Jesse Fried

In February 2017, the company behind the hit games Candy Crush and Call of Duty signaled optimism in its future and announced a $1 billion program to buy back its own shares — and investors responded by buying heavily. But few of them could know that as they were buying, insiders at the mobile gaming titan Activision Blizzard were selling, and taking home additional profits as the stock price jumped....While many executives have prearranged procedures to sell stock, these plans do not have to be publicly disclosed and can be changed, Jesse Fried, a Harvard Law School professor who testified about buybacks at congressional hearings in October, said in a phone interview. He also noted that some insiders are in a position to decide the timing of a buyback announcement, meaning it could be set ahead of a prearranged sale, putting them in a position to benefit from any price rise.

An article by Jesse Fried: In August, 181 chief executives, including Apple’s Tim Cook and JPMorgan’s Jamie Dimon, officially demoted their shareholders. They all signed a Business Roundtable statement in which they “commit to lead their companies for the benefit of all stakeholders — customers, employees, suppliers, communities and shareholders”. If you believe what the members of the influential business group say, equity holders will no longer be paramount. In reality, the Business Roundtable is merely paying lip service to broader social concerns. I predict that the pledge will not actually affect how they run their companies.

An op-ed by Jesse M. Fried and Steven Davidoff Solomon: The House of Representatives recently voted 398-17 to reject the global Boycott, Divestment, and Sanctions effort against Israel. Against this lopsided vote, Congresswoman Ilhan Omar offered a resolution defending BDS as an exercise of free speech by Americans. We strongly support free speech, but BDS supporters often use free speech talk to try to dodge accountability for their misbehavior.   Case in point: The American Studies Association’s Israel boycott. In 2013, the ASA’s leadership, known as the National Council, endorsed a resolution to cut ties with Israeli universities. The proposal was put to member vote. Turnout was low; only 20 percent voted in support. But the National Council declared victory anyway and, ever since, claims the resolution was adopted.

Should the government apply any standards to the quality of the companies that get to sell their shares to the public in an IPO? I realize the SEC has minimum requirements but when I consider some of the companies going public these days, I wonder whether those standards are high enough. ...A corporate governance expert at Harvard Law School, Jesse Fried, told CNN that having a couple within its C-suite could be the least of its problems. "[It] could be a plus or a minus. If it's a minus, it pales in comparison to the other risks. From investors' perspective, WeWork is associated with many business and governance risks."

As scrutiny over unfair Chinese business practices intensifies amid drawn out U.S.-China trade discussions, investors are debating another contentious issue: minority American shareholders “squeezed out” by U.S. listed Chinese companies. ... Further complicating the issue is the controlling share structure of the companies, which allows founders to retain voting control. Minority investors, who own less than a 50% stake in the company, have little say in the direction of the company and are left powerless to contest a low-ball buyout offer. While that itself is not unique to Chinese firms, they have largely escaped shareholder repercussions because they are domiciled in the Cayman Islands, where minority investors have less protection than in Delaware, where most U.S. companies are registered, according to Harvard Law Professor Jesse Fried. “The problem from the perspective of minority shareholders is the fact that all the defendants, the assets, the records, are all in the People’s Republic of China, which makes them unavailable,” Fried says. “It also drives up the cost of litigation.”

The legal battle over who’s at fault for the opioid crisis, which involves more than 1,600 lawsuits in federal and state courts, could get even more complicated soon, with OxyContin manufacturer Purdue Pharma reportedly considering filing for bankruptcy. ...The idea is to produce a resolution in a faster, more focused manner than would be the case in civil court. And even if plaintiffs only receive a fraction of what they are owed, the aim is to get everyone a piece of the pie. Otherwise, different plaintiffs might try to accelerate their own efforts so they can take the full amount owed to them, leaving little for other plaintiffs. “If [a company] has to pay cases as they were finalized, the plaintiff that had reached a resolution in its case earlier might get paid in full, but there would be nothing left for anyone else,” said Jesse Fried, a professor at Harvard Law School.

An op-ed by Jesse M. Fried and Charles C.Y. Wang: Senators Chuck Schumer of New York and Bernie Sanders of Vermont recently announced they would introduce legislation to prohibit a public firm from repurchasing its own stock, unless the firm first invests in employees and communities, including paying workers at least $15 per hour and offering “decent” pension and health benefits. Welcome to the newest form of virtue-signaling on Capitol Hill, in which Democratic senators demonstrate their concern for employees by proposing bills that severely restrict — or even outlaw — buybacks. The proposals are based on misleading measures of corporate capital flows, as well as on a profound misunderstanding of how the US economy works. If enacted, such bills could threaten not only the capital markets but also the workers and communities the senators claim to care about.

Long controversial, the practice by which public corporations use spare cash to buy back their own stock has turned into a policy flash point for both Democrats and Republicans. The basic allegation is that profits devoted to stock buybacks — $583 billion by S&P 500 companies during the first three quarters of 2018 — are profits not plowed back into new plants, equipment or higher wages. This is especially galling now, the critics argue, given that last year U.S. corporations got a huge tax cut, whose Republican authors advertised it as a boon to productivity and investment. ... Undoubtedly, stock buybacks favor corporate executives lucky enough to cash out, but to the extent this increases inequality, it mainly favors the very rich (CEOs) over the somewhat rich (shareholders). Opponents of buybacks commonly cite figures showing that they swallowed up 96 percent of S&P 500 profits between 2007 and 2016; research by Harvard professors Jesse M. Fried and Charles C.Y. Wang, however, suggests that the actual figure is more like 41.5 percent after accounting for new stock issuance and expenses for research and development. Contrary to the concerns about diverting investment funds, U.S. nonresidential investment and job creation have been rising for most of the past decade. When shareholders get cash for their stocks, the money doesn’t disappear; it flows through the economy, often as productive investment elsewhere.

An op-ed by Jesse M. Fried and Matthew Schoenfeld: While Washington and Beijing battle over trade, a worrisome cross-border financial link has escaped scrutiny: Americans now collectively own most of the public equity of China’s biggest tech companies, including Alibaba, Baidu and Weibo. This relationship is strange (imagine if the Chinese owned most of Amazon, Facebook and Google). It’s also extremely risky, at least for American investors.

The Republican-led Congress approved a massive corporate tax cut last year on the premise that executives would put the money saved to good use. Companies would build new factories. They would hire more workers. Buy new equipment. Get more efficient. Fund more research. Expand. ... Harvard law professor Jesse Fried has done extensive research on buybacks and supports them. Fried said the money spent on buybacks circulates back to workers because people reinvest the cash they get from selling shares to the company. “Shareholders take much of this cash, invest it in capital-hungry private firms, which use it to invest and hire workers,” Fried said. “And while public firms may grab the spotlight, smaller private firms employ twice as many workers and tend to be much more innovative, and can often put this cash to better use.”

There’s a quip attributed to LBJ that needs updating for 2020. “Whenever most senators look in a mirror, they see a president,” it goes. Elizabeth Warren’s mirror is a piece of legislation. The Massachusetts Democrat has introduced measures in recent months to transfer corporate governance to Washington and mandate social responsibility, by whatever definition it takes...“The [Accountable Capitalism] Act could also be expected to lead to additional distortions down the road,” writes Harvard Law professor Jessie Fried. Those distortions not only may be clumsy, but nefarious. “Once corporate law is federalized, Congress will be tempted to use its foot-hold in corporate governance to add more mandates and restrictions, ostensibly to address other ‘problems’ in corporate America, but actually to benefit key voting constituencies and campaign financiers.”

Much debate over the effectiveness of the 2017 tax overhaul has centered on corporate buybacks, and as November elections approach, that debate is sure to heat up....But a big chunk of repurchases among the S&P 500 is offset by new equity—$3.3 trillion worth between 2007 and 2016, versus $4.2 trillion in buybacks over the same period, according to a Sept. 4 paper from Harvard Law School professor Jesse M. Fried and Harvard Business School professor Charles C. Y. Wang. The S&P 500 may spend $1 trillion on repurchases in 2018, Fried told Bloomberg Tax, “but they’re probably going to have $500 billion to $600 billion in equity issuances.” The focus on the S&P 500, he said, ignores the many young, growing businesses that employ a much larger slice of the workforce and tend to issue far more shares than they’re paying out.

An op-ed by Jesse Fried. American president Donald Trump and Democratic senator Elizabeth Warren rarely see eye-to-eye. But both seem to believe that American public companies are overly focused on the short-term, and that the solution is to reduce investor power. Ms Warren this month introduced legislation — the Accountable Capitalism act— that would force all US-domiciled businesses with revenues exceeding $1bn to hand over at least 40 per cent of board seats to employees, and require directors to consider all stakeholders, not just shareholders. President Trump, meanwhile, asked the Securities and Exchange Commission to study the possibility of eliminating quarterly disclosure requirements for public companies. The apparent consensus around corporate short-termism is mistaken. It is powered by myths and misconceptions, not facts and careful analysis.

Elizabeth Warren has a big idea that challenges how the Democratic Party thinks about solving the problem of inequality. Instead of advocating for expensive new social programs like free college or health care, she’s introducing a bill Wednesday, the Accountable Capitalism Act, that would redistribute trillions of dollars from rich executives and shareholders to the middle class — without costing a dime...This is, of course, not an uncontested view. Jesse Fried and Charles Wang argued earlier this year that the real amount of buybacks is overstated by politicians who focus on gross share repurchases that are partially offset by new share issuances.

...Not all economic and financial analysts see buybacks as problematic. “Far from being starved of resources, S&P 500 companies are at near-peak levels of investment and have huge stockpiles of cash available for even more,” argue Jesse M. Fried and Charles C.Y. Wang in the Harvard Business Review. “The proportion of income available for investment that went to shareholders of the 500 over the past 10 years was a modest 41.5 percent—less than half the amount claimed by critics.” Plus, if buybacks merely transferred money from businesses to investors who then reallocated that money to other, more dynamic businesses, the overall effect on the economy might be muted.

U.S. companies are collecting record amounts of cash in their coffers, and many can’t think of anything better to do with it than buy back their stock. Here’s a better idea: Hand out some of those shares to rank-and-file employees...In practice, though, a sizable portion of the repurchased shares are reissued in the form of equity-based compensation, said Jesse Fried, a Harvard Law School professor who studies compensation and buybacks. Mr. Fried said shareholders may see aligning executive pay with stock performance as logical because senior leaders can do disproportionately more to affect a company’s performance. But giving out shares at the entry level where wages are set could be considered a handout. “Companies aren’t in the business of making charitable contributions with other people’s money,” he said.

An op-ed by Jesse M. Fried and Charles C.Y. Wang. There is a problem with share buybacks—but it isn’t the one many critics and legislators are obsessed with...The real problem is that buybacks, unlike dividends, can be used to systematically transfer value from shareholders to executives. Researchers have shown that executives opportunistically use repurchases to shrink the share count and thereby trigger earnings-per-share-based bonuses. Executives also use buybacks to create temporary additional demand for shares, nudging up the short-term stock price as executives unload equity. Finally, managers who know the stock is cheap use open-market repurchases to secretly buy back shares, boosting the value of their long-term equity. Although continuing public shareholders also profit from this indirect insider trading, selling public shareholders lose by a greater amount, reducing investor returns in aggregate.

So Warren Buffett is "delighted" that Apple Inc. has decided to buy back $100 billion worth of its own stock. And really, why wouldn't he be? As he pointed out Saturday during Berkshire Hathaway Inc.'s annual meeting, Berkshire owns somewhere around 5 percent of Apple. "And," he noted happily, "with the passage of a little time, I figure we might own 6 or 7 percent simply because they repurchased shares." He added, "I love the idea of having our 5 percent or whatever it may be grow to 6 or 7 percent without us having to lay out a dime." But how should the rest of us feel about this use of Apple's cash?...When I asked Jesse Fried, a professor at Harvard Law School and the author of a recent article defending share buybacks in the Harvard Business Review, why companies weren't using the money to give employees raises, he scoffed. "The idea that a for-profit company shares the wealth with its workers is pretty far-fetched," he said.

America’s 500 biggest public companies in 2018 are expected to distribute up to $600 billion or more through stock buybacks...These companies and others find themselves sitting on an Everest of cash, thanks to profits pouring in faster than they can find productive ways to spend it. The profits have built up in recent years, aided by low borrowing costs, rapidly advancing technology that has reduced overhead and boosted margins, and international trade that has allowed offshore production of goods at bargain prices...“Public firms started with $3.3 trillion in cash in 2007 and accumulated 50 percent more cash over the next decade, ending with $4.9 trillion in the bank,” said Harvard law professor Jesse Fried, who is part of a team that has done extensive research on the subject and that supports buybacks. “Buybacks cannot be starving firms of cash for investment if cash stockpiles are huge and rising. If buyback alarmists were correct, investment by public firms should be declining.”