Jesse Fried

When Randall Stephenson joined 180 of his peers leading many of the richest U.S. companies in signing the Business Roundtable pledge on the “purpose of a corporation” in August 2019, the then-chief of AT&T Inc promised to look out for the interests of all the wireless carrier’s stakeholders, not just shareholders. Two months later, the Dallas-based company outlined a plan for cost reductions that also prioritized dividends and stock buybacks for shareholders, succumbing to pressure from $41 billion hedge fund Elliott Investment Management LP...The CEOs signed the pledge without legally binding their companies and largely without approval from their boards. COVID-19 stress-tested their commitments, as large swathes of the economy were forced to shut down. The pledge’s lack of detail gave signatories wide discretion in deciding how the pandemic pain would be spread among shareholders, employees and other stakeholders. “It’s a political signaling exercise that doesn’t mean very much,” said Harvard Law School professor Jesse Fried, who is on the research advisory council of Glass, Lewis + Co which advises investors over how to vote on corporate governance.

The final days of the Trump presidency are being marked by both a challenge to the US from within by the far right and the administration’s efforts to combat perceived external threats from China. Our Washington bureau reports the US commerce department has just finalised new rules to make it easier for the federal government to block Americans from importing technology from China and other US adversaries that it decides could threaten national security. The rules cover software, such as that used in critical infrastructure, and hardware that includes drones and surveillance cameras. It gives new powers to the commerce secretary to issue licences or block imports...In an FT opinion piece, Jesse Fried, Dane professor at Harvard Law School, says US interests are being sacrificed for anti-China grandstanding, citing the delisting of China’s three leading telcos. “The idea that barring purchases of these telecom companies’ stock will affect China’s military is laughable, but their US investors are not laughing,” he says. “The purchase bans and delistings have temporarily depressed prices as American stockholders run for the exits. Hong Kong and other foreign traders are buying up these shares on the cheap. American investors lose; China’s investors win — and its military continues to grow unimpeded.”

An op-ed by Jesse Fried: The China delistings have begun. This week, the New York Stock Exchange expelled three Chinese telecom companies to implement President Donald Trump’s November order that bars Americans from buying shares in “communist Chinese military companies”. Others might also be booted. Separately, the Holding Foreign Companies Accountable Act — signed into law by Mr Trump in December — will delist all China-based companies in three years if China does not co-operate with audit-oversight inspections.  Such moves grab headlines and allow politicians to express pique at China. Hence their appeal. But they are poor policy tools. Their main effect is to enrich Chinese insiders and investors at Americans’ expense. Here is why. Mr Trump’s order aims to slow the modernisation of China’s armed forces by depriving military-linked companies of US capital. But it is risible to think these companies need US equity investment. They have substantial assets and revenues, financial backing by China, and access to large pools of Asian capital.  Consider the three telecom companies — China Mobile, China Telecom, and China Unicom. Their assets total about $400bn, with annual revenues adding up to around $200bn. China owns about 70 per cent of each. They went public with dual listings in Hong Kong and New York around 2000, raising most of the money in Asia. If they ever need to raise equity capital again, non-US investors in Hong Kong can easily supply it.

Top executives at U.S. pharmaceutical company Novavax Inc aren’t waiting to see how well their COVID-19 vaccine works before they reap the financial rewards. Chief Executive Stanley Erck and three of his top lieutenants have sold roughly $46 million of company stock since the start of last year, according to a Reuters review of securities filings, capitalizing on a near 3,000% rally in Novavax shares fueled by investors betting on the success of the shot under development...Jesse Fried, a Harvard Law School professor and a member of the research advisory council at proxy advisor Glass, Lewis + Co., said he didn’t think it was inappropriate to reward executives during the drug development process. “It may be a once in a lifetime opportunity to lock in huge gains,” said Fried. “I don’t have a problem with them making a lot of money even though they don’t have a drug yet.” Investors will get to express their views on the stock sales this summer at Novavax’s annual shareholder meeting, where they will be asked to approve the company’s board of directors and executive compensation.

Outgoing US President Donald Trump has signed a bill calling for the delisting of foreign companies that don't adhere to the same accounting transparency standards that securities regulators impose on US public companies. The US Congress passed the Holding Foreign Corporation Accountability Act on Dec 2, which prohibits foreign companies, despite being listed in the US, from trading in the country if they do not comply with the accounting requirements of the US Securities and Exchange Commission for three consecutive years...If delisted, Chinese companies can remove American investors as their shareholders at a depressed buyout price, and then re-list on Chinese stock exchanges at a much loftier valuation. Jesse Fried, a law professor at Harvard University, argues that the HFCA Act aims to delist Chinese companies from the US exchanges at the expense of Americans holding shares in these companies－a cure likely worse than the disease. And the losses will be suffered by not only big institutional investors but also retail investors, who either directly own the Chinese companies' shares, or have retirement portfolios which include exchange-traded funds that cover these companies.

From a rundown office tower in downtown Shanghai, wedding dresses are sold to the US, wristwatches are shipped to France and cheap trainers are sent to customers in the UK. Dozens of websites and apps operate from the 23-floor Greenland business building, where employees sit in offices that are completely unmarked, apart from the words “Self Confidence” pasted to their glass doors. One man is behind all these ventures, 40-year-old Colin Zheng Huang, the billionaire founder, chairman and controlling shareholder of one of this year’s biggest sensations, the online shopping app Pinduoduo, whose shares have risen by 261 per cent since January...Mr Huang has only occasionally held shares in his own name in China. Even at Pinduoduo, he signed over all his shares in its Chinese business ahead of the company’s 2018 initial public offering to Chen Lei, Pinduoduo’s chief executive, who he studied with at the University of Wisconsin-Madison...Other Chinese tech executives, such as Pony Ma of Tencent or Robin Li of Baidu, have kept tight control of their onshore companies, which run their businesses and hold crucial licences. But Mr Huang holds no shares in Pinduoduo’s VIE. “Colin must really trust Chen Lei or it’s a scary situation, for both Colin and US investors,” said Jesse Fried, a corporate governance expert at Harvard Law School.

An op-ed by Jesse M. Fried and Charles C.Y. Wang: The European Commission recently released a sustainable corporate governance report claiming to find short-termism in EU listed firms, and proposing to solve the problem by shifting power from investors to other stakeholders. But the report’s findings are deeply flawed and its proposals would, perversely, reduce business sustainability in the EU. To try to demonstrate short-termism, the report points to rising levels of gross shareholder payouts—dividends and repurchases—and declining levels of investment. But the report mismeasures both. The actual data paint a very different picture. Start with capital flows. Oddly, the Commission’s report fails to account for equity issuances in measuring capital flows between firms and shareholders. But as we have shown, stock issuances in the EU are substantial, far exceeding repurchases. During 2010-2019, for example, gross shareholder payouts represented 65% of net income.  But equity issuances amounted to 27% of net income, so the ratio of net shareholder payouts to net income was only 38%. The findings about investment are also deeply flawed, as they rely on an incomplete sample. Our analysis of all EU-listed firms reveals that both capital expenditures (CAPEX) and research and development (R+D) actually increased during the period covered by the report, both in absolute terms and relative to revenues.  Moreover, cash balances grew by nearly 40% over the last decade, from €703 to €960 billion. Investment is clearly not limited by a lack of cash. Here’s the irony: while the report fails to show EU businesses are misgoverned, adopting the report’s proposals would actually put these businesses at risk.

Politically speaking, Senate Bill 945 was a perfect weapon for Sen. Kelly Loeffler (R-GA) in the midst of a hard-fought campaign. The legislation, dubbed the Holding Foreign Companies Accountable Act, would require foreign companies listed on U.S. stock exchanges to regularly open up their books to auditors and U.S. investors—or else get booted from those exchanges. The clear target of the legislation was China, where companies invoke state security laws to avoid sharing potentially revealing information about the full scope of Beijing’s economic influence...The expectation among analysts was that many of those companies would choose to leave rather than subject themselves to scrutiny. And those departures will hurt the exchanges, said Jesse Fried, a professor at Harvard Law School who specializes in corporate and securities law. Companies pay hefty yearly fees to be listed on exchanges like the NYSE. And the trading of shares and other financial products offered on exchanges commands fees, that while small, add up to a sizable take when considered collectively—especially for ICE’s NYSE, which processes $20 trillion worth of trades annually. The delisting of companies, says Fried, will also dry up IPOs from China. “They make up a large percentage of IPOs, which are an important source of fresh blood and boost the prestige of the exchanges as well as their revenues.” “It’s not surprising to me,” Fried added, “that they’d lobby heavily against the HFCA.” On Monday, the House ended up passing the HFCA, unanimously, setting up Trump to sign it into law before he leaves office in January.

President Donald Trump has a bill on his desk that could kick several Chinese companies off U.S. stock exchanges and inflame an already strained relationship between Washington and Beijing. The Holding Foreign Companies Accountable Act would force companies to give up their listings on Wall Street if they refuse to open their books to U.S. accounting regulators. It could also bar them from raising money from American investors. While the law technically applies to companies from any country, it is mainly targeting Chinese corporations...If the law is passed, it could affect companies like Alibaba, oil giant PetroChina, JD.com and more than 200 other names. Chinese companies listed on U.S. exchanges have a combined market capitalization of about $2.2 trillion, so a mass delisting would mean major movements of capital. Something that experts say could backfire on American investors. “If the bill becomes law, I think these companies are going to leave our exchanges and they’re going to leave on prices that are not going to make American investors better off,” said Jesse Fried, a professor of law at the Harvard Law School, in an interview on CNBC’s “Street Signs Asia.” ...A company like Alibaba leaving the United States also appeals to Beijing, because it reduces the role of U.S. regulators. “Having these companies trade in the United States gives rise to frictions with the Chinese authorities, because the U.S. authorities want to impose their rules on these companies,” Fried explained.

A bill that would delist Chinese companies not following American auditing rules after a buffer period looks set to be one of the last President Donald Trump signs into law in the coming days, after it unanimously passed the U.S. House of Representatives Wednesday. The Holding Foreign Companies Accountable Act, first introduced to the Senate by Democrat Chris Van Hollen and Republican John Kennedy, gives foreign companies listed in the U.S. three years to comply with the Public Accounting Oversight Board's audits before giving them the boot. The legislation also unanimously passed the Senate in May...This week, U.S.-listed Chinese real estate website Fang Holdings, announced it received a preliminary buying proposal from General Atlantic. Some experts in the U.S. fear the delisting solution, while well-intentioned, could harm American investors. "Beijing is unlikely to back down, leading to a tsunami of delistings and cheap take-privates that hurt current investors in China-based firms," Jesse Fried, a Harvard Law School professor, and Matthew Schoenfeld, a portfolio manager in Chicago, warned in a post published on the Harvard Law School Forum on Corporate Governance after the bill passed the Senate.

Lawmakers next week are likely to force Chinese companies with shares traded on American exchanges to finally comply with audit-oversight rules—or leave U.S. markets altogether. House leaders plan to consider a measure on Wednesday that would force Chinese firms such as Alibaba Group Holding Ltd. either to make the transition to getting an annual audit that is reviewed by U.S. regulators, or remove the shares from trading in the U.S. The House plans to vote under rules that limit debate and require a two-thirds majority for passage, according to an online notice posted Friday. The legislation, if it becomes law, would give Chinese companies and their auditors three years to comply with inspection requirements before they could be kicked off the New York Stock Exchange or Nasdaq Stock Market...Other Chinese companies may go private instead. The mechanics of that process would be relatively simple, with investors getting cash for their shares. But management teams could buy out American stockholders at a low share price, benefiting insiders at the expense of outside investors. “They could use the threat of an impending delisting to take the company private at a low price,” said Jesse Fried, a law professor at Harvard University. “Then this law would have made U.S. investors worse off.”

Even as the pandemic roils the American economy, compensation for US chief executives has largely held up as many corporations adjust their criteria for performance pay and bonuses during the crisis. Only about one-fifth Russell 3000 index of publicly traded firms have reduced CEO pay, according to data compiled by the Conference Board with the consultancies Semler Brossy and Esgauge. Corporate boards have opted for generous packages for executives at the top even when, in many cases, firms have been laying off workers. For CEOs, "it's heads I win, tails I don't lose," said Jesse Fried, a Harvard Law School professor specializing in executive compensation. Fried said boards of directors appear to be willing to make adjustments to compensation criteria when it results in a boost for CEOs, but rarely will cut pay. "Sometimes, there are good reasons for such adjustments: the need to retain talent, or better motivate managers," he said. "But there is a problem here: when firms experience positive shocks that have nothing to do with the CEO's own performance, the compensation committee never adjusts CEO pay downwards so that the CEO is not overcompensated."

Four Harvard professors have criticised a recent European Commission report that proposes reforms to encourage long-term strategic thinking. The commission’s report aims to tackle short-term management of companies and make them more sustainable. The wince-inducing conclusion of four Harvard academics is that the commission report contains “deep flaws”, “mistakenly conflates” key factors, fails to engage with alternative sources of evidence and “touts cures” backed by “little evidentiary support”. Some of the cures proposed by the report, the four argue, could be “counterproductive and costly”. Amounting to a brutal comment on the complexity of sustainability, The European Commission’s Sustainable Corporate Governance Report: A Critique, illustrates the difficulty governments may encounter when attempting to legislate for long-term strategic thinking in large listed companies. The European Commission’s report, written by the business advisory firm EY, concludes that far too many company directors across the EU continue to think short term instead of acting in the long-term interests of their stakeholders. It presents evidence and then sets about detailing the remedies. The Harvard professors—Mark Roe, Holger Spamann and Jesse Fried of Harvard Law School, and Charles Wang of the university’s business school—say it’s mostly wrong. First, the academics argue, the report confuses the definition of the problem. In focusing on the issue of “short-term” business thinking, they say the report “conflates” timeframes with problems stemming from “externalities” and the “distribution” of benefits. That’s three topics probably needing different cures, they say. “For policy analysis, however, the conflation is seriously debilitating. Real world companies will often fall short on all three dimensions, but cures for one may exacerbate another,” they write. Then there is the issue of flawed evidence of short-termism.

A new stock exchange backed by Silicon Valley heavyweights is opening for business Wednesday. The Long-Term Stock Exchange can now trade all U.S. exchange-listed stocks, and it will now start soliciting new listings from companies that commit to policies around diversity, sustainability and long-term planning...Silicon Valley entrepreneur and "Lean Startup" author Ries designed the exchange to reward founders and investors who are thinking years down the road. Quarterly reports are still an SEC regulation, but the LTSE requires companies who list on the exchange to agree to a set of five principles designed to promote long-term thinking, including which stakeholders are important, a company's environmental and community impact, a company's approach to diversity, how a company invests in its own employees, and how it rewards them for its long-term success. The exchange doesn't set strict quotas or standardized rules, like requiring a woman on the board, but companies interested in listing have to set up policies that adhere to the principles to be eligible to list... "I'm in favor of experimentation, innovation and more competition — so I applaud those trying to make the LTSE work," Harvard professor Jesse Fried told Marker in February. "However, I have trouble seeing why the LTSE is necessary. R+D spending by public firms is at a record high in absolute terms and relative to revenues. Long-term investors have done and continue to do very well."

This simple and important question does not get anywhere near the attention it deserves. And, just to be clear, I don’t mean are they worth $20 million in any moral sense. I am asking a simple economics question; does the typical CEO of a major company add $20 million of value to the company that employs them or could they hire someone at, say one-tenth of this price ($2 million a year) who would do just as much for the company’s bottom line? This matters not only because a thousand or so top executives of major corporations might be grossly overpaid. The excessive pay of CEOs has a huge impact on pay structures throughout the economy. If the CEO is getting $20 million it is likely the chief financial officer (CFO) and other top tier executives are getting in the neighborhood of $8-12 million. The third echelon may then be getting paid in the neighborhood of $2 million. And these pay structures carry over into other sectors...If we want to raise pay for the bottom in a big way, we have to drive down pay at the top. This would be a problem if we actually had to pay the CEOs $20 million to get them to perform well, from the standpoint of producing profits for the company or returns to shareholders, but the evidence is that we don’t. The best place to start on the evidence is the great book by Lucian Bebchuk and Jesse Fried, Pay Without Performance...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.

Last month, the United States Senate signed a bill that would increase regulation on Chinese companies listed on American exchanges. Listed companies will be required to prove that “they are not owned or controlled by a foreign government,” in addition to being subjected to three consecutive years of audit inspection by American regulators.  How did we get here, and how is this bill gaining rare bipartisan traction? The answer lies in investigative investment firm Muddy Waters.  According to Muddy Waters’s website, it produces three types of research reports: “Business fraud, accounting fraud, and fundamental problems.” It is known for publishing research on Chinese companies believed to be fraudulent...Muddy Waters more recently published research on Chinese online tutoring company GSX Techedu, accusing the company of fabricating online user traffic with bots. While GSX’s listing on the NYSE was not hit as hard, Muddy Waters’ due-diligence research sure gained its fair share of attention. This prompted a protectionist reaction from Congress; legislators were motivated by a desire to defend American investors. It received almost nonexistent legislative opposition...If Chinese firms are indeed in danger of being delisted from American exchanges, some experts note potential backfiring on Wall Street. Harvard Law Professor Jesse Fried predicts the transfer of these Chinese companies to exchanges in Hong Kong or the mainland as a response. He also expects a sharp fall in stock prices if Beijing disallows American inspections on Chinese-owned company audits–which could seriously hurt American investors just before these firms privatize. Fried also notes China’s desire to build up its domestic exchanges. Abandoning American trading soil could open up an opportunity to further develop local stock markets, increasing the attractiveness of the region. He says that China is therefore not desperate to keep listings in the U.S.

Moderna Inc. (NASDAQ:MRNA) is one of the biotech companies that are developing COVID-19 vaccines, and if the company wins, it could earn billions in stock appreciation and sales. However, if it doesn’t succeed, its value could decline. For now, the CEO of Moderna, Stephane Bancel is earning millions of dollars each month through the sales of stock, which has almost tripled in value on COVID-19 vaccine development progress. Since January to June 26, 2020, Bancel’s share sales, which include those held under his children’s trust and companies, have been around $21 million.  Also, Moderna Chief Medical Officer, Tal Zaks, sold most of his available shares in the company since January, earning almost $35 million. Bancel has set a schedule of the sale of his shares under the 10b5-1 plan before the COVID-19 crisis. These kind of stock-sale plans are meant to prevent insider trading from company executives. The plans prevent advance selling from executives who might have knowledge about bad news on the way or putting off selling of stock until when there is a positive announcement. On March 13, 2020, Zaks put in place a new plan which has seen him cash on almost all his interest. This was days before the biotech company announced the first-in-human dosing of its COVID-19 vaccine setting the stock on a 24% surge. Executive compensation experts indicated that these lucrative liquidations are a reflection of the unusual incentives for company executives to highlight development milestones for products that aren’t sold or approved. They stated that an optimistic company statement on COVID-19 vaccines can result in overpaying for stock or create false optimism among health officials and the public. Harvard Law School professor Jesse Fried stated that sales give the executives a rare opportunity to earn big on short-lived market optimism. Fried added that for company execs, this could be chance of profiting should the vaccine fail to work. Normally company executives have discretion of information, and as a result, they have the motivation to keep share prices up.

Biotech firm Moderna Inc could reap tens of billions of dollars in sales and stock appreciation if it wins the race for a COVID-19 vaccine. If it loses, the early-stage company’s value could crash. In the meantime, the firm’s chief executive is pocketing millions of dollars every month by selling shares that have tripled in price on news of Moderna’s development progress, a Reuters analysis of corporate filings shows. The sales - by CEO Stéphane Bancel, his childrens’ trust and companies he owns - amount to about $21 million between January 1 and June 26, including $6 million in May. The company’s chief medical officer, Tal Zaks, has cashed out the majority of his available stock and options, netting over $35 million since January, the filings show...Zaks sharply increased the pace of his sales with a new plan he put in place on March 13. That was three days before Moderna announced it had dosed the first human with a vaccine candidate, news that sent its stock price up 24% and signaled that future development milestones might push the shares higher. The sales give the firm’s executives an unusual opportunity to lock in big profits on what could be fleeting market optimism, said Jesse Fried, a Harvard Law School professor who wrote a book about executive compensation. “This may be their one shot at making a boatload of money if the vaccine doesn’t work out,” Fried said. Executives have wide discretion in releasing information, he said, and Moderna’s chiefs have a powerful motivation to “keep the stock price up.” Reuters found no evidence that Bancel, Zaks or Moderna has exaggerated the company’s vaccine progress.

Pinduoduo (Nasdaq: PDD) is one of the fastest-growing internet companies in the world, nearly surpassing Alibaba and JD in gross merchandise value, active users, and revenue growth in just five years, but is much less well-known to global investors. It sprinted past the trillion yuan GMV mark after less than five years, shattering the 14-year and 20-year records set by Alibaba and JD respectively...Founder and ex-CEO Huang Zheng, a former Googler and serial entrepreneur, became China’s second richest person with a net worth of $45.4 billion dollars, according to Forbes’ Real-Time Billionaires Rankings on June 22. He has expressed his vision for the company as “an exemplification of a multi-dimensional space, seamlessly integrating cyberspace and the physical space. It would be a combination of ‘Costco’ and ‘Disneyland.’” On July 1, Huang unexpectedly announced he would give away nearly 14% of his PDD holdings and step down as CEO. According to a regulatory filing, Huang reduced his personal holdings in PDD from 43.3% to 29.4% that day, worth roughly $14 billion. He still holds near-complete control over PDD, however, as his voting power was only reduced from 88.4% to 80.7%. Additionally, the CEO role in Chinese startups is ambiguous; stepping down from the office is unlikely to have a big impact on Huang’s control, as long as he holds on to his voting power and position as chairman. Also worth mentioning is that PDD does not have a CFO. It constitutes a red flag for the company, according to Harvard Law School corporate governance expert Jesse Fried: “That’s true even if a corporate controller serves as board chair and CEO, but not CFO. But what’s unusual and particularly worrisome here is that the controller is also effectively the CFO.” PDD claims it is looking for a CFO, but has not hired one for years.

As shares of biotech firm Moderna soared in May to record highs on news that its novel coronavirus vaccine showed promise in a clinical trial, the nation’s senior securities regulator was asked on CNBC about news reports that top executives had been selling their stock in the company. Jay Clayton, chairman of the Securities and Exchange Commission, responded that companies should avoid even the appearance of impropriety. “Why would you want to even raise the question that you were doing something that was inappropriate?” he said. Notwithstanding Clayton’s statement, there is little public evidence that company leaders slowed their stock selling. Now, corporate governance experts and some lawmakers say the trades could cast a shadow over Moderna, one of the biopharmaceutical industry’s most remarkable stories...Bloomberg in May estimated Bancel’s stake in the company as worth more than $2.2 billion, when measured at Moderna’s peak stock price. He has sold about $17 million worth of shares since Jan. 21, according to the Equilar analysis. Flagship’s 11 percent share of the company was worth $3.2 billion, Bloomberg said, and its sales of Moderna stock represented about 2 percent of that value. Given the large value of those holdings, the relatively small value of stock sales does not raise a major concern, said Jesse Fried, a Harvard Law School professor and expert on executive pay and insider trading. “You don’t want to be exploiting a crisis to make money, but the truth is that any company that is going to sell the vaccine is going to be making money on the crisis,” Fried said, “and that’s great, because we want to incentivize people to wake up early in the morning and stay in their labs late at night coming up with something that will help us.”

The most valuable company in the world never to have made a quarterly profit is on a stock market run.  Pinduoduo, which claims to have reinvented online shopping in China, has seen its share price rise by more than 130 per cent in the past three months, giving it a market value of $101bn, above that of Uber or Sony and twice that of Baidu or Foxconn.  Its founder and chief executive, Colin Zheng Huang, who earned his master’s from the University of Wisconsin-Madison and later worked at Google, is now China’s third-richest man, behind Jack Ma, the founder of Alibaba. He attributes Pinduoduo’s success to a magic formula of bargains and entertainment — he has said he wants his company to be both “Costco and Disneyland”...Pinduoduo has never had a formal chief financial officer despite its US listing. The company’s previous “vice-president of finance”, Tian Xu, resigned for personal reasons in April last year after just 10 months in the job. “Concentrating almost all corporate power in the hands of a single individual should raise a red flag, as it creates substantial corporate governance risk,” said Jesse Fried, a corporate governance expert at Harvard Law School. “That’s true even if a corporate controller serves as board chair and CEO, but not CFO. But what’s unusual and particularly worrisome here is that the controller is also effectively the CFO.”