In the first post of this series (Part 1), we discussed the following questions: Should companies be allowed to 'collude' to reach net zero targets or other green economy goals? Are sustainability goals in tension with antitrust statutes? Do institutional investors, pursuing ESG goals collectively, violate antitrust law? Increasingly, competition policy / antitrust regulators are asking these questions and, in some cases, re-evaluating the goals of competition law.
But how do we understand the boundaries of competition and collaboration in markets? Who should be allowed to collaborate and when? For what purposes?
In today's post, we'll cover:
• Lessons from evolutionary biology on competition and collaboration
• The role of investors in determining the boundaries of competition and collaboration (interlocking directorates and shareholder coordination on ESG goals)
Have you ever let someone cut in front of you in the airport security line who was running late for a flight? Or let another car have the right of way, despite it being your turn? Or perhaps you've served in the military or in public office, at great personal sacrifice. Why?
A central question in evolutionary biology is why altruism – when an individual cooperates or sacrifices to benefit a larger group – exists at all. Why would someone knowingly disadvantage themselves? Does it serve an evolutionary purpose?
Two main theories exist: kin selection and multi-level selection. Kin theory proposes that an organism favors the reproductive success of its relatives, and sometimes sacrifices to increase the survival chances of organisms which share a certain biological likeness, like similar genes. This theory is complicated in humans, however, who can feel a sense of kinship with others outside of our traditional family groupings, and also with other animal species.
Multilevel selection theory, which I've written about before, is an alternative theory put forward by David Sloan Wilson and E.O. Wilson. The basic premise of multilevel selection is that evolution 'selects' for traits, not only in individuals but on multiple levels of biological organization – for example, between groups. A behavior – like altruism or cooperation – may be disadvantageous to an individual, but it still may benefit the larger group. In other words: A group with a bunch of selfish people will struggle to win against a group of mostly cooperative people. Humans are very cooperative, which has made us very evolutionarily successful. As D.S. Wilson is fond of saying: “Selfishness beats altruism within groups. Altruistic groups beat selfish groups. Everything else is commentary.”
So while this makes sense evolutionarily speaking, it must be then asked – what are the boundaries of cooperative (and competitive) actors within markets? And what are they cooperating to do? Groups can cooperate in both pro-social and anti-social ways. Companies can cooperate to reduce slavery in the supply chain, but they can also cooperate to form cartels, erect competitive moats, and hike prices on consumers.
This is what antitrust law seeks to understand – when is it appropriate for individuals and groups to cooperate, and when is it disadvantageous to markets overall?
The other complicating factor is that we can't only look at the systems level of the company when asking this question (when should companies collaborate vs compete?). We also have to look at the entire capital markets stack, and the incentives which are present for and from institutional investors, who influence companies to behave in certain ways. Which actors are collaborating across the economy, and for what purposes? Let's look at two examples: interlocking directorates and shareholder coordination on ESG goals.
Recently, the Department of Justice took significant action against 'interlocking directorates' – sending letters to investors, companies, and individuals saying that the agency might take them to court for violating Section 8 of the Clayton Act (the second antitrust law passed in 1914 which clarified and expanded on the Sherman Act of 1890).
Antitrust law prohibits individuals from sitting on the boards of two or more competing firms. When someone serves as an officer or director of more than one competing companies, it's called an 'interlocking directorate.' This law was meant to prevent companies from colluding through information sharing – or strategically coordinating in an anticompetitive way – through their board members. It's easy to see how this would happen if, say, Delta and American Airlines had someone sitting on both of their boards. And technically, interlocking directorates can also mean two different people from the same company on two different but competing boards (inviting information sharing), but this is slightly harder to prosecute.
There are some provisions in the law which give a safe harbor (exemption) to smaller firms with under ~$41 million in total capital and profits. But this recent effort by the DOJ is significant because the agency proactively sought out violators, instead of reviewing board seats during the normal merger review process. It signifies a much more aggressive antitrust push, as is consistent with the appointment of Jonathan Kanter as head of the DOJ's Antitrust Division. In response, at least five directors have resigned from their positions, according to a DOJ press release.
This law also applies to entities or portfolio companies of private equity companies. According to one law firm, "The interlock can also be indirect, such as when the same private equity firm appoints different representatives to sit on the boards of competing companies." With private equity companies assigning board members to multiple portfolio companies, it is the limited partners who stand to benefit from potential anticompetitive information sharing.
What is interesting to me about this, is that it illuminates the key question of how to define the boundaries of competition and collaboration between firms. In the case of private equity, it is not enough to look at the firm-level when evaluating competition – we must also take into account a company's governance structure and who may ultimately benefit from information sharing (in their case, their limited partner investors). However, it's not transparent how common this practice is, particularly in private equity, and even then, it's not always easy to define what constitutes a market competitor.
Shareholder coordination on ESG goals
The question of the appropriate ways to collaborate has hit ESG investors hard in recent months, as conservatives launch an attack campaign on 'woke' capitalism. (I wrote about it here). ESG investors are accused of using shareholder power to push leftist causes "because it allows the left to accomplish what it could never hope to achieve at the ballot box” according to former VP Mike Pence.
ESG investing saw record inflows in 2021 with more than $8 billion per day coming into the asset class. Bloomberg Intelligence projects that more than one-third of all globally managed assets could carry explicit ESG labels by 2025, amounting to more than $50 trillion. ESG's success has roiled conservatives. Republican state AG of Arizona, Mark Brnovich, has launched an investigation into ESG investing, calling it a "coordinated conspiracy" and a "potentially unlawful market manipulation" strategy of "spurious political activism."
Investors, however, increasingly want to coordinate on ESG goals through shareholder proposals and proxy voting. They see themselves as ‘universal owners’ of the entire market, which means they are unable to diversify away from system risks like climate change. In some cases, they see these risks are material and financially risky to their portfolios in the long-term. When oil is down, this financial case is easier to make. When prices spike, as they did in June of this year, it becomes a harder thesis to justify in the near-term.
So while conservatives take aim at Blackrock and other major asset managers for supposedly being too negative on oil, it turns out that a small number of concentrated of financiers and asset managers like Blackrock actually fund heavy emitters and are therefore active contributors to climate change inaction. A new study has found that just ten financial actors – a mix of investment advisors, governments, and sovereign wealth funds – stand in the way of slowing climate change. These ten financial firms own 49.5 percent of the emissions potential from the 200 largest fossil fuel firms. The top 5 were: Blackrock, Vanguard, the Government of India, State Street and the Kingdom of Saudi Arabia.
According to the study, “The results not only assert that financial markets can influence the trajectory of sustainability transitions but also exemplify that power is concentrated among just a handful of powerful and path-dependent financiers.” Blackrock, Vanguard, and State Street increasingly market ESG products, but also vote against corporate ESG proposals. BlackRock said that it supported 22% of E&S shareholder proposals this year, substantially below last year’s 47%.
So Blackrock is in the crosshairs of both conservatives and liberals for acting too strongly or not acting strongly enough, respectively. Fink recently said, “I’m now being attacked equally by the left and the right, so I’m doing something right, I hope.” But the question of who should be allowed to collaborate to shape markets according to their respective agendas remains.
Competition or Collaboration?
All of this adds up to a very live debate for regulators, policymakers, companies, and investors on the appropriate ways to collaborate without violating antitrust law. It also foregrounds the question of whether antitrust law needs to adapt to meet new 21st century coordination problems, or whether maintaining competition among firms is the best way to meet climate and other sustainability goals.
In my opinion, competition/antitrust policy should always be in service to larger, societal goals — if we get increasing market breakdown from climate disruptions, competition policy becomes mute. To perhaps state the obvious, we must have functional markets, operating in planetary boundaries, to have a role for competition policy in the first place.
But we also need to be very cautious when inserting exemptions into antitrust law to allow competitors to collude to meet environmental targets, because these loopholes could easily become exploited to the detriment of people and planet.
Is there a role for learning from evolutionary biology on how natural systems have determined the thresholds and boundaries of collaboration and competition? This is something I'll be exploring further with David Sloan Wilson and Professor Thomas J. Horton, who has written extensively on the intersection of antitrust law and evolutionary biology, in coming months. We welcome your thoughts and contributions.