In a study dubbed “the specter of” Giant Three “”, HLS’s Lucian Bebchuk and Scott Hirst write that “regulators and other market players need to recognize – and take very seriously – the prospect of a scenario that would give birth to to three giants asset management.
“If the proposed rules are adopted, proxy advisers would face the prospect of suits against them by issuers that are displeased with their recommendation, and this prospect would operate to discourage recommendations that are unfavorable to managers and to impose costs that would be borne by investors,” said Lucian Bebchuk, a law school professor who directs a program on corporate governance.
“A paper Lucian Bebchuk and Jesse Fried in the Journal of Economic Perspectives examined the effects of these cross horizontal shareholdings in three areas: executive compensation, income inequality and the split between corporate growth and economic growth in America.”
Activists thought BlackRock, Vanguard found religion on climate change. Not anymore, CNBC, October 13, 2019
“Concerns about conflicts of interest were recently studied by Harvard Law School corporate governance expert Lucian Bebchuk and Boston University law professor Scott Hirst, who also is the director of institutional investor research at Harvard Law’s corporate governance program. They concluded there were incentives for the biggest index fund companies to “defer excessively” to corporate managers.”
“Challenging company management in proxy votes creates adversarial relationships that do not serve the business interests of the index funds, Lucian Bebchuk, a Harvard University corporate governance scholar, wrote in a May research paper. … Bebchuk and several other academics say the index fund providers do not want to rankle senior management at publicly traded U.S. corporations because they also want to make money selling index funds to their employees through company retirement plans.”
“The market for index funds, Bebchuk and Hirst argue, naturally favors bigness. Managing a trillion-dollar fund is not dramatically more expensive than managing a billion-dollar firm. This means the big firms can use their larger revenue streams to offer consumers lower fees, giving them a competitive advantage. Innovations in types of index funds are also easy to copy, meaning that it’s especially hard for small companies to disrupt the big ones.”
“In universities, economists such as Eugene Fama declared that free markets were the only valid engine of growth and value, while law professors such as Lucian Bebchuk insisted corporate boards had no right to ever overrule investors, however short-term their focus.”
Three Fund Managers May Soon Control Nearly Half of All Corporate Voting Power, Researchers Warn, MarketWatch, July 17, 2019
“Concentrated ownership — what the authors refer to as the “Giant Three scenario” — means investors and policy makers need to keep a careful eye on the role of fund managers in upholding corporate governance, argue authors Lucian Bebchuk of Harvard Law School and Scott Hirst of Boston University in a working paper titled The Specter of the Giant Three.”
“In their second report, due to be published in the December 2019 issue of the Columbia Law Review, Profs. Bebchuk and Hirst say the index firms are found to be extremely cautious when it comes to their own spending on corporate stewardship or taking action to change the way public companies do business.”
“Two recent academic studies co-authored by notable Harvard Law School professor Lucian Bebchuk provide evidence suggesting that, despite the large ownership stakes held by the so-called “Big Three,” the largest investors aren’t wielding their might in the form of say-on-pay votes, engagement with boards about director nominations, involvement in securities class action lawsuits, and governance reform efforts. Instead, for all their dominance, the largest investors may be incentivized to defer to companies’ management teams, the papers posit.”
“‘Policymakers and others must recognise — and must take seriously — the prospect of a Giant Three scenario. The plausibility of this scenario makes it important to understand the incentives of index fund managers,’ wrote Lucian Bebchuk and Scott Hirst in a paper entitled The Specter of the Giant Three. The pair point out that BlackRock, Vanguard and SSGA have quadrupled their collective ownership stake in S&P 500 companies over the past two decades, with each fund manager typically holding 5 per cent or more of US public companies.”
“The potential advantages of dual-class structures (such as those resulting from founders’ superior leadership skills) tend to recede, and the potential costs tend to rise, as time passes from the IPO,” Lucian Bebchuk, Director of Harvard College’s Corporate Governance wrote in a research paper entitled The Untenable Case for Perpetual Dual-Class Stock.
“For example, Lucian Bebchuk, a professor at Harvard Law School who specialises in executive pay, is in no doubt that rising executive pay since the 1980s is all about power and rent extraction under the cloak of corporate-governance rules. “
Report writers Lucian A. Bebchuk and Scott Hirst “document that the Big Three have almost quadrupled their collective ownership stake in S&P 500 companies over the past two decades.” More importantly, “they have captured the overwhelming majority of the inflows into the asset management industry over the past decade.”
“In a working paper released this month by the National Bureau of Economic Research, researchers at Harvard Law School and Tel Aviv University ran the names of all individuals to have run a company listed in the S&P 1500 between 2000 and 2017 through federal campaign finance databases, which include contributions to both congressional and presidential candidates as well as party committees.”
“The most Republican-leaning sectors are energy (89.1%), manufacturing, and chemicals. Business equipment and telecoms are the least-leaning R to D sectors for their CEOs, though still Republican by clear margins. In the Northeast and West the number of Democratic CEOS has almost caught up to the Republicans. As for female CEOs, they lean Republican 34.3% to Democratic 32.3%, a small margin but still more Republican donors. That is all from a new paper The Politics of CEOs, by Alma Cohen, Moshe Hazan, Roberto Tallarita, and David Weiss, NBER link here.”
“The Center for Political Accountability’s push for better political-spending disclosure started in 2003. Proposals to improve political-spending transparency made up the biggest single category of shareholder proposals among S&P 500 companies from 2005 through 2018, partly prompted by the Supreme Court’s 2010 Citizens United decision that ended longstanding limits on corporate political spending. Such proposals accounted for 626 of 5,092 in all, according to an analysis by researchers at Harvard and Tel Aviv universities.”
“But the practice is increasingly controversial among governance experts. And Kobi Kastiel and Lucian Bebchuk from Harvard Law School have warned that the dual-class structure may ‘significantly decrease the economic value of Pinterest’s low-voting shares.'”
Harvard Researchers: Lyft Investors Will Regret Dual-Class Structure, Business Insider April 6, 2019
“In a post published Wednesday, Harvard Law School’s Lucian Bebchuk and Kobi Kastiel argue that Lyft’s corporate governance structure “can be expected” to decrease Lyft’s per-share value in the future, and increase the discount at which Lyft’s low-voting shares trade.”
“A new, first of its kind study tracks the political leanings of CEOs by examining 18 years of political contributions by more than 3,800 CEOs of S&P 1500 companies. … Harvard Law School’s Alma Cohen and Roberto Tallarita and Tel-Aviv University’s Moshe Hazan and David Weiss analyzed the political contributions to candidates, committees, and parties from 3,810 individuals who served as CEOs of companies in the S&P 1500 index between 2000 and 2017.”
“Lucian Bebchuk, a Harvard Law School professor, said it is still rare for a traditional manager to be openly critical of companies. “Like index funds, most of the major mutual fund families that focus on active funds display a deferential attitude toward corporate managers in their stewardship choices and activities,” he said.”
Independent Ground-Breaking Research Shows Strong Return on Investment for Whistleblower Hotline Use, AP, November 1, 2018
“Other findings show that the absence of hotline activity was associated with suspect corporate governance or financial reporting practices. Companies with lower levels of hotline activity rated poorly on the Bebchuk Entrenchment Index, which reflects governance practices such as staggered boards, limited shareholder rights, and golden parachute payments for senior executives — all of which correlate to lower firm valuations.”
Containing CEO Pay: Shareholders are Allies, The Center for Economic and Policy Research, October 22, 2018
“There is considerable research showing that CEOs are not worth their pay, much of which is cited in Lucian Bebchuk and Jesse Fried’s excellent book, Pay Without Performance. There are any number of studies showing, for example, that CEOs get richly rewarded for events they had nothing to do with, like higher profits at an oil company due to a jump in world oil prices.”
“Bebchuk et al. (2010) calculate that, in 2000, Fuld owned about $200 million of Lehman Brother stock, which would eventually become worthless. Nevertheless, Fuld withdrew about $520 million from the bank between 2000 and 2008 in the form of cash bonuses and equity sales, none of which was accessible to Lehman’s creditors.”
“Adding two independent directors can be expected to help, but its impact is likely to be limited,” Professor Bebchuk said. “As courts and governance researchers have long recognized, the presence of a dominant shareholder is likely to reduce the effectiveness of independent directors as overseers of the C.E.O.’s decisions and behavior.”
MySay: Greater Pay Transparency Needed at GLCs and GLICs to Improve Governance, The Edge Markets, August 28, 2018
“This proposition views fixed pay, such as salary, as a source of “rent” which may be practically deemed as risk-free pay (that is, taking on additional effort or legitimate risk is not necessary to earn this pay). The inefficient pay hypothesis is consistent with the scholarly thought of Professor Lucian Bebchuk of Harvard Law School who viewed certain pay as “stealth compensation” or “agency costs”.”
“This idea is a favorite of corporate governance advocates including Lucian Bebchuk of Harvard Law School, and a member of the Securities and Exchange Commission recently advocated for dual-class shares to expire after a period of time. The theory is that the executives of young companies can have more authority over a company when it’s still young, but built-in defenses should fall away as it matures and strengthens.”
“The Harvard Law School professor Lucian A. Bebchuk used the Redstone example in an argument that dual-share class structures typically outlive their utility, and should be phased out by a company at some point. “
“We controlled for several possible confounding factors,” the authors wrote in a post on the website of Harvard Law School’s Forum on Corporate Governance and Financial Regulation. Those factors included the chief executives’ tenure, characteristics of the firms (size, performance and risk), and the size and independence of the boards.
CII Conference Panelists Dish on Corporate Culture, Voting Structures, Pensions & Investments, March 16, 2018
“On a March 13 panel weighing the pros and cons of sunset provisions on companies with unequal voting structures, Lucian Bebchuk, professor of law, economics and finance, and director of corporate governance at Harvard Law School, argued that the potential benefits of a dual-class structure tend to diminish over time and that the structure should not be maintained indefinitely.”
DealBook Briefing: We Still Have Questions About Wynn Resorts’ Board, New York Times, February 2, 2018
“In an email exchange with me, Lucian Bebchuk, a Harvard law professor and an expert in corporate governance, asked why the board did not suspend Mr. Wynn from his position pending the investigation, or demand that he not interact with Wynn Resorts employees, a step that would have limited his ability to influence the board investigation.”
“Activists’ bargaining power at companies with controlling shareholders is not always as limited as it appears, according to a 2016 paper by Kobi Kastiel, a fellow at Harvard Law School. Forces that facilitate activism include the right to nominate directors, the right to veto going-private transactions, and the use of litigation to put pressure on those in control, Kastiel concludes.”
“Nor are activists without independent defenders. Lucian Bebchuk, a Harvard professor whose research has unearthed the virtues of activist campaigns, concluded in a 2015 paper that we ‘should not accept the validity of the frequent assertions that activist interventions are costly to firms and their shareholders in the long term’.”
“This meeting and this resolution comes at a unique moment,” said Stephen Davis, associate director of Harvard Law School’s Programs on Corporate Governance and Institutional Investors. Vanguard and its competitors “have really begun to take environmental, social, and governance issues seriously as investment risks.”
Lucian Bebchuk, a professor at Harvard Law, has been at the heart of scholarly arguments over corporate governance for a long time, perhaps since 1990, the year he edited a textbook on Corporate Law and Economic Analysis. That was also the year Bebchuk, along with Marcel Kahan, authored a seminal article on “legal policy toward proxy contests.” They argued that ‘companies should be free to adopt rules more favorable to challengers, and less favorable to incumbents, than the standard proxy rules; however, companies should be restrained from opting for rules favoring incumbents over challengers.'”
“The outcome is a wake-up call that directors at U.S. companies may no longer glide through a crisis without taking individual hits in reputation,” said Stephen Davis, associate director of Harvard Law School’s Programs on Corporate Governance and Institutional Investors. “Institutional investors are staffing up for regular, tougher scrutiny of directors.”
A common concern is that the boards are more focused on following technical rules than looking out for shareholder interests, said Stephen Davis, a senior fellow at the Harvard Law School Program on Corporate Governance.
According to Harvard Law’s Lucien Bebchuk and colleagues, about 12 percent of firms—or 2,000 in total—backdated CEO stocks from the mid-1990s to mid-2000s, which boosted executive compensation by 20 percent.
Despite claims that activist investors are “pumping and dumping,” a recent study of activist interventions between 1994 and 2007 by Harvard Law School professor Lucian Bebchuk and others found that Tobin’s Q and return on assets were consistently higher three, four, and five years following the interventions.
Lucian Bebchuk, a Harvard law professor and director of its program on corporate governance, said the board conflict highlights the problems of companies with two classes of stock—one set that holds voting power, and another that does not. He said in an email that Viacom’s corporate structure is now “highly problematic and fraught with risks for public investors.”
Some Companies Balk at Disclosing Details of Political Giving, Wall Street Journal, December 26, 2015
Between 2011 to 2014, a group at Harvard University led by professor Lucian Bebchuk campaigned to get more than 100 major companies to put their entire boards up for annual election, instead of staggering directors in multiyear terms.
Hindering the S.E.C. From Shining a Light on Political Spending, New York Times DealBook, December 21, 2015
The omnibus budget agreement adopted by Congress includes a provision that prevents the Securities and Exchange Commission from issuing a rule next year that would require public companies to disclose their political spending. […] In July 2011 we [Lucian A. Bebchuk and Robert J. Jackson Jr.] were co-chairmen of a bipartisan committee of 10 corporate and securities law professors that considered this issue and submitted a rule-making petition to the S.E.C. The petition urged the agency to develop rules requiring public companies to disclose their spending on politics.
The Examiners: Insider Pay Disclosures Can Spark Troubling Unintended Consequences, Wall Street Journal, November 18, 2015
Whatever the merits of the disclosure debate may be, the debate is swept up in the larger controversy surrounding executive pay faced by healthy and distressed businesses alike. For example, in their controversial treatise on the unfulfilled promise of executive compensation, Lucian Bebchuk and Jesse Fried weave a detailed account of how structural flaws in corporate governance have enabled managers to influence their own pay and have produced widespread distortions in pay arrangements. They believe that directors must focus on shareholder interests and operate independently from the executives whose compensation they set by making directors more directly accountable to shareholders.
Members of Congress Ask SEC to Divulge Corporate Political Spending, Corporate Counsel, October 28, 2015
Some 58 members of the House of Representatives this week sent a letter to the U.S. Securities and Exchange Commission supporting a mandate for corporations to disclose their political spending to investors, hoping to get the agency to reconsider a rule-making petition. […] The representatives join 44 U.S. senators who sent White a similar letter in August supporting the rule-making petition submitted by a committee chaired by law professors Lucian Bebchuk of Harvard and Robert Jackson Jr. of Columbia.
Activist hedge funds can count on a number of supporters in academia and in the media rising up in defense of their actions. No doubt activist hedge funds have found their most persistent academic supporters in Professor Lucian Bebchuk of the Harvard Law School and his co-authors. In several papers, but most particularly in the Bebchuk, Brav and Jiang (2013) paper, the authors make several claims, which are summarized in Bebchuk’s op-ed piece in the Wall Street Journal: […]
Some Companies Balk at Disclosing Details of Political Giving, Wall Street Journal, September 15, 2015
Shareholders are hitting a wall with some major companies in their effort to persuade them to disclose how they spend corporate money to support political candidates. According to the Center for Political Accountability, at least one in 10 big publicly traded companies doesn’t reveal details of its donations to electoral candidates, parties or causes on its website, where investors could easily find it…Many investors want to know how and where companies put corporate funds to work, said Lucian Bebchuk, a professor at Harvard Law School. “Without disclosure and accountability, companies may well spend funds on political causes that insiders favor but shareholders do not.”
Elsewhere in insider trading, “Insiders Beat Market Before Event Disclosure: Study.” The study is by Alma Cohen of Harvard and Rob Jackson and Joshua Mitts of Columbia.
‘Trading the gap’ give insiders a big advantage in stock trades. And it’s perfectly legal. The Washington Post, September 15, 2015
Stock markets today move by the microsecond. Fortunes are made and lost in the blink of an eye. Yet public companies are still allowed to wait four business days before announcing a major merger, bankruptcy, layoff or a new CEO. That kind of news can send share prices soaring or crashing. And a potential 96-hour delay in revealing those events translates into an eon by the clock that runs modern markets…It’s called “trading the gap.” And in the last six years, corporate insiders have earned $105 million in above-market profits by doing it, researchers found. It’s not illegal. But the findings raise questions about whether this was the intended effect of financial regulations, write study authors Alma Cohen of Harvard Law and Robert J. Jackson, Jr. and Joshua R. Mitts at Columbia Law.
Corporate executives and board members regularly make market-beating returns from buying and selling their companies’ stock in the days before disclosing a significant event, according to a study that says it has found a link between insider knowledge and investment profits. Researchers at Columbia and Harvard universities analyzed 42,820 insider purchases and sales reported by companies between 2004 and 2014. The findings wade into a long-running debate over whether U.S. securities laws, many of them decades old, can effectively police a trading market that has grown ever faster and more complex. Critics say the lag time allowed by current disclosure rules is a relic of an era before electronic filings and is ripe for abuse. “To leave open a gap like that is an invitation to insider trading,” said Robert Jackson, a Columbia Law School professor who co-wrote the study with his colleague Joshua Mitts and Alma Cohen of Harvard.
CalSTRS Explains Sponsorship of Declassification Proposal at the 2015 Perry Ellis Annual Shareholders Meeting, MarketWatch, July 6, 2015
A staggered board has been found to be one of six entrenching mechanisms that negatively correlate with company performance, as referenced in “What Matters in Corporate Governance?” by Lucian Bebchuk, Alma Cohen & Allen Ferrell, Harvard Law School, Discussion Paper No. 491 (09/2004, revised 04/2009).
However, Lucian Bebchuk, director of the corporate governance programme at Harvard Law School and a former adviser to the US government’s “pay tsar”, argued there should be tighter restrictions on the amount of annual selling by executives. “When bank executives have substantial freedom to unload equity incentives given to them as part of their compensation, and when executives can be expected to make significant use of their freedom to unload such equity incentives, the executives’ pay arrangements produce distorted incentives to engage in excessive risk-taking,” he said. “Providing bank executives with desirable risk-taking incentives requires precluding them, as long as they lead their bank, from unloading a significant fraction of their holdings in any given year.”
How Wall Street Enabled A Controversial Power Grab At A Wannabe Berkshire Hathaway, Forbes, June 14, 2015
“The tender offer is an aggressive entrenchment move aimed at enabling the CEO to use the shareholders’ money to gain control over the company,” says Lucian Bebchuck, director of the program on corporate governance at Harvard Law School. “Given that the CEO’s management and performance has been controversial, it is especially important for this company’s shareholders to retain the power to vote for a change of control. Unfortunately, if the tender offer is successful, the CEO would become fully entrenched,” he adds.
Former Commissioners Slam SEC for Inaction on Political Spending Rule, Compliance Week, May 27, 2015
The push for political spending disclosures initiated with a Petition for Rulemaking filed by a team of 10 prominent law professors. Robert Jackson, an associate professor at Columbia Law School, and Harvard Law School Professor Lucian Bebchuk spearheaded the effort in 2011.
Wall Street will always crush the little guy, but the stock market could be fairer, MarketWatch, May 21, 2015
A paper by Harvard Law School professor Lucian Bebchuk found that CEOs who earn more than the average “pay slice” of 35% of a firm’s total compensation for its top five executives significantly underperform their peers. That is because such companies make poor acquisition decisions, reward their CEOs for “luck” when industry conditions improve, fail to hold CEOs accountable for poor performance, and grant options that are timed “opportunistically,” Bebchuk found.
Harvard law professor Lucian Bebchuk opposes the use of the Dutch poison pill. “The shareholders of a company should be able to decide whether to sell the company, and giving the board of a Dutch foundation effective veto power over an acquisition is detrimental to the interests of shareholders,” he said in an email.
Wall Street Executives from the Financial Crisis of 2008: Where Are They Now?, Vanity Fair, March 19, 2015
[Former Lehman Brothers C.E.O. Dick] Fuld remains fabulously wealthy, although just how wealthy remains a subject of some dispute. During the same October 2008 congressional hearing in which he sparred with Mica and Henry Waxman, the committee chairman, about how much money he had made at Lehman, Waxman released a chart showing that Fuld had been paid $484 million between 2000 and 2007. Under oath, Fuld argued he had received closer to $310 million. Later in the hearing he conceded that it may have been $350 million. A subsequent analysis by Harvard law professor Lucian Bebchuk and colleagues concluded that the figure was $522.7 million; Oliver Budde, formerly a lawyer who worked at Lehman on regulatory matters, has calculated that Fuld made $529.4 million between 2000 and 2007.
Similarly, most executives don’t automatically favor share purchases over hard investment projects, argues Harvard law professor Lucian Bebchuk, an expert on corporations. If they had hard projects that were more profitable than purchasing shares, they would actually do better personally, he says. Firms would become more profitable, so their stock prices and executive compensation would rise even further. What’s happening, Bebchuk says, is that investment funds are being channeled from slow-growing to fast-growing sectors.
The Morning Risk Report: Petrobras Underlines Corruption Risks for Investors, Wall Street Journal, March 17, 2015
Anger over the [Petrobras corruption] revelations sent more than a million Brazilian protesters into the streets last weekend, in a sign that the issues may lead to a broader, more painful reorganization of the firm, said Stephen Davis, an associate director of Harvard Law School’s program on corporate governance. “It has elevated corruption on the risk hierarchy within the investor community,” Mr. Davis said. The case begs the question “if a company is looking the other way or tolerating corruption what else is the company doing that might not be in the shareholders’ interest?”
A study of activism in 1994-2007 by Lucian Bebchuk of Harvard Law School, and his colleagues, found that activist interventions lead to a sustained, if modest, improvement in operating performance and better shareholder returns. Its period of interest precedes the recent growth in activism, but there is reason to believe that the pattern persists.
At the heart of the dispute is an academic paper written last month by Daniel M. Gallagher, a member of the Securities and Exchange Commission, and Joseph A. Grundfest, a professor at Stanford Law School and himself a former S.E.C. commissioner, that was titled “Did Harvard Violate Federal Securities Law? The Campaign Against Classified Boards of Directors.” The paper took aim at Lucian A. Bebchuk, a Harvard Law School professor who has long researched corporate governance issues and has been an outspoken advocate for increased democracy in corporate America’s boardrooms. Through Harvard’s Shareholder Rights Project, a group he created, Mr. Bebchuk, on behalf of public pension funds, has helped wage proxy contests at 129 companies to change policies that prevent shareholders from electing, or overthrowing, an entire board at once.