Special thank you to Christina and Sergio for joining us for our first video + audio Roundtable Roundup. If you enjoyed this format, please let us know and reshare this post!
AUDIO
MATT: For this week's Roundtable Roundup, we sat down with two corporate law professors, Christina Sautter from LSU Law and Sergio Alberto Gramitto Ricci from NYU and Hofstra University, who have been researching the new generation of what they refer to as 'Wireless Investors" and their potential impact on proxy voting and corporate engagement.
We want to thank Christina and Sergio for taking the time to speak with us about their research.
CHRISTINA: I am Professor of Law currently at LSU Law Center in Baton Rouge, Louisiana but I'm going to be joining the faculty of SMU Law School in Dallas, Texas, soon. I was a mergers and acquisitions associate in New York at Sherman and Sterling for a few years and then decided that I really wanted to do research.
Most of my research to date has been focused on mergers and acquisitions. Actually, the research about retail investors really kicked off with a conversation that I actually had with Sergio and Sergio had asked me whether I was following what was happening with GameStop. He asked, “what about have you thought about corporate governance implications?” And so it kind of just really snowballed from there.
SERGIO: I have a PhD in business law, and I've been very much interested in structural corporate governance, so I witnessed what was happening in GameStop from a financial perspective, I thought that exploring the corporate governance dimension of it would be particularly interesting.
More generally, I have been studying corporate governance and corporate law for quite some time. I'm a fellow at NYU School of Law, and I am Associate Professor of Law at Hofstra School of Law.
CHRISTINA: So ‘Wireless Investors’ is a term that we coined to reflect individual natural person investors, like all of us, who are sourcing their investing information online and who also are investing online using investing platforms like the mobile first, commission, free trading platforms like Robinhood. Millennials and GenZers typically constitute wireless investors because of where they're sourcing their information and where they're investing but wireless investors can also come from other generations as well.
SERGIO: So now that communication on a global scale is very easy, very accessible, coordinating investing endeavors becomes particularly affordable, both in terms of money and in terms of time.
Traditional barriers that prevented shareholders, retail shareholders, from engaging with corporations have been obliterated precisely because it's so easy to communicate not just one on one, but to communicate to communities.
Communities that gather online, they typically gather on social media, such as Reddit, but they also circulate information through Twitter and other social media.
So retail investors can now coordinate their effort in an absolutely unprecedented fashion on a global scale. And that's one important element because it allows retail investors to decide how to engage and whether to engage based on what other investors are doing.
Traditionally, there was a prisoner dilemma issue. In other words, retail investor would not engage because even though that would be a suboptimal decision, it would still be more cost effective than engaging because most likely other retail investors would have not engaged. It's very similar to what happens with respect to voting. So if people believe that their vote in political election are absolutely inconsequential, they might not vote at all, right?
So that happens in states where the voting outcome is particularly obvious, and that happens in corporate governance as well. But every time there is a possibility to swing from one decision to another, then retail investor, even though they only hold the minority of the shares traded on the market, they can still determine the outcome of decisions. They can be needle movers, so it is now time for it to investors to engage, to get in the game.
CHRISTINA: Probably the biggest example that we've seen to date with wireless investors affecting voting is with AMC. Back in 2021 you may remember that AMC wanted to increase the number of shares it had to authorize and in its certificate of incorporation. In order to do that, of course they needed a shareholder vote to approve that amendment to that certificate. And there was just so much pushback on social media, on reddit and on other platforms that AMC yanked that proposal from the shareholder agenda.Now since of course AMC has engaged in other things where to issue more shares, which is I guess a topic of maybe another podcast…
SERGIO: 60 years ago most of the investors were actually retail investors, were individuals, whereas today most of the shares are held by institutional investors, which doesn't mean that most of the investors are institutional investors.
These are two different concepts. In fact, the majority of investors in the United States are still retail investors, but they simply don't own as many shares as institutional investors, right? So there has been a very significant power shift.
The reason are multiple, some of them have to do with regulatory reforms or changes in markets and structural pensions, et cetera, et cetera, et cetera.
But what is really important to place emphasis on is that that today not only most of the shares are held by institutional investors, most of the shares that are voted are actually voted by institutional investors. In fact, institutional investors bought most of the shares, almost all the shares they hold, whereas retail investors bought a small percentage of the shares they hold.
So that is a particular important aspect to consider when we talk about retail investors because there is an enormous potential to shift this paradigm from the so called apathy to engagement and there are enormous and very significant incentives for retail investors to start to engage with corporations and harness the benefit that comes with engagement.
CHRISTINA: We don't see as many examples at this point as we'd like to see but I think that part of that is probably a result of people not quite understanding that the power that they're sitting on, that they have this immense power. And I think it's also something that we are seeing a lack of not really understanding how the vote works.
But I do think that it is quite telling that Robinhood purchased Say Technologies back in 2021. So that very same infrastructure that really was the first mover in making direct investing accessible to everyone, purchased a company that facilitates investor communications and voting services. So I think that that is looking into the crystal ball very beneficial for retail investors and their power to impact.
SERGIO: Christina and I worked on an academic, on a scholarly piece titled The Corporate Forum. It's a response to an article written by Professor Fisch in which we place emphasis on the opportunity for corporations to host corporate, to host a forum on their website where investors can communicate with other investors and potentially also with the corporation itself. So with investor relation functions that would allow retail investors to fact check the information they gather online but also asking directly to the corporation.
That potentially comes with a number of issues related to liability. Liability both for issuer that potentially would be reluctant to engage in this type of conversation and release information or address or address comments and information. But it might also come with potential liabilities for investors unless they are provided with the safe harbor with respect to the regulation on proxy solicitation.
The SEC has been on it, since I believe 2008, providing some safe harbor. But we believe that much more needs to be done in order to really make issuers comfortable when they engage in this type of communication with investors.
MATT: Related to that, I'd be curious, you guys are probably deep in some new research right now. If you could snap your fingers and get access to data from public company, from a private company, what would be the most powerful data that would drive your research forward?
SERGIO: Some great information that would be helpful for research is information about the characteristics of investors who actually engage and potentially characteristics investors who do not engage. So if you have, if you look at ownership of shares, what are the characteristics of those who engage and the characteristics of those who don't engage across the board from a demographic perspective, perspective socioeconomic diversity. So it would be great to have this type of breakdown which we don't have, but corporations don't have either.
It would be great if investors and society would be surveyed with respect to some key questions such as what are the most significant barriers that prevent the average person from engaging with corporation, from voting their shares as well as from holding shares, company shares directly rather than investing in funds and so on. And also surveying what information people believe would be particularly helpful to shift this paradigm and what services could also help shift paradigms such as standing board instruction for retail investors as Jill Fisch investigated in an article.
MATT: Christina, how do you use your students as a sounding board?
Do you see opportunity to survey them? Do you see opportunity to just ask, qualitatively, where are you guys looking for investment advice? How's that been for you as a data point in your research?
CHRISTINA: That's actually a great question, Matt.
And the fact that you even say I should survey them, I never thought about that. Actually, what I did think about, I gave a presentation to a class at UNLV Online about two years ago covering GameStop and what was happening in 2021 and we did survey them beforehand, sent them the corporate governance gaming article that Sergio and I had wrote and asked them their thoughts and so that was interesting to hear or to read their feedback.
But actually, I have some fantastic research assistants and they tell me what's happening and what they're looking at by one of my research assistants is, I think, slightly obsessed with Reddit and likes to go on reddit and just read forums. She kind of tells me what's happening, and I go on Reddit myself as well.
I'm actually writing an article about it's actually a book chapter about NFTs and play to earn and governance and they're telling me all about gaming and what's happening in gaming, and they basically educated me a ton about about the blockchain, about gaming, about Play to earn, and it's really interesting to have that dialogue.
Introduction to ‘Wireless Investors’ 101 with Professors Christina Sautter and Sergio Alberto Gramitto Ricci