Lucian Bebchuk

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.”

... 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.

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.”

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”.

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.”

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.

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.

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."

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.

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.

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).

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.”

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.”

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.

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.

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”?

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.”

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.

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.

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.”