“We continue to go back and forth. In 2019, to much fanfare, 181 CEOs of the US Business Roundtable publicly committed to manage corporations for stakeholders – reversing their 1997 statement that upheld shareholder primacy! Not so fast, countered Harvard Law Professors Lucian Bebchuk and Roberto Tallarita, who argued that stakeholderism can backfire in insulating corporate leaders from external accountability and compromising economic performance… to the detriment of broader stakeholders!”
“One of the papers presented at the Chicago conference channels Friedman and questions the logic of shareholder capitalism. “The Illusory Promise of Stakeholder Governance” is by Lucian Bebchuk and Roberto Tallarita of Harvard Law School. “Stakeholderism,” it says, ‘would increase the insulation of corporate leaders from shareholders, reduce their accountability, and hurt economic performance.'”
The Illusory Promise of “Stakeholderism”: Why Embracing Stakeholder Governance Would Fail Stakeholders, Pro Market, September 8, 2020
“In The Illusory Promise of Stakeholder Governance, which we will present at the Stigler Center’s Political Economy of Finance conference later this week, we critically examine “stakeholderism,” the increasingly influential view that corporate leaders should give weight to the interests of non-shareholder constituencies (stakeholders).”
“That conclusion comes from a recent study about whose interests it appears corporate leaders bargained for during the past two decades at companies that are governed by so-called constituency statutes. Such laws were passed in more than 30 states back in the days of corporate raiders and allowed boards to consider other stakeholders during sale negotiations. But those constituency statutes did not have any meaningful impact, according to the study, which was posted on the Harvard corporate governance blog by Harvard’s corporate governance program director Lucian Bebchuk and two co-authors, Kobi Kastiel, an assistant law professor at Tel Aviv University, and Roberto Tallarita, the associate director at Harvard Law’s governance program. “[C]onstituency statutes failed to deliver the benefits to stakeholders that they were supposed to produce,” the trio asserts.”
The Business Roundtable and ‘Stakeholder Capitalism’ — a Retrospective, InsideSources, September 3, 2020
“Contrarily, Lucian Bebchuk and Roberto Tallarita, director and associate director, of the Harvard Law School Program on Corporate Governance, published an op-ed in The Wall Street Journal (“‘Stakeholder’ Capitalism Seems Mostly for Show,” August 7), where they reported on their study results on the companies that signed the 2019 Business Roundtable “Statement.” Of the 48 companies responding to their survey, only one said the decision was approved by the board of directors.”
“The best place to start on the evidence is the great book by Lucian Bebchuk and Jesse Fried, Pay Without Performance. While this book is now somewhat dated (it was published in 2004) it compiles much of the literature available at the time on the relationship of CEO pay to returns to shareholders. It includes many studies that show CEOs pay often bear little resemblance to what they do for shareholders. For example, the pay of oil executives skyrockets when the world price of oil rises, an event for which they presumably are not responsible. Another study found that CEOs tend to get big pay increases when they appear on the cover of a major business magazine, even though returns to shareholders generally lag the overall market.”
“For instance, important research by Harvard Law professor Lucian Bebchuk and colleagues shows that firms that profess to be acting in the interests of all the stakeholders are mostly acting in the interest of the shareholders and the executives. The professed support for stakeholder capitalism, says Bebchuk, “is mostly for show.” In effect, the principles that are really driving behavior in those firms are quite different from the professed goals. Understanding a firm’s principles means going “inside the engine room” and finding out what’s actually driving behavior.”
“The widely acclaimed pledge that 181 CEOs signed last year to redefine the purpose of corporations was “largely a public-relations move,” according to Lucian Bebchuk, one of the country’s best-known academics on corporate governance and founder of the influential blog the Harvard Law School Forum on Corporate Governance. More importantly, writes Bebchuk, most CEOs who joined the pledge never planned to shift from the current model of shareholder primacy”
“The view that it is possible to always strike a win-win for shareholders and other stakeholders is misguided, said Lucian Bebchuk, the director of the Harvard Law School Program on Corporate Governance: “There are a lot of decisions where there is a tradeoff.” Mr. Bebchuk, a critic of stakeholder capitalism proposals, said the current regulations and corporate bylaws often demand that investors emerge as the winner when a tradeoff is necessary—even if other stakeholder interests need to be considered.”
Governance week: stakeholderism, US election, IoD departure, ESG blow, Board Agenda, August 21, 2020
“However, not everyone is convinced “stakeholder” governance is real. Academics Lucian Bebchuk and Roberto Tallarita of Harvard Law School have written a series of articles, culminating this week, claiming the evidence they’ve looked at suggest the Business Roundtable statement was “largely a public-relations move rather than a signal of a significant shift in how corporations treat stakeholders”.”
“Given the myriad global catastrophes that have led to this new wave of stakeholder capitalism, it is safe to surmise that “constituency statutes” did not achieve everything they set out to. Lucian Bebchuk, a Harvard Law professor, has looked more deeply into the issue and has a sobering message.”
“On the other side, Lucian Bebchuk and Roberto Tallarita, the director and associate director, respectively, of the Harvard Law School Program on Corporate Governance, published an op-ed article Stakeholder’ Capitalism Seems Mostly for Show, previewing their study, “The Illusory Promise of Stakeholder Governance,” which is scheduled for publication in the autumn.”
“A forthcoming study from the Harvard Law School Program on Corporate Governance aims to puncture the “illusory promise” of the statement but mainly succeeds in proving that it has an illusory premise. Two researchers contacted the companies whose CEOs signed the statement to see if their boards of directors had agreed to the decision. Only one of the 48 companies that responded said its board had done so. Their study concluded that the CEOs did not mean for the statement to lead to major changes in their conduct or their companies’ conduct. This finding should not be scandalous or even surprising, though, given that nothing in the statement suggested major changes were needed or on the way.”
One year ago, the Business Roundtable pledged to reshape the culture of business. Has anything changed?, Fast Company, August 19, 2020
“It depends on whom you ask. Lucian A. Bebchuk and Roberto Tallarita, researchers at the Harvard Law School Program on Corporate Governance, say it’s been little more than words. They examined promises of stakeholder governance by looking at how involved a company’s board was in the decision to adopt that pledge, and if the board’s corporate governance guidelines were amended afterward to reflect a commitment to bring value to stakeholders.”
How corporate actual responsibility, not social responsibility, would look, Washington Examiner, August 19, 2020
“Among the 181 CEOs who signed, Harvard Law School’s Lucian Bebchuk and Roberto Tallarita have found only one whose board of directors gave approval. On the organization’s own website, the most recent “Principles of Corporate Governance” still dates from 2016.”
Revisiting the Business Roundtable’s ‘Stakeholder Capitalism,’ one year later, Fortune, August 19, 2020
““The statement is largely a rhetorical public relations move rather than the harbinger of meaningful change,” say Lucian Bebchuk and Roberto Tallarita of the Harvard Law School in a 65-page article, “The Illusory Promise of Stakeholder Governance.” They argue that the incentives CEOs face have not changed, so their behavior won’t change. The authors also examine corporate behavior when state laws have permitted companies to protect stakeholders other than shareholders; they say they found no evidence that companies do so any more often than when they are not permitted to do so.”
Last year CEOs pledged to serve stakeholders, not shareholders. You were right not to buy it, LA Times, August 19, 2020
“Had the companies that signed the Roundtable statement actually remade their management policies to raise the interests of customers, workers, and others above those of shareholders, argue Lucian Bebchuk and Roberto Tallarita of Harvard Law School in a forthcoming paper, “the impact on society would be considerable.””
“Lucian Bebchuk and Roberto Tallarita helpfully document how last summer’s Business Roundtable mission statement did not outline a radical new vision of stakeholder capitalism (“‘Stakeholder’ Capitalism Seems Mostly for Show,” op-ed, Aug. 7). In fact, the statement is almost a carbon copy of the famous credo of Johnson & Johnson, beacon of capitalism, in place since 1943.”
“I was too generous to the CEOs! I shouldn’t have said “and the board.” Lucian Bebchuk and Roberto Tallarita did a study of the Business Roundtable statement and got this hilarious result: […]
They’re probably right, but my own preference is to assume that a CEO who signed the Business Roundtable statement is particularly likely to be an imperial CEO, that she is particularly likely to be a CEO who does not want to have to listen to or consult with shareholders, because that is actually what the Business Roundtable statement is about. If you assume the signing CEOs are the ones who don’t want to listen to shareholders, it’s not so surprising that they don’t bother consulting their directors either.”
“After looking the evidence from 48 US companies signed up to a ground breaking pledge to work for “all stakeholders” rather than shareholders alone, Lucian Bebchuk and Roberto Tallarita, experts in governance at Harvard Law School, conclude than in reality nothing much has changed.”
“According to Bebchuk, shareholders may be reluctant to use any greater powers granted to them for fear of economic consequences. However, the Aviva case study reveals that shareholders will be prepared to use powers to control the board, and thus one might take the view that extending shareholder powers is unnecessary.”
“Harvard Law School Professor Lucien Bebchuk is an eminent scholar of corporate governance with whom I often disagree. He, for example, favors SEC rules requiring public companies to disclose their political spending. See Lucien Bebchuk & Robert Jackson, Shining the Light On Corporate Political Spending, 101 Georgetown L. J. 923-967 (2013). I do not. Id. (citing my opposition to SEC rulemaking). I was therefore pleased to see that I agree with many of his conclusions about stakeholder capitalism.”
“Lucian Bebchuk of Harvard Law School, another expert in the field, has argued that American ceos, who tend to tower over their boardrooms, have too much influence over this opaque process. Don Delves of Willis Towers Watson, a consultancy with a big pay-advisory arm, points to “lots of positive changes” in pay-setting over the last two decades, from greater independence for compensation committees to more sophisticated setting of performance targets.”
What kind of debate finds Andrew Behar, CEO of As You Sow, the US shareholder advocate, and Marty Lipton, founding partner of Wachtell Lipton, the corporate law firm, on the same side; and the US Council of Institutional Investors (CII) and Lucian Bebchuk, Harvard Law School professor on the other?
Yes, it’s the debate over the rather awkward neologism: ‘stakeholderism’.
“From a corporate governance perspective, large payments to executives are appropriate only if they serve an adequate corporate purpose,” said Lucian A. Bebchuk, the director of the Program on Corporate Governance at Harvard Law School. He added that shareholders in Intercontinental Exchange “should not view this arrangement to have been on the up-and-up.”
In a March 2020 working paper, “The Illusory Promise of Stakeholder Governance,” Harvard Law School’s Lucian Bebchuk and Roberto Tallarita conclude that the stakeholderism advocated by the Business Roundtable and BlackRock should be viewed “largely as a PR move.”
“The executive pay arrangements reflect a substantial disconnect between pay and performance, and raise serious corporate governance concerns,” said Lucian A. Bebchuk, director of the Program on Corporate Governance at Harvard Law School.
Wall Street firm dangled up to 175% returns to investors using U.S. aid programs, Reuters, April 9, 2020
Lucian Bebchuk, a corporate governance expert at Harvard Law School who reviewed key assumptions of Arcadia’s pitch for Reuters, said that the potential returns, assuming they are estimated correctly, “suggests a design flaw on the part of the government’s program.”
In a new paper Lucian Bebchuk and Roberto Tallarita of Harvard Law School pore over data from the companies of some of the brt signatories and find little evidence (so far) that the declaration has altered corporate behaviour. For example, they found that only three of the 20 companies whose ceos sit on the brt’s board—Boeing, Stryker and Marriott—have amended their corporate-governance guidelines in any way since the declaration. And none of the amendments had anything to do with stakeholder welfare, the authors say.
Bebchuk and Lipton last squared off in public about five years ago, when the issue was so-called staggered boards: whether all directors rather than, say, one-third of them should face re-election each year. The professor and his activist-investor allies championed annual votes as an antidote to entrenched management, while Lipton and his partners at Wachtell, Lipton, Rosen & Katz touted the stabilizing benefits of staggered ballots. The debate still rages.
“Wall Street power broker Marty Lipton and professor Lucian Bebchuk are fighting again, this time over the Business Roundtable’s push for stakeholder capitalism.
Lipton was a strong supporter of the lobby group’s shift in August away from shareholder primacy. In a working paper published this month Bebchuk fired back, arguing that the emphasis on workers, the environment and other stakeholders “would increase the insulation of corporate leaders”, reduce their accountability and hurt shareholders.”
Harvard prof: ‘Stakeholder’ corporate paradigm is just P.R. – and bad for everyone, Reuters, March 4, 2020
Bebchuk said in a statement that Lipton and his co-authors failed to engage substantively with the arguments in his paper. “If Wachtell can provide substantive objections to these arguments, we will be happy to address them,” he said. Bebchuk also said that the paper’s critique of stakeholder governance is not intended to suggest that stakeholders do not have an interest in corporate governance – but that the flood of recent pronouncements does not actually serve those interests.
“But here are a blog post and paper from Lucian Bebchuk and Roberto Tallarita about “The Illusory Promise of Stakeholder Governance.” As the title suggests, they are skeptical. For one thing, unlike a lot of stakeholder-governance advocates, they try to draw a clear distinction between the second and third theories, and dismiss the second theory as just another form of shareholder value:”
“Now, a series of papers from the Law School’s Program on Corporate Governance sounds the alarm about the ways index-fund managers are using their expanding influence—or not. Ames professor of law, economics, and finance Lucian Bebchuk, director of the program, shows through empirical analysis that index funds often vote against the financial interests of investors.”
“The bill’s name echoes a 2015 academic study that examined a decade of corporate leaders’ trades and found that “insiders can — and do — earn significant abnormal profits by trading during 8-K gaps.” One of the authors, Robert J. Jackson Jr., became an SEC commissioner in 2018 and helped inform the legislation.”
“In a 2019 paper, he writes that the Big Three spent minuscule amounts on stewardship. According to Morningstar, Vanguard employed 21 people to do the work of corporate oversight at a cost, by Bebchuk’s estimate, of about $6.3 million—a drop in the bucket considering Vanguard’s trillions of dollars under management.”
“Researchers at Harvard Law School and Tel Aviv University found that CEOs of the 1,500 largest US public companies donate “disproportionately more” to the Republican party and its candidates, with the median CEO directing 75% of his or her political contributions to Republicans. They also found that Republican-leaning CEOs lead companies with almost twice the asset value of companies led by Democratic-leaning executives.”
“In their book Pay Without Performance, Lucian Bebchuk and Jesse Fried argue that directors don’t actually care about linking pay to performance, but must “camouflage” this indifference from shareholders. The best form of compensation for fat cats is “stealth compensation”, and stock options seem to be a way to achieve that.”
“The study, by four economists at Harvard and Tel Aviv universities, looked at campaign contributions by 3,810 CEOs of S&P 1500 companies from 2000 through 2017. (Another 1,268 CEOs either didn’t contribute or did so in ways that the researchers couldn’t confidently identify, such as using nicknames or omitting company affiliations.)”
“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.