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Lucian Bebchuk

  • Mark Roe and Lucian Bebchuk.

    Articles by Harvard Law faculty and alumni among top ten corporate and securities articles of 2021

    June 22, 2022

    Articles by four Harvard Law faculty were selected in an annual poll of corporate and securities law professors as three of the ten best corporate and securities articles of 2021.

  • Selling Twitter to Elon Musk Is Good for Investors. What About the Public?

    April 27, 2022

    Twitter is “the digital town square, where matters vital to the future of humanity are debated,” a triumphant Elon Musk proclaimed in announcing his deal to buy the social media platform. In other words, Twitter is no ordinary corporation. It serves as something akin to a public utility, a unique global means of communication. ... “Corporate leaders and practitioners have been increasingly pledging to pay close attention to the interests of stakeholders, such as customers or society in the case of Twitter, and not only shareholders,” said Lucian Bebchuk, a professor at Harvard Law School. Even so, a study of more than 100 recent $1 billion-plus deals that Mr. Bebchuk recently completed found that there had been little impact, with “large gains” for shareholders and corporate leaders and little or nothing for other constituencies.

  • Political proxies: conservative activists file record shareholder proposals

    March 28, 2022

    Conservative activists have lodged a record number of shareholder proposals at US annual meetings this year, setting up a highly politicised proxy season as they take advantage of new regulatory guidelines and borrow topics and tactics from their liberal foes. ... Lucian Bebchuk, a Harvard law professor who studies shareholder resolutions, said that sharply worded proposals sometimes draw attention but their impact may be limited. “The pressure [chief executives] are facing is not so much the number of proposals but what percentage of support they think the proposals will get,” he said. “When they think a proposal will not get many votes, it is not a source of pressure that would lead them to do anything different.”

  • Is it time to separate ‘E’ from ‘S’ and ‘G?

    March 28, 2022

    Back in the 1990s, when I was a reporter in Japan, one of the most prescient commentators about financial trends I knew was Chris Wood, the veteran reporter-turned-stock-market-analyst, who predicted the collapse of the Japanese bubble, and now writes perceptively about global markets for Jefferies. ... But the rise of these ESG-linked bonus metrics can be dangerous to shareholders, employees and the environment, according to research published this month by Lucian Bebchuk and Roberto Tallarita at Harvard Law School. Too often, these new ESG-linked bonuses are vague, opaque and “can be exploited by self-interested CEOs to inflate their pay-offs, with little or no accountability for actual performance,” they said.

  • The SEC Wants to Stop Activism

    March 25, 2022

    The way activist investing works in the U.S. is generally that an activist investor quietly buys up a chunk of a company’s stock, announces that she owns the stock, and goes to the company’s managers asking them to change something about their strategy or operations. Sometimes the managers agree, there is a productive conversation, the activist helps the company improve, the stock goes up and eventually the activist sells at a profit. Sometimes the managers disagree, and the activist tries to pressure them into doing what she wants. She might wage a public campaign, writing open letters explaining her position. She might talk to other shareholders — big institutional holders who don’t wage activist campaigns themselves but who own a lot of stock — to persuade them that she is right. ... And here is a comment letter from Harvard Law School professor Lucian Bebchuk: For hedge fund activists that accumulate economic positions in a target with significant market value through equity swaps, the Equity Swap Rule would lead to disclosure of the activist’s potential interest in engaging with the company at a much earlier time and stage of accumulation than under current rules. Disclosure at such an early stage would curtail the ability of such activists to accumulate a position prior to their initial disclosure. Such early disclosure would also enable management to start engaging in defensive actions much earlier than under current rules. Altogether, for such activists, the Equity Swap Rule would substantially reduce their payoffs and considerably discourage their activities.

  • The Flaws and Limits of ESG-Based Compensation

    March 14, 2022

    An article co-written by Lucian Bebchuk: Companies have increasingly pledged support for stakeholder capitalism, but these pledges have been met with significant skepticism by some observers. The main criticism, which we have laid out in previous work, is that corporate leaders lack incentives to take into account the interests of employees, suppliers, the environment, or other stakeholders; therefore, relying on managerial discretion will not create value for stakeholders.

  • Is Stakeholder Capitalism Real Or Not?: The Natural Experiment Of COVID-19

    February 25, 2022

    Harvard Law School Professor Lucian Bebchuk is an interesting and impressive individual. He grew up in Israel and there simultaneously obtained a degree in mathematics and economics from Haifa University and another one in law from the Tel-Aviv School of Law. He came to Harvard in the late 1970s and has stayed there ever since, first getting a master’s and then a doctorate in law from Harvard Law School. He joined its faculty in 1986 and obtained tenure just two years after that. Perhaps most impressively, and somewhat counterintuitively, he got a Ph. D. in economics from Harvard in 1993. While a full time law school professor. He is now the James Barr Ames Professor of Law, Economics, and Finance, and Director of the Program on Corporate Governance. Bebchuk is clearly a very smart guy!

  • How the Covid-19 Pandemic Put Corporate Stakeholder Promises to the Test

    February 24, 2022

    An article co-written by Lucian Bebchuk: Prior to the outbreak of Covid-19, corporate leaders pledged to look after all stakeholders, not just deliver value to shareholders. Did they live up to these promises? A new empirical study examines more than 100 major public company acquisitions that were announced during the pandemic and shows that corporate leaders failed to look after stakeholder interests.

  • Shareholders Reign Supreme Despite CEO Promises to Society

    February 10, 2022

    Chief executives love to talk about “stakeholder capitalism.” But when they face a final choice to sell a company and divide the spoils between workers and shareholders, guess who gets the money? You got it: Shareholders are the winners—along with the executives themselves. An analysis of takeover deals during the pandemic by academics at Harvard Law School reveals the priorities of America’s corporate leaders. In public, they talk about the importance of employees, communities, the environment and other stakeholders in the business. In private, they negotiate deals they know will lead to job losses and closed offices but don’t demand compensation for the losers. ... “The enthusiasm for the Business Roundtable and Davos visions was because people can read into them whatever they like,” says Prof. Lucian Bebchuk, director of Harvard Law School’s program on corporate governance and co-author of the research. “They avoid the difficult trade-off questions.”

  • Why Top Management Must Change Fundamental Assumptions

    November 29, 2021

    ... Yet this game plan is still rare: Reichheld cites a recent Bain & Company survey: “Only 10% of business leaders believe that the primary purpose of their firm is to maximize value for customers. Many companies still operate in the old-school financial capitalist mindset in which maximizing shareholder value is front and center.” ...According to studies made by Harvard Law Professor Lucian Bebchuk and his colleagues, there is no evidence that the firms in question have made any change in their actions since the 2019 declaration. Bebchuk concludes that the 2019 BRT declaration was “only for show.” In effect, we are dealing with a smokescreen: the goal of many major corporations has become undiscussable.

  • The E in ESG Means Cancelling the S and the G

    October 19, 2021

    Price rises—they keep on coming. Even before the recent surge in energy prices, companies had been warning about inflationary pressures in their supply chains.  ... Government climate policies, such as biofuel mandates, help drive up the cost of energy and food. So do non-commercial decisions made by business and Wall Street. In his 1970 essay on the social responsibility of business, Milton Friedman wrote that when a corporate executive makes expenditures on pollution reduction beyond what’s in the best interests of the corporation or required by law, that executive is, in effect, imposing taxes and deciding how the tax proceeds should be spent. In their critique of the doctrine of stakeholderism as propounded by the Business Roundtable in its August 2019 statement of corporate purpose, Harvard Law School’s Lucian Bebchuk and Roberto Tallarita note the Roundtable’s denial of the reality that the interests of shareholders and stakeholders can clash. Freeing directors from shareholder accountability puts directors in the position of adjudicating these trade-offs and elevates them to the role of social planner—“the ideal benevolent entity conjured up by economists to model socially optimal outcomes.”

  • The $US10 trillion man – how Larry Fink became king of Wall Street

    October 15, 2021

    BlackRock’s co-founder and CEO has created a business with unprecedented power. So what, exactly, did it take for him to get this far? A new book explains all. ... Lucian Bebchuk of Harvard Law School and Scott Hirst of Boston University estimated in a 2019 paper titled The Spectre of the Giant Three that the trio’s combined average stakes in the 500 biggest listed US companies had vaulted from about 5 per cent in 1998 to over 20 per cent. Their real power is even greater – and growing. Given that many shareholders don’t actually bother to vote at annual meetings, BlackRock, Vanguard and State Street now account for about a quarter of all votes cast on average, which will rise to 41 per cent over the next two decades, the academics estimated. John Coates, a Harvard Law professor, has called this rising concentration of economic power “a legitimacy and accountability issue of the first order”.

  • Can Any Board Member Ever Be Truly Independent?

    October 8, 2021

    Both the NYSE and Nasdaq require the boards of listed companies to have a majority of independent directors and audit committees that are composed solely of independent board members. But there is an argument about what makes a board member independent. Technically, independence means that the director has no “material relationship” to the business that could present a conflict of interest in performing their duty to represent all stakeholders. Those relationships include being an employee of the company or a partner of the company (distributor, supplier, etc.). ... Similarly, Lucian Bebchuk, the James Barr Ames Professor of Law, Economics and Finance and director of the program on corporate governance at Harvard Law School, says that directors nominated by institutional investors may bow to the goals of those shareholders. “In companies with a controlling shareholder, our corporate law system places excessive reliance on the mechanism of nominally independent directors,” Bebchuk says. “It is important to recognize that effective oversight requires alternative or supplemental mechanisms.” In order to distance a director from relying on management or institutional investors to get or keep a seat on the boards, Bebchuk proposes “enhanced independence.”

  • SEC proposes new rule mandating funds disclose votes on executive pay

    September 29, 2021

    The Securities and Exchange Commission voted Wednesday to propose several new rules related to institutional investment funds’ votes on proxy proposals, including whether they support companies’ compensation packages for their top executives. ...Voting behavior of large investment vehicles like index funds and exchange-traded funds has come into greater focus in recent years as passive investing has grown in popularity. Researchers Lucian Bebchuk and Scott Hirst recently estimated that by the end of 2019, the largest three index fund managers — BlackRock Inc. BLK, -0.46%, State Street Global Advisors STT, -0.31% and the Vanguard Group owned on average 21.4% of the shares of S&P 500 index corporations. “The stewardship decisions of index fund managers — how they monitor, vote and engage with their portfolio companies — are likely to have a profound impact on governance and the performance of public companies and the economy,” they wrote in a February working paper.

  • How To Persuade Even Major Firms To Change

    September 13, 2021

    In any large firm today, top management usually includes two groups. One group is committed transform the firm digitally, as a key to survival, let alone thrival. The other group treats the need for digital transformation as a sideshow of the status quo...But within the firm, little has changed, as researchers like Harvard Law professor, Lucian Bebchuk, have noted.

  • ‘Stakeholder Capitalism’ a Sham? Unfortunately Not

    August 31, 2021

    A week or so ago, Lucian A. Bebchuk and Roberto Tallarita wrote an article for the Wall Street Journal in which they complained that the notorious (my description, not theirs) redefinition of the purpose of a corporation contained in a statement by the Business Roundtable (BRT) in August 2019 was something of a sham. By introducing the new definition, the BRT abandoned its earlier support for shareholder primacy — the idea that a company should be run, above all, for the benefit, shockingly, of the shareholders who own it — in favor of the assertion that a company should be managed in a way that takes proper account of the interests of various “stakeholders” of which shareholders were only one category. Despite this, Bebchuk and Tallarita maintained that very little had really changed: "Corporate leaders have been busy presenting themselves as guardians of the interests of “stakeholders,” such as customers, employees, suppliers and communities as well as shareholders. Our recent research, however, casts serious doubt on whether corporations are matching the talk with action . . .We’ve identified almost 100 signatory companies that updated their corporate governance guidelines by the end of 2020. We found that the companies that made updates generally didn’t add any language that elevates the status of stakeholders, and most of them reaffirmed governance principles supporting shareholder primacy."

  • Pledge on corporate values turns out to be mere PR

    August 30, 2021

    When 181 CEOs pledged to run their companies to benefit customers, workers and communities as well as shareholders, it was hailed as a breakthrough moment for capitalism. Two years later, two Harvard Law School researchers find that the companies have done little to act on the pledge. Most of their key documents, such as bylaws and corporate governance guidelines, still emphasize running the company for the benefit of shareholders.... The two Harvard Law professors, Lucian Bebchuk and Roberto Tallarita, found only two companies that place other stakeholders on a par with shareholders. Both firms, Cummins and International Paper, had their guidelines in place before the Business Roundtable statement was written.

  • Stakeholder Capitalism Is Slowly Advancing

    August 30, 2021

    Lucian Bebchuk and Roberto Tallarita’s op-ed “‘Stakeholder’ Talk Proves Empty Again” (Aug. 19) is probably correct, as far as it goes. On its face, the Business Roundtable’s statement is far from having been meaningfully implemented. Market pressures from investors to sustain profits are substantial. On the other hand, progress, while glacial, is occurring and the Business Roundtable’s statement may have been a pull. Institutional investors are now rattling the cage in favor of recognizing stakeholder values such as wages, working conditions and environment. Major investors are now with policy positions of their own, making it clear that they will, in the future, take account of what companies may or may not be doing regarding stakeholders. Public pressure from consumers to rectify some of the problems and inequalities of the past is also mounting.

  • Germany offers a cautionary tale for Biden’s pro-labor agenda

    May 20, 2021

    President Biden embraced a pro-labor stance during his campaign. He has underlined his ambition to support workers’ interests by nominating as his future labor secretary Boston Mayor Marty Walsh, who was strongly backed by the AFL-CIO and major labor unions. While there should be no disagreements with the goal of improving the situation of the labor force in the United States, there could be some merit in taking a closer look at possible side effects...A Harvard Law School paper published by professors Lucian Bebchuk and Roberto Tallarita warned of the consequences and showed that such stakeholderism would impose substantial costs both on stakeholders and society. It would also hurt the owners—namely the investors. This is exactly the result we see in Germany. Only 16% of Germans own equity-based investments, and only 7% directly own stocks; in the U.S., in contrast, 55% of people own stocks (either directly or through instruments like mutual funds).

  • Why Business Must Shift From Value Extraction To Value Creation

    May 3, 2021

    As income inequality steadily deteriorates, and President Biden explores one-time fixes like increasing corporate taxes, more durable solutions are needed to deal the root cause of growing inequality: the goal of big business. That, in turn, would require understanding how most business remains committed to extracting value from the economy, rather than the more profitable, more productive, more worthwhile path of value creation...Criticism of big business became so intense that in August 2019 major corporations issued a declaration through the Business Round Table that maximizing shareholder value was no longer the goal of business and vowed to help all stakeholders. However, in the period since the BRT declaration was issued, Harvard Law Professor Lucian Bebchuk and his colleagues have not detected significant change in corporate behavior. Few of the signatory CEOs obtained the approval of their boards to sign the announcement. Massive share buybacks that benefit shareholders, particularly executives, continue to flourish, even where there has been a collapse in profits. Bebchuk concludes that the BRT statement was “mostly for show.”

  • Langdell Hall

    More than 1,200 empirical studies apply an index developed by HLS Professors Bebchuk, Cohen and Ferrell

    March 11, 2021

    "What Matters in Corporate Governance," a 2009 study by Harvard Law Professors Lucian Bebchuk, Alma Cohen, and Allen Ferrell continues to have enormous influence on present-day research

  • On the moral responsibility of business: An alternative view

    March 1, 2021

    In November last year, the largest business and professional associations in the Philippines — collectively called the Philippine Business Group (PBG which includes the Management Association of the Philippines, sponsor of this column) signed a “Covenant for Shared Prosperity” by which it pledged to address the universal issues of economic and social inequality and non-inclusivity by ensuring “… ethical wealth creation and the sharing of prosperity with all their stakeholders.” ... There have been serious objectors to the idea of Stakeholder Capitalism, notably from academe. According to Harvard Law School Professor Lucien Bebchuk, the Business Roundtable’s statement that companies have responsibilities to society equal to their responsibilities to shareholders is “largely cosmetic,” adding that “… when CEOs and other corporate leaders face choices, they do not give independent weight to the interests of stakeholders.”

  • Why Management Is A Branch Of Narrative Economics

    February 22, 2021

    We live in an age of competing economic narratives. President Biden tells the story that a $1.9 trillion stimulus bill will help the economy, while Republicans tell the story that the bill is too big and will cause inflation. As the Nobel-prize winning economist, Robert Shiller, points out his wonderful book, Narrative Economics(Yale, 2019), mega-narratives drive public discourse and our lives. Nowhere is this more true than in management, which for the last hundred years has been driven by competing mega-narratives...In August 2019, big-business CEOs could no longer take the political heat. Shareholder value was renounced by the CEOs of more than 200 of the largest corporations who signed a new formal declaration of the BRT. The new declaration foreshadowed a supposed return to an older mega-narrative stakeholder capitalism—an approach that had already been tried and discredited in the mid-20th century. In the period since the 2019 declaration was issued, research by Harvard Law Professor Lucian Bebchuk and his colleagues have been unable to detect evidence of any significant change in corporate behavior. Few of the signatory CEOs obtained the approval of their boards to sign the announcement. Bebchukconcludes that shareholder value remains the guiding narrative for most big business. In effect, the declaration was done “mostly for show.” Shareholder value is still the dominant mega-narrative of American business.

  • Is There Really a Conflict Between Better Corporate Governance and More Competitive Product Markets?

    February 5, 2021

    The common ownership hypothesis suggests that when large investors own shares in more than one firm within the same industry, those firms may have reduced incentives to compete. Firms can soften competition by raising prices, reducing investment, innovating less, or limiting entry into new markets. Empirical contributions document the growing importance of common ownership and provide evidence to support the theory...Our analysis clarifies widespread misconceptions about the mechanism of common ownership. For example, in a series of award-winning papers, Lucian A. Bebchuk, Alma Cohen, and Scott Hirst have argued that because common owners such as index fund managers have “incentives, which would lead them to limit intervention with their portfolio companies […] it is implausible to expect that index fund managers would seek to facilitate significant anticompetitive behavior.” Our framework explains why common owners have an incentive to remain passive and not to intervene with portfolio companies, so we agree with the first part of that statement. However, it does not follow that this passivity makes the anticompetitive effects of common ownership implausible. In fact, it is precisely the lack of intervention when setting high-powered incentives for top managers or “excessively deferential treatment of managers,” as Bebchuk and Hirst call it that leads to less competitive product market behavior.

  • Riding The ESG Juggernaut: Whose Business Is It, Anyway?

    February 4, 2021

    The new Administration’s commitment to Environmental, Social, and Governance (”ESG”) issues begs the question of a business’s end goals. We deserve an open and honest debate. Will we get one? What should be a business’s end goal? Over the last 50 years, two competing approaches have duked it out...In August 2019, a Business Roundtable press release proudly announced that the “Business Roundtable Redefines the Purpose of a Corporation to Promote ‘An Economy That Serves All Americans.’” Delaware law notwithstanding, was this game, set, and match for High Idealism? Not exactly. In a Wall Street Journal Op/Ed, Harvard Law School professor Lucian Bebchuk challenged the sincerity of Roundtable statements. He noted that of the approximately 184 global companies whose CEOs had signed or endorsed this statement, only one company had had the statement approved by the Board of Directors, a corporation’s highest policy-making body. The Roundtable’s announcement was even inconsistent on its face. Roundtable CEOs run global companies: if they really wanted to move from serving shareholders to serving stakeholders, why limit the benefits to “All Americans”?

  • Elon Musk once argued that Tesla should be a private company but Wall Street has proved him wrong

    February 4, 2021

    What if Tesla founder and CEO Elon Musk had taken the company private in 2018, as he threatened to do? This question about Tesla TSLA, -1.18% is of more than just historical interest. It goes to the heart of the debate over whether Wall Street’s obsession with short-term results is harmful to long-term performance...At the time, Musk suggested that Tesla’s private valuation would be about $70 billion. While we’ll never know how Tesla would have fared had Musk followed through, it’s difficult to imagine that it would have done better than it has as a public company...Also consider the argument made in the current issue of Harvard Business Review, by Lucian Bebchuk, professor of law, economics, and finance at Harvard Law School and director of its Program on Corporate Governance. He writes: “Over the past two decades, as dire warnings regarding short-termism have proliferated, growth companies — whose value largely reflects expectations about their payoff in the long term —have enjoyed substantial appreciation in value… [They are] trading at high price/earnings ratios, reflecting the willingness of the markets to attach great value to companies on the basis of their future prospects rather than their current earnings.” It would be just the opposite, of course, “if investors were systematically underestimating long-term prospects.”

  • Business School Briefing: respect staff, graduates’ progress, gender divide

    February 3, 2021

    Welcome to Business School Briefing. We offer you insights from Andrew Hill and Jonathan Moules, and the pick of top stories being read in business schools...Last week I asked what questions you'd pose to board directors as part of an evaluation. Sandra Pickering, inspired by Gerry Brown, author of Making a Difference, about being an independent director, suggests asking "What is the most toxic belief in your boardroom?" as a way of working out whether the board is even able to speak out about dangerous issues.In further reading, the always provocative Lucian Bebchuk's Harvard Business Review essay about what he says are the overstated perils of short-termism: "Those who are concerned about short-termism should focus on reforming [executive] pay arrangements before considering the adoption of measures that would insulate managers and bring about such costs," he argues.

  • Why Companies Must Learn To Discuss The Undiscussable

    February 1, 2021

    It is a curious fact about the human race, which often lays claim to rationality, that some of the most important issues in life are undiscussable. It is less well known that major corporations face a similar issue concerning their most important question, namely what is their goal? In 1997, big business declared through the Business Round Table (BRT) that their goal was to maximize shareholder value. But 22 years later, in August 2019, in the face of increasingly severe critiques, more than 200 CEOs from major corporations signed a new BRT declaration renouncing the goal of shareholder value and embracing stakeholder capitalism. According to the new declaration, these firms plan to be pursuing the interests of all the stakeholders. Yet, according to studies made by Harvard Law Professor Lucian Bebchuk and his colleagues, there is no evidence that the firms in question have made any change in their actions since the 2019 declaration. Bebchuk concludes that the 2019 BRT declaration was “only for show.” In effect, we are dealing with a smokescreen: the goal of a major corporation has become undiscussable.

  • Your Five Leadership Moves To Get To 21st Century Management

    January 4, 2021

    The transition to 21st century leadership and management in a large organization isn’t easy, simple, or quick. In part, that’s because change also entails overcoming unspoken attachments to the current way of doing things. In part, it’s because even the best of current management fixes generally fail. It’s also because the necessary shifts are often the opposite of what made firms successful in the 20th century. The transition will eventually put almost everything currently being done in question, and requiring immense relearning by almost everyone...In considering whether to proceed at this time, you will need to assess the size and intensity of battles that may lie ahead. Of particular importance is any inconsistency between the goal of the 21st century leadership and management—an obsession with enhancing customer value above all else—and the way the firm is currently being run. In a public company, the probability of such an inconsistency is high, given priority that many public firms continue to give to maximizing shareholder value as reflected in the current stock price, despite the Business Round Table declaration to the contrary on August 2019. As Harvard Law professor Lucian Bebchuk has pointed out, the declaration has not led to any discernible substantive change in corporate behavior and appears to have been done “mostly for show.”

  • Debating stakeholder capitalism

    December 17, 2020

    The COVID-19 crisis has intensified discussions about corporate purpose and corporate duties to stakeholders. Against this backdrop, the European Corporate Governance Institute and the London Business School Centre for Corporate Governance hosted a virtual debate on stakeholder capitalism between Harvard Law School Professor Lucian Bebchuk LL.M. ’80 S.J.D. ’84 and London Business School Professor Alex Edmans. Held earlier this month, the debate, titled “Stakeholder Capitalism: The Case For and Against,” was moderated by Gillian Tett, chair of the editorial board and editor-at-large of the Financial Times. Stakeholder capitalism is the idea that companies should look to serve all stakeholders, not just shareholders but also customers, employees, suppliers, and local communities. Shareholder capitalism, on the other hand, is the view that companies should focus exclusively on serving in the interest of shareholders, the owners of the stock of the company...Bebchuk, the James Barr Ames Professor of Law, Economics, and finance and director of the Program on Corporate Governance at Harvard Law School, argued that relying on corporate leaders to serve goals other than shareholder value should not be expected to provide material benefits to stakeholders and should be rejected, including by those who deeply care about stakeholder interests, as a way to ensure that capitalism works for stakeholders.

  • Bebchuk’s Study of Index Funds Wins IRRC Institute Prize

    Debating stakeholder capitalism

    December 16, 2020

    Against the backdrop of the COVID-19 crisis intensifying discussions about corporate purpose duties to stakeholders, the European Corporate Governance Institute and the London Business School Centre for Corporate Governance recently hosted a virtual debate on stakeholder capitalism between Harvard Law School Professor Lucian Bebchuk LL.M. ’80 S.J.D. ’84 and London Business School Professor Alex Edmans.

  • The Business Roundtable’s Statement on Corporate Purpose One Year Later

    December 15, 2020

    It’s been a little over a year since the Business Roundtable (BRT) issued its much-ballyhooed statement on corporate purpose. Many of the commentators who welcomed it rapturously predicted the statement would usher in a new era of corporate social responsibility (CSR), with corporations tackling a range of social problems such as climate change and racism. After a year in which society and business have faced unprecedented problems, it seems fair to ask whether corporations have really embraced the BRT’s vision of corporate purpose...Further evidence that the BRT statement was mostly greenwashing comes from surveys by legal scholars Lucian Bebchuk and Roberto Tallarita. They found that most CEOs who signed the statement had not gotten approval to do so from their companies’ board of directors, which one would expect in the event of a major shift in corporate policy and purpose. They also found that the corporate governance guidelines of a sample of signatory firms had not been modified to reflect the statement’s emphasis on social responsibility and stakeholders. To the contrary, as they pointed out, “explicit endorsements of shareholder primacy can be found in the corporate governance guidelines of the two companies whose CEOs played a key leadership role in the BRT’s adoption of its statement.” ... In an open letter to the CEOs of the signatory firms, management academic Bob Eccles pointed out that the logical next step would have been for their boards to “publish a statement explaining the specific purpose of your company,” but “not a single one of your boards has published such a statement.” Bebchukand Tallarita’s argument that boards are not even talking the talk, let alone walking the walk, remains valid.

  • Seven Telltale Signs That Your Agile Journey Has Stalled

    December 10, 2020

    More than 90% of CEOs give high priority to being agile, according to surveys by Deloitte and McKinsey and most large firms are exploring business agility, at least in their IT departments. Yet these efforts are often limited in scope, and most of the potential gains are unrealized, owing to the lack of agility elsewhere in the firm...Some ask what would it take to put the life back into it? What would it take to make the whole firm Agile? To use a baseball analogy, what would it take to get from being “stranded at first or second base” to “reach home plate”? This three-part article will explore seven central questions...To enable ideas to come from anywhere, the dynamic of the firm has to take the form a horizontal network of competence, rather than a vertical hierarchy of authority. These three elements—customer, teams and network—constitute the core principles—the three laws—of 21st century management. These principles reflect what the management does, not just what it says. Often what management declares for public consumption is merely window dressing. For instance, in August 2019, more than 200 chief executives of major corporations signed a statement of the Business Round Table (BRT) on the purpose of a corporation and publicly renounced the goal of maximizing shareholder value. However, analysts have found little change in corporate behavior in the year since. Harvard law professor Lucian Bebchuk concludes that the BRT statement was signed “mostly for show.” Despite the highly publicized BRT announcement, 20thCentury management principles in these firms remain unchanged and continue to drive corporate behavior.

  • Active managers see value in these 3 company practices but indexers hate them. Who’s right?

    December 1, 2020

    Every corporation is unique. It follows that governance arrangements should be tailored to suit. Yet many shareholders, especially indexers, roundly condemn certain governance practices as if one size fits all. Three corporate practices illustrate this: combining the roles of chairman and chief executive; staggered director terms, and classes of stock with different voting rights. Each is derided for valid abstract reasons, but all persist because they can be suitable at particular companies...Why might indexers and other critics universally condemn corporate practices that quality shareholders accept and that may enhance a company’s performance? Different business models may explain: indexers address the market as a whole while quality shareholders focus on specific companies. Indexers prescribe policies expected to benefit the overall market, on average, not particular businesses. The size and reach of indexers — commanding around one-third of public equity — give them outsized influence, and a wide critical following. But they have small stewardship staffs and minuscule budgets to address particular companies, according to research led by Harvard Law School’s Lucian Bebchuk — no more than 45 people covering  well more than 3,000 U.S. companies.

  • There’s an Oligopoly in Asset Management. This Researcher Says It Should Be Broken Up.

    December 1, 2020

    Jack Bogle championed index funds as a way to democratize investments. Now the three biggest index fund managers pose a new threat, a former Federal Reserve staffer argues...According to the paper, the stock holdings of BlackRock, Vanguard, and State Street give them “outsized influence” in corporate elections and reward anti-competitive behavior among companies in a given sector...Even though BlackRock and the other firms don’t own the underlying assets that they manage, they still control many activities, including voting shares, Steele said. According to the paper, BlackRock, Vanguard, and State Street manage over $15 trillion in global assets, which is equal to approximately three-quarters of the U.S. gross domestic product. The asset management industry has also grown more concentrated over the last decade, with these three firms attracting 82 percent of all investor money over the time period. BlackRock, State Street, and Vanguard also control between 73 percent and 80 percent of the exchange-traded fund market, according to Steele. That dominance means that when combined, the “Big Three” are the largest shareholder of 88 percent of firms in the S&P 500. This concentrated ownership has several potential consequences, according to Steele. One example is the rise in stock buybacks. Research from Lucian A. Bebchuk and Scott Hirst has found that companies with a high amount of index fund ownership have increased stock buybacks more rapidly than peers with more diverse ownership.

  • Indexers blast these 3 corporate decisions but they actually can boost a company’s — and shareholders’ — results

    November 19, 2020

    Every corporation is unique. It follows that governance arrangements should be tailored to suit. Yet many shareholders, especially indexers, roundly condemn certain governance practices as if one size fits all. Three corporate practices illustrate this: combining the roles of chairman and chief executive; staggered director terms, and classes of stock with different voting rights. Each is derided for valid abstract reasons, but all persist because they can be suitable at particular companies...Why might indexers and other critics universally condemn corporate practices that quality shareholders accept and that may enhance a company’s performance? Different business models may explain: indexers address the market as a whole while quality shareholders focus on specific companies. Indexers prescribe policies expected to benefit the overall market, on average, not particular businesses. The size and reach of indexers — commanding around one-third of public equity — give them outsized influence, and a wide critical following. But they have small stewardship staffs and minuscule budgets to address particular companies, according to research led by Harvard Law School’s Lucian Bebchuk — no more than 45 people covering  well more than 3,000 U.S. companies.

  • Stewards’ inquiry

    November 17, 2020

    Robert Fleming has a claim to be a pioneer of active asset management. His First Scottish investment trust pledged to invest mostly in American securities, with choices informed by on-the-ground research. Fleming saw that shareholders needed to act as stewards in the governance of the businesses that they part-owned. So once the fund was launched, in 1873, he sailed directly to America. It was the first of many fact-finding trips across the Atlantic over the next 50 years, according to Nigel Edward Morecroft’s book, “The Origins of Asset Management”. The art of asset management is capital allocation. It is easy to miss this amid confusing talk of alpha and beta, active and passive, private and public markets...A paper in 2017 by Lucian Bebchuk, Alma Cohen and Scott Hirst, a trio of law professors, found that asset managers mostly avoid making shareholder proposals, nominating directors or conducting proxy contests to vote out managers. Index funds are especially at fault. Their business model is to avoid the costs of company research and deep engagement. The law professors reckoned that the big three asset managers devoted less than one person-workday a year to stewardship.

  • Governance experts call for US Stakeholder Capitalism Act

    November 3, 2020

    The US debate over the future of capitalism continues to flare with a proposal for new legislation that would shift companies away from “shareholder primacy” and into the realm of “stakeholder governance”. A newly published white paper, from non-profit organisations B Lab and The Shareholder Commons, proposes the US push through a Stakeholder Capitalism Act containing measures to give both company directors and investors revised fiduciary duties. In an article for the Harvard Law School governance blog, the paper’s authors argue that there is a need for urgent reform while insisting the best elements of capitalism must be retained. They say their policy measures are “designed to maintain the market mechanism inherent in profit-seeking but correct market failures that allow for profits derived by extracting value from common resources and communities, including workers.” Their legal reforms, they say, consist of “revised fiduciary considerations that extend beyond responsibility for financial return…” Among the key changes, the writers call for reforms that give investors a requirement to consider the “economic, social and environmental” implications of their decisions. The white paper also calls on investors to report on how they have met these new responsibilities...In the US, the debate around stakeholderism, or “purposeful” business, has been ongoing for some time. But in August last year the discussion was jet-fuelled when the Business Roundtable—a club for corporate leaders at some of the largest US corporates—declared its members would become “purpose-driven” corporates. A year on and a blizzard of articles have poured cold water on the idea that anything is different. Perhaps the most notable comes from academics Lucian Bebchuk and Roberto Tallarita, who say they found little evidence of change in Roundtable members. “Notwithstanding statements to the contrary, corporate leaders are generally still focused on shareholder value. They can be expected to protect other stakeholders only to the extent that doing so would not hurt share value,” they write in the Wall Street Journal.

  • Stakeholder Capitalism Needs Gov’t Oversight To Work

    November 3, 2020

    Despite the urgent pressure of COVID-19 and other crises brought to us by 2020, stakeholder capitalism — the idea that corporations should take into account the interests of their stakeholders, not just shareholders — has remained at the top of the corporate news cycle. On the recent 50th anniversary of economist Milton Friedman's essay "The Social Responsibility of Business Is to Increase Its Profits" — which established shareholder primacy as the prime corporate directive — many legal, business and economic leaders challenged Friedman's legacy, favoring stakeholder capitalism over shareholder primacy. We think that it isn't an either/or situation. Stakeholder capitalism can work to benefit shareholders as well, but there must be collaboration between business and government in order to achieve the desired goals. In fact, a review of recent history shows us that collaboration between business and government is the optimal way to determine what is in the best interests of the stakeholders...How can we restore confidence? Stakeholder capitalism can help, by increasing the accountability of institutions for the constituencies they affect. However, in order for stakeholder capitalism to work, the government needs to take a central role, because corporations are not legally accountable to any parties other than their shareholders and the government. Moreover, corporate leaders are not incented to prioritize the interests of stakeholders, as concluded in a recent study by Harvard professors Lucian Bebchuk and Roberto Tallarita. And under corporate law in Delaware, where most large corporations are incorporated, directors have fiduciary duties to make decisions in the best interests of shareholders — not stakeholders. Delaware public benefit corporations allow directors to weigh a public benefit alongside shareholder interests, but do not provide for broader accountability.

  • Getting serious about stakeholder capitalism

    October 28, 2020

    In August last year, the US-based Business Roundtable created waves when it announced its “Statement on the Purpose of a Corporation” that formally pushed for stakeholder capitalism. Led by Jamie Dimon of JPMorgan Chase, 187 chief executive officers (CEOs) of the top American companies turned away from its decades-long belief that the main goal of a business corporation is to service its shareholders. In its statement, the Roundtable declared that “each of our stakeholders is essential [and] we commit to deliver value to all of them, for the future success of our companies, our communities and our country.” More than a year since this declaration was made, the global pandemic has caused massive job losses in the US amid the highest number of coronavirus disease 2019 (Covid-19) cases and deaths in the world. The Washington Post reported that “the economic collapse sparked by the pandemic is triggering the most unequal recession in modern US history, delivering a mild setback for those at or near the top and a Depression-like blow for those at the bottom.” Ironically, the state of stakeholder capitalism in the US is much worse today than it was before the Roundtable released its statement. Tremendous profits have been made in the stock market while millions have suffered the worst economic setback since the Global Financial Crisis. This led Professor Lucian Bebchuk of Harvard Law School to remark that “stakeholder capitalism seems mostly for show.” He contacted the companies whose CEOs signed the statement and asked who was the highest-level decision maker to approve the decision. Only one of the 48 companies who responded had board approval to sign the statement. Bebchuk further observed that the corporate governance guidelines of JPMorgan Chase stated that “the board as a whole is responsible for the oversight of management on behalf of the firm’s shareholders.”

  • Reclaiming Leadership In The Age Of Agile

    October 26, 2020

    In a world with too many disengaged, dissatisfied, and disaffected employees, as well as bumbling governments unable to deal with destabilizing change, and too many people putting misplaced trust in populist leaders, it’s sad to note that even leadership experts concede that the multi-billion-dollar leadership industry has been of little help. The never-ending array of conferences, books, workshops, and training programs on the theme of leadership has not only failed to generate appropriate leadership behavior, or even agreement on the concept of leadership: they have often made things worse. A different, more pragmatic, and more agile concept of leadership is needed to cope with the complex, rapidly changing world of the 21st century...Meanwhile, the goal of maximizing shareholder value—which even Jack Welch called “the world’s dumbest idea”—eventually came under such heavy fire that, in August 2019, more than 200 chief executives of major corporations signed a statement of the Business Round Table (BRT) publicly renouncing it. The BRT declaration stated, “Each of our stakeholders is essential. We commit to deliver value to all of them, for the future success of our companies, our communities, and our country.” Yet since the declaration was issued, researchers have found no indication of significant change in corporate behavior. Harvard Law Professor Lucian Bebchuk and colleagues found that few of the signatories obtained the approval of their boards to sign the announcement. Nor has there been any apparent effort to change the many processes and practices that reinforce the goal of maximizing shareholder value. And in cases where the firm has had to make a clear choice between shareholders and other stakeholders, these firms have invariably chosen shareholders ahead of other stakeholders. Massive share buybacks that benefit shareholders, particularly executives, continue to flourish, even where there has been a collapse in profits. Bebchuk concludes that the BRT statement was signed “mostly for show.”

  • Bringing Ethics Back to Friedman’s Call to Purpose for the Next 50 Years

    October 7, 2020

    We can bring ethics back to Professor Friedman’s call to corporate purpose by returning to the more inclusive purposes that historically bound us together to form corporations. Corporations have the capacity to tap humanity’s greatest potential to accomplish projects spanning, in scope and time, beyond what any individual could provide to the world. Think of the earliest forms of group associations that combined our efforts, from the Roman origin of our word for corporation, corpora (founded “around a common tie such as a common profession or trade, a common worship, or the widespread common desire to receive a decent burial”), through the intergenerational building of cathedrals erected to the glory of powers beyond ourselves...In theory, the 2019 Business Roundtable Statement demoting shareholder primacy, and describing corporate purpose as “a fundamental commitment to all of our stakeholders,” is a good start to rethink the direction in which we are headed. Recent work by Professor Lucian Bebchuk and Mr. Roberto Tallarita asks why, however, if corporations were serious about these changes, they did not bring them more often to their governing boards. Professor Tyler Wry’s work further suggests that Covid-19 is testing the resolve of the companies that signed the Statement. Since the economic impacts of Covid-19 began, its signatories have paid out 20 percent more capital to shareholders than similar companies, and signatory companies have been almost 20 percent more likely to announce layoffs or worker furloughs. Given management incentive systems in place, the Statement’s aspirations do not seem to be penetrating into the behavior of signatory corporations. As another essay by Bebchuk, Tallarita, and Mr. Kobi Kastiel examining the efficacy of stakeholder constituency statutes in this ProMarket series concludes, there should be “substantial doubt [about]… relying on the discretion of corporate leaders, as stakeholderism advocates, to address concerns about the adverse effects of corporations on their stakeholders.”

  • More companies are committing themselves to social change. Is it all talk?

    September 29, 2020

    When the Business Roundtable last August issued a statement on corporate purpose shifting from focusing on returns to shareholder to satisfying the needs of a broader range of stakeholders, it was treated as momentous news. But were the U.S. CEOs signing the statement serious? Would anything really change? Two academics decided to follow up, contacting the 184 companies where CEOs pledged their support, asking who was the highest level decision-maker that approved the decision – was it the board of directors, the CEO, or an executive below the CEO? Only 48 companies responded, and 47 said it was approved by the CEO, not the board. There’s no reason to believe the picture would be much different in the non-respondents, suggest the researchers, Harvard Law School professors Lucian Bebchuk and Roberto Tallarita. And they argue the fact the boards weren’t involved indicates the CEOs didn’t regard the statement as a commitment to make a major change in how their companies treat stakeholders. “In the absence of a major change, they thought that there was no need for a formal board approval,” they report in a law school publication. Another explanation, of course, is that the CEOs believe the statement is what their corporations are already committed to. In his just-released book The New Corporation, UBC law school professor Joel Bakan writes about how companies have been trying to present a different face in recent years, more compassionate and committed to social ends. “Visit the website of any major corporation and you’ll wonder whether you’ve accidentally clicked on that of an NGO or activist group. These days all corporate communications lead with social and environmental commitments and achievements,” he notes. Whether this is driven by noble impulses, or an attempt to do well financially by doing good societally, or just blarney is up for debate. You, however, may be happier working for a company that is more socially and environmentally conscious, perhaps with a high-sounding purpose and even giving you time off for volunteer activity, as some companies do.

  • What is stakeholder capitalism?

    September 18, 2020

    “When did Walmart grow a conscience?” The question, asked approvingly in a Boston Globe headline last year, would have made Milton Friedman turn in his grave. In a landmark New York Times Magazineessay, whose 50th anniversary fell on September 13th, the Nobel-prizewinning economist sought from the first paragraph to tear to shreds any notion that businesses should have social responsibilities. Employment? Discrimination? Pollution? Mere “catchwords”, he declared. Only businessmen could have responsibilities. And their sole one as managers, as he saw it, was to a firm’s owners, whose desires “generally will be to make as much money as possible while conforming to the basic rules of the society”. It is hard to find a punchier opening set of paragraphs anywhere in the annals of business...Some bosses claim they can do this, keen to win public praise and placate politicians. But they are insincere stewards, according to Lucian Bebchuk, Kobi Kastiel and Roberto Tallarita, of Harvard Law School. Their analysis of so-called constituency statutes in more than 30 states, which give bosses the right to consider stakeholder interests when considering the sale of their company, is sobering. It found that between 2000 and 2019 bosses did not negotiate for any restrictions on the freedom of the buyer to fire employees in 95% of sales of public firms to private-equity groups. Executives feathered the nests of shareholders—and themselves. Such hypocrisy is rife. Aneesh Raghunandan of the London School of Economics and Shiva Rajgopal of Columbia Business School argued earlier this year that many of the 183 firms that signed the Business Roundtable statement on corporate purpose had failed to “walk the talk” in the preceding four years. They had higher environmental and labour compliance violations than peers and spent more on lobbying, for instance. Mr Bebchuk and others argue that the “illusory hope” of stakeholderism could make things worse for stakeholders by impeding policies, such as tax reform, antitrust regulation and carbon taxes, if it encourages the government blithely to give executives freedom to regulate their own activities.

  • Milton Friedman’s hazardous feedback loop

    September 15, 2020

    In a famous article written 50 years ago this week, Milton Friedman argued ‘the social responsibility of business is to increase its profits’. The statement remains a lightning rod for the debate on ‘corporate purpose’ – whether public corporations should be managed just for the benefit of shareholders or for a broader set of stakeholders, including employees, suppliers and the community.  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! Friedman’s essay was necessarily of its time. In 1970, Friedman was one of the leading economists of his day. However, and not really his fault, he presided over a discipline profoundly shaped by a reductionism that was then the deep guiding force of social sciences, but which has since revealed limitations. Economics was not alone in being so waylaid, but was arguably most affected. The extraordinary explanatory power of reductionism in the hard sciences over the preceding centuries had drawn all fields with scientific pretensions in the direction of physics and its methods. Social scientists were eager for their own simple, universalizable laws and for the prestige which might follow such discoveries.  But, fifty years on, general laws in the social sciences remain elusive, and another development from the 1970s clarifies why. Even as Friedman was penning his op-ed, a new science – ‘complexity science’ – was emerging. It – and its associated ‘systems thinking’ – announced itself with the formation of the Santa Fe Institute in 1984.

  • The Illusory Promise of “Stakeholderism”: Why Embracing Stakeholder Governance Would Fail Stakeholders

    September 9, 2020

    An article by Lucian Bebchuk and Roberto TallaritaIn The Illusory Promise of Stakeholder Governnace, 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).  Acceptance of stakeholderism, we demonstrate, would not benefit stakeholders as supporters of this view claim. Corporate leaders have incentives, and should therefore be expected, not to use their discretion to benefit stakeholders beyond what would serve shareholder value. Furthermore, over the past two decades, corporate leaders have in fact failed to use this kind of discretion to protect stakeholders. Our analysis concludes that acceptance of stakeholderism should not be expected to make stakeholders better off. Embracing stakeholderism, we find, could well impose substantial costs on shareholders, stakeholders, and society at large. Stakeholderism would increase the insulation of corporate leaders from shareholders, reduce their accountability, and hurt economic performance. In addition, by raising illusory hopes that corporate leaders would on their own provide substantial protection to stakeholders, stakeholderism would impede or delay reforms that could bring meaningful protection to stakeholders. Stakeholderism would therefore be contrary to the interests of the stakeholders it purports to serve and should be opposed by those who take stakeholder interests seriously.

  • Hate Your Job? You Are Not Alone

    September 9, 2020

    On the eve of Labor Day, as we pay tribute to workers’ contributions to the strength and well-being of America, and grieve for the millions who have lost their jobs in the pandemic, can we also shed a tear at the sad news of the unexpected death of David Graeber, author of the landmark book, Bullshit Jobs: A Theory (Simon + Schuster, 2018)? Graeber, a professor of anthropology at the London School of Economics, put his finger on an uncomfortable fact: our society is riddled with useless jobs that no one wants to talk about...Graeber put his finger on an even more worrying issue: the holders of these pointless positions, often know that their work is pointless. “Could there be anything more demoralizing than having to wake up in the morning five out of seven days of one’s adult life to perform a task that one secretly believed did not need to be performed — that was simply a waste of time or resources, or that even made the world worse ? Would this not be a terrible psychic wound running across our society?” ...Why didn't all the big old firms embrace Agile management? It was largely because they were hooked on the world's dumbest idea—maximizing shareholder value (MSV)...After the Business Round Table of August 2019, which condemned MSV, the executives had to pretend that they were actually helping all the stakeholders, even society as a whole, when the underlying reality remained the same: maximizing shareholder value. Thus, 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. Stakeholder capitalism is there “just for show.”