.
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 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.
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".
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.
If the decrease in value to Pepsi is less than the gains in Coca Cola, then yes, by the logic of this suit. However, I'd Coca Cola gains more than the loss to Pepsi, then no need to sue.
The alleged harm caused by Meta may have a lot of merit, but the portfolio argument seems insane to me too. This line of reasoning suggests that companies have a fiduciary responsibility to avoid competing too hard against competitors because they share common owners. Anticompetitive effects have already been a concern due to common ownership by index funds [1] and would be exacerbated if this portfolio argument becomes a legal standard.
What you’re saying makes sense but I actually agree with the intent. They’re basically saying don’t destroy the government/society in the name of shareholder value. I feel like there should be a way to say this without saying “because our portfolio value!” But that’s the justification they want to try.
Agreed. Totally insane - you might as well have the stock exchanges fold up and go home. What's the point in raising money in the capital markets if you are going to be subject to such silly lawsuits. Hopefully this will be thrown out quickly in the courts.
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.
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.
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.
It’s not even clear yet whether this has been a bad investment decision. Zuckerberg is playing a long game here, and the market is notoriously short-term, immediate-profits-driven. Long term investors may actually be quite pleased if this strategy turns out to be generation-defining. Obviously no person can say this with certainty, but they can see his track record — he’s gone against the grain on many occasions, at the peril of short term holders, only to dramatically increase the overall profits of the company exponentially.
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.
The Quest 2 was not an acquisition. Oculus was an acquisition. Then, over 6 years later, the Quest 2 was released. Not sure anyone can claim that FB didn't have a huge role in inventing the Quest 2 after 6 years of building up to it.
I’ve got both Quests. The 2 is nice, but it’s not very different from the first gen; upped specs and resolution. The first gen was nice; separating it from the PC was important, but it’s still hard to see it as that innovative over the Rift predecessor it largely inherited from.
“We never expected the leopards to eat our faces!” say investors in Face-Eating-Leopards inc.
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 think highly accountable tech CEOs with experience managing large organizations, and executing long term visions, are in shorter supply than you suggest.
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.
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.
I'm just a two-bit software engineer and not a lawyer but I'll go against the general flow of the rest of the posts here and say "this is interesting." Whether or not it will work is another question, but it seems like they are trying to establish some precedent that companies need to consider the downstream impacts of the things they do.
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.
But the lawsuit isn't arguing that "companies need to consider the downstream impacts of the things they do." That's an argument to be made to governments that grant corporate charters (though, I'd note that some governments have recently gone in the opposite direction, e.g. prohibiting pension fund managers from considering anything besides financial returns in their decisions).
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.
> But the lawsuit isn't arguing that "companies need to consider the downstream impacts of the things they do."
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.
> Well if there is a measurable harm that can be traced back to a given company why shouldn't they be sued?
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.
The problem is that this creates an open ended obligation of companies to whatever common shareholders want in their dreams about Society, and are responsible for doing so.
Interesting and disturbing. They are making an argument that Facebook/Meta is harmful to the global economy because it cant do [impossible task] of moderating its 3.5 billion users to stifle [unwanted behavior]. And because of that, their decisions are negatively impacting the modern investors distributed portfolios.
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.
It's fighting pursuit pursuit of benefits that negatively impact the global economy.
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.
The lawsuit doesn't argue that Facebook actions hurt specific portfolios from their shareholders.
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.
"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.""
Honestly, the whole business of shareholders suing companies is a bit crazy given they were also the beneficiary of any ill-gotten gains and, ultimately, any damages come out of the share price.
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.
In simple terms, investors are suing because even though they might have made a boatload of cash from their investments in Meta, they ended up with a net loss overall because what Meta did to pump up the stock value ended up destroying the value of a lot of other things the investors had in their portfolios.
It seems to me that if you owned the companies outright something like preventing one company from harming the value of the other could easily be illegal collusion and monopolizing.
I doubt they’ll win this one but if they do it would be hilariously amusing.
That is not what I gathered, but I invest in dirt so who knows.
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.
> the facebook decisions impacted non-facebook stocks, facebook not only should have known but also are responsible as fiduciary to the stock holders.
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.
Wow, this seems bananas. The loss in value isn’t even other investment, but rather “mental health issues for millions of users and increasingly negative political rhetoric, while facilitating ethnic cleansing, drug cartels, modern slavery, and vaccine disinformation”
I think they are intentionally being vague to encompass as much as possible in their theoretical “diversified portfolio”.
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.
While I like the idea that a company has a duty to the wider marketplace, the construction using diversified portfolios is more creative than convincing. Problem is, that we can easily construct portfolios that react in a specific way to actions. In the example with promotion of mental health issues we may wonder how the bottom line of clinics of chocolate manufacturers is impacted by trying to avoid mental health issues.
Hopefully the case gets summarily tossed for lack of standing. The idea that one company's decisions would have such tangible and personally-harmful (to "my portfolio") 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.
As another person commented, maybe they should be open to that responsibility?
> 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.
I'm not saying it's ok -- I'm saying that an individual person doesn't have enough concrete, particularized, provable harm that came from the company's actions to take that company to court.
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.
I can't speak to the legalese, but on the surface the complaint sounds ridiculous.
> 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?
Lawsuits like this are just political theater, abusing the court system to publicize a particular social issue. The plaintiffs know they have no hope of winning a judgment, but if they can bring enough negative publicity to Meta then the company might actually change some policies.
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.