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Lucian Bebchuk

  • 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.”

  • Are Corporate CEOs Worth $20 Million?

    September 2, 2020

    This simple and important question does not get anywhere near the attention it deserves. And, just to be clear, I don’t mean are they worth $20 million in any moral sense. I am asking a simple economics question; does the typical CEO of a major company add $20 million of value to the company that employs them or could they hire someone at, say one-tenth of this price ($2 million a year) who would do just as much for the company’s bottom line? This matters not only because a thousand or so top executives of major corporations might be grossly overpaid. The excessive pay of CEOs has a huge impact on pay structures throughout the economy. If the CEO is getting $20 million it is likely the chief financial officer (CFO) and other top tier executives are getting in the neighborhood of $8-12 million. The third echelon may then be getting paid in the neighborhood of $2 million. And these pay structures carry over into other sectors...If we want to raise pay for the bottom in a big way, we have to drive down pay at the top. This would be a problem if we actually had to pay the CEOs $20 million to get them to perform well, from the standpoint of producing profits for the company or returns to shareholders, but the evidence is that we don’t. The best place to start on the evidence is the great book by Lucian Bebchuk and Jesse Fried, Pay Without Performance...It compiles much of the literature available at the time on the relationship of CEO pay to returns to shareholders. It includes many studies that show CEOs pay often bear little resemblance to what they do for shareholders. For example, the pay of oil executives skyrockets when the world price of oil rises, an event for which they presumably are not responsible. Another study found that CEOs tend to get big pay increases when they appear on the cover of a major business magazine, even though returns to shareholders generally lag the overall market.

  • Picturing What Good Agile Looks Like

    August 31, 2020

    Agile management began as a work of passion and as a desire to set things right. It continues excite passion in its advocates and its critics. My article “What Good Agile Looks Like” has generated many excellent questions and suggestions. Perhaps the most unintentionally illuminating came from my long-time colleague, Dave Snowden, who wrote: “Utopia on the left, dystopia on the right and little or no truth in either - why do people do this?” ...Agile management as presented here is not utopian in the sense of “an impractically ideal social and political scheme.” It is the reality in many organizations around the world, including the most financially valuable firms on the planet. It only sounds unrealistic if you have suffered under constraints of bureaucracy for your whole working life and never learned that other ways of working are possible. But for those who have experienced Agile management, or who have observed it first hand, Agile management often unfits you for working in any other way. When workers have a clear line of sight to those for whom the work is being done, work becomes meaningful in a way that isn’t possible in a bureaucracy...Principles reflect the underlying assumptions that drive decision-making throughout an organization. Principles reflect what the firm is actually doing, not necessarily with what the management says it is doing. For instance, important research by Harvard Law professor Lucian Bebchuk and colleagues shows that firms that profess to be acting in the interests of all the stakeholders are mostly acting in the interest of the shareholders and the executives. The professed support for stakeholder capitalism, says Bebchuk, “is mostly for show.” In effect, the principles that are really driving behavior in those firms are quite different from the professed goals. Understanding a firm’s principles means going “inside the engine room” and finding out what’s actually driving behavior.

  • “Is the Stakeholder Pledge Just a ‘PR Move?’ Directors Respond”

    August 28, 2020

    The widely acclaimed pledge that 181 CEOs signed last year to redefine the purpose of corporations was “largely a public-relations move,” according to Lucian Bebchuk, one of the country’s best-known academics on corporate governance and founder of the influential blog the Harvard Law School Forum on Corporate Governance. More importantly, writes Bebchuk, most CEOs who joined the pledge never planned to shift from the current model of shareholder primacy. Board directors and governance experts run the gamut in reacting to Bebchuk’s appraisal. What they do agree upon, however, is that the topic requires every board to take a more nuanced approach than the academic chose to in his recent pronouncement. “I believe that boards and CEOs understand that stakeholder capitalism is really a ‘thing’ and they understandably want to figure out how it will work,” writes Howard Brod Brownstein, director at P&F Industries, in an e-mail. “[B]oard directors should rightfully require management to explain fully how interests of non-shareholder stakeholders are being taken into account, and at what cost, if any, to shareholders.” On the other hand, Henry D. Wolfe, the founder and chairman of private equity firm De La Vega Occidental & Oriental Holdings, responds that he doubts that many boards and CEOs are in favor of the stakeholder model of governance. “And, yes, I think it is terrible for shareholders if by stakeholder capitalism the intent is to treat all stakeholders ‘equal.’” Bebchuk is a professor of law, economics, and finance at Harvard Law School and directs its corporate governance program. He was also a director of mining and metals company Norilsk Nickel of Russia, which trades on the Moscow and London stock exchanges.

  • A dire warning for stakeholder capitalism

    August 21, 2020

    Stakeholder-centric capitalism may be the hot new trend in the corporate world, but the concept traces its roots back much further than last year’s headline-grabbing statement from the Business Roundtable. In fact, the US already tried a version of “stakeholderism” back in the 1980s when it introduced “constituency statutes” which allowed companies to consider how an acquisition might negatively affect people and communities as they defended themselves against corporate raiders. Given the myriad global catastrophes that have led to this new wave of stakeholder capitalism, it is safe to surmise that “constituency statutes” did not achieve everything they set out to. Lucian Bebchuk, a Harvard Law professor, has looked more deeply into the issue and has a sobering message. In new research released this week, Mr Bebchuk — along with Kobi Kastiel of Tel Aviv University and Roberto Tallarita of Harvard Law School — found “constituency statutes” to have been an abject failure for stakeholders.

  • Money Stuff: Robinhood Ends Its Popularity Contest

    August 21, 2020

    A reader once said to me that Robinhood, the retail brokerage for young people trading on their phones, “is one giant momentum algo.” If you are bored during a coronavirus lockdown and you can’t go to a casino or bet on sports, you might decide to start gambling on stocks instead. If you decide to start gambling on stocks you might download Robinhood, which is, stereotypically, the app for gambling on stocks. If you download Robinhood … then what? You have heard that it might be fun to gamble on stocks, but you do not necessarily know which stocks are fun to gamble on. There are a lot of stocks and they all, from inside an app, look kind of the same. What is the stock discovery mechanism? If you walk into a casino, the layout of the casino will tell you what to gamble on: There are slot machines right in front of you with blinking lights, there are people shouting around the craps tables, etc. ... I was too generous to the CEOs! I shouldn’t have said “and the board.” Lucian Bebchuk and Roberto Tallarita did a study of the Business Roundtable statement and got this hilarious result: To probe what corporate leaders have in mind, we sought to examine whether they treated joining the Business Roundtable statement as an important corporate decision. Major decisions are typically made by boards of directors. If the commitment expressed in the statement was supposed to produce major changes in how companies treat stakeholders, the boards of the companies should have been expected to approve or at least ratify it.

  • One year ago, the Business Roundtable pledged to reshape the culture of business. Has anything changed?

    August 21, 2020

    On August 19, 2019 , the Business Roundtable, a collection of CEOs of the country’s biggest companies, at the time helmed by JPMorgan Chase CEO Jamie Dimon, announced a fundamental rethinking of what it means to be a corporate entity in the U.S. Previously, the Roundtable had held that a company’s key obligation was to increase the value of its stock for its shareholders. But the 2019 announcement, signed by 181 business leaders, committed to provide value to the full range of a company’s “stakeholders,” including their employees, their customers, and their communities—as well as shareholders. The move was praised as a monumental step in the idea of corporate responsibility but also held up as a possible empty promise. One year later, how has the commitment held up? It depends on whom you ask. Lucian A. Bebchuk and Roberto Tallarita, researchers at the Harvard Law School Program on Corporate Governance, say it’s been little more than words. They examined promises of stakeholder governance by looking at how involved a company’s board was in the decision to adopt that pledge, and if the board’s corporate governance guidelines were amended afterward to reflect a commitment to bring value to stakeholders.

  • Revisiting the Business Roundtable’s ‘Stakeholder Capitalism,’ one year later

    August 19, 2020

    The one certainty about the Business Roundtable’s “Statement on the Purpose of a Corporation” is that it has elevated that topic to a new height in global policy debates. A year after the BRT announced its new view of purpose on Fortune’s cover, “stakeholder capitalism”—what it means, and what, if anything, should be done to advance it—is a hot issue, sparking hotly opposed views. As the U.S. election approaches, it will only get hotter. The BRT’s statement was prompted by JPMorgan Chase CEO Jamie Dimon, who was then the BRT’s chairman, and was signed by 184 CEOs of major U.S. corporations... “The statement is largely a rhetorical public relations move rather than the harbinger of meaningful change,” say Lucian Bebchuk and Roberto Tallarita of the Harvard Law School in a 65-page article, “The Illusory Promise of Stakeholder Governance.” They argue that the incentives CEOs face have not changed, so their behavior won’t change. The authors also examine corporate behavior when state laws have permitted companies to protect stakeholders other than shareholders; they say they found no evidence that companies do so any more often than when they are not permitted to do so...Bebchuk and Tallarita argue more bluntly that CEOs and directors are seeking more power for themselves. “The support of corporate leaders and their advisers for stakeholderism is motivated, at least in part, by a desire to obtain insulation from hedge fund activists and institutional investors,” the authors say. “In other words, they seek to advance managerialism”—a system in which managers exercise the most power—“by putting it in stakeholderism clothing.” The BRT explicitly denies that its members want to avoid accountability.

  • How corporate actual responsibility, not social responsibility, would look

    August 19, 2020

    Wednesday marks the first anniversary of the Business Roundtable’s vocal renunciation of “shareholder primacy” in a statement that claimed to “redefine the purpose of a corporation.” Like most efforts at “corporate social responsibility,” the initiative has proved long on public relations, short on action, and lacking in effect. Among the 181 CEOs who signed, Harvard Law School’s Lucian Bebchuk and Roberto Tallarita have found only one whose board of directors gave approval. On the organization’s own website, the most recent “Principles of Corporate Governance” still dates from 2016. The Business Roundtable’s CEO members sought to ensure the public that they could be trusted as benevolent leaders of the economy, but instead they have demonstrated precisely the opposite — that multinational corporations are incapable of fulfilling obligations voluntarily to anyone besides shareholders, and external constraints are needed. In fairness, the market’s competitive pressures discourage any one firm from hampering short-term profitability for the sake of corporate actual responsibility. But that is precisely where an institution like the Business Roundtable could play a valuable role, were it genuinely committed to addressing interests beyond those of the shareholders who control the firms themselves.

  • The Wall Street Journal Opinion: ‘Stakeholder’ Capitalism Seems Mostly for Show

    August 10, 2020

    An article by Lucian Bebchuk and Roberto TallaritaBy putting American workers through months of turmoil, the Covid-19 crisis has heightened expectations that large companies will serve the interests of all “stakeholders,” not only shareholders. The Business Roundtable raised such expectations last summer by issuing a statement on corporate purpose, in which the CEOs of more than 180 major companies committed to “deliver value to all stakeholders.” Although the Roundtable described the statement as a radical departure from shareholder primacy, observers have been debating whether it signaled a significant shift in how business operates or was a mere public-relations move. We have set out to obtain evidence to resolve this question. To probe what corporate leaders have in mind, we sought to examine whether they treated joining the Business Roundtable statement as an important corporate decision. Major decisions are typically made by boards of directors. If the commitment expressed in the statement was supposed to produce major changes in how companies treat stakeholders, the boards of the companies should have been expected to approve or at least ratify it. We contacted the companies whose CEOs signed the Business Roundtable statement and asked who was the highest-level decision maker to approve the decision. Of the 48 companies that responded, only one said the decision was approved by the board of directors. The other 47 indicated that the decision to sign the statement, supposedly adopting a major change in corporate purpose, was not approved by the board of directors. We received responses from only about three-tenths of the signatories. Yet there is no reason to expect that these companies are less likely than companies electing not to respond to have obtained board approval for joining the statement.

  • Stakeholderism: Study finds evidence in short supply

    August 10, 2020

    Have companies become more focused on stakeholders and toned down their attention to the interests of shareholders? Many argue there has been a shift but Harvard academics say they have evidence that is it is more like business as usual. After looking the evidence from 48 US companies signed up to a ground breaking pledge to work for “all stakeholders” rather than shareholders alone, Lucian Bebchuk and Roberto Tallarita, experts in governance at Harvard Law School, conclude than in reality nothing much has changed...Bebchuk and Tallarita look at companies who signed up to an August, 2019 statement from the Business Roundtable —a club for US corporate leaders, then chaired by JPMorgan Chase chief executive Jamie Dimon—which saw 180 big name companies declare: “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.” The statement was reported around the world and is frequently cited as evidence that corporate attitudes have changed and a fundamental shift is underway at the heart of capitalism. The Harvard profs conclude the evidence is lacking. They asked Business Roundtable companies if the decision to sign up to the statement had been cleared by their boards. Of the 48 that replied just one confirmed its board was consulted first. The other 47 “indicated” their boards were not involved. Bebchuk and Tallarita wonder why chief executives would sign up to such a significant statement without the green light from their boardrs. The most “plausible” explanation, they say, is that the CEOs did not believe the statement entailed any major change to the way stakeholders would be treated. The profs note it could be because CEOs are convinced their stakeholders are already well considered. “But it still implies that they believed signing the statement wasn’t a major step for their businesses,” they write. Then they dug a little deeper looking at the board-approved governance guidelines published by a number of the companies. They found they “mostly reflect a clear ‘shareholder primacy’ approach.” They cite the example of JPMorgan Chase itself, where guidelines clearly state the board works “on behalf of the firm’s shareholders.”

  • Pandemic Highlights Need To Reform Shareholder Rights

    July 30, 2020

    The 2007–2008 global financial crisis presented the paradoxical question: Should shareholders be given greater influence over company activities? The current pandemic, COVID-19, highlights again the need for review and reevaluation of corporate governance frameworks and the creation of a new regulatory framework aimed at increasing shareholders' control...Lucian Bebchuk, a professor at Harvard Law School argued extensively in his research paper "Letting Shareholders Set the Rules" that shareholders should enjoy the "power to initiate, and approve by vote, major corporate decisions." Consequently, arguments for shareholder empowerment are likely to be "convincing" post 2007–2008...According to Bebchuk, shareholders may be reluctant to use any greater powers granted to them for fear of economic consequences. However, the Aviva case study reveals that shareholders will be prepared to use powers to control the board, and thus one might take the view that extending shareholder powers is unnecessary. Section 439 of the U.K.'s Companies Act 2006 does not give shareholders the power to prevent payouts made under remuneration policies, simply to state their disapproval; however, the Aviva case study demonstrates that mere disapproval itself will be sufficient to prevent payouts and indeed control corporate activities. While this adds further support to Bebchuk's argument that the threat of action can be enough to ensure boards behave responsibly and that further empowering of shareholders is unnecessary, caution is advised.

  • How CEO pay in America got out whack

    July 10, 2020

    "Too often, executive compensation in the us is ridiculously out of line with performance…The deck is stacked against investors.” It was with these words that in 2006 Warren Buffett, a legendary investor and red-blooded capitalist, challenged the received wisdom in corporate America about CEO pay. This maintains that bosses deserve generous rewards because these are tightly linked to their companies’ financial performance. Fourteen years’ worth of evidence later the received wisdom is still looking shaky. “Pay for performance” has been the mantra of America Inc over the past few decades. A small circle of influential pay consultants, compensation analysts and academics has argued that American firms must pay top dollar for top candidates because they compete in a global market for talent. They argue that firms have grown more complex and bosses must know how to manage new technologies and the vagaries of globalisation...Critics point to problems besides rewarding luck instead of skill. One is rent-seeking by bosses, who can take advantage of the opacity that tends to surround pay-setting. The process was long a dark art, explains David Larcker of Stanford University’s Graduate School of Business. Lucian Bebchuk of Harvard Law School, another expert in the field, has argued that American CEOs, who tend to tower over their boardrooms, have too much influence over this opaque process. Don Delves of Willis Towers Watson, a consultancy with a big pay-advisory arm, points to “lots of positive changes” in pay-setting over the last two decades, from greater independence for compensation committees to more sophisticated setting of performance targets. However, he concedes that bosses retain “more influence over their own pay than any other person”.

  • Langdell building

    Bebchuk, Hirst study among top ten corporate and securities articles of 2019

    May 14, 2020

    A study by Professor Lucian Bebchuk and Boston University Professor Scott Hirst, “Index Funds and the Future of Corporate Governance: Theory, Evidence, and Policy,” was selected in an annual poll of corporate and securities law professors as one of the ten best corporate and securities articles of 2019.

  • Loeffler Got Lucrative Parting Gift From Public Company en Route to the Senate

    May 6, 2020

    When Kelly Loeffler accepted an appointment to be a United States senator from Georgia, she left behind a high-paying job as a senior executive at the parent company of the New York Stock Exchange. But on her way to Washington, her old employer gave her a lucrative parting gift. Ms. Loeffler, who was appointed to the Senate in December and is now in a competitive race to hold her seat, appears to have received stock and other awards worth more than $9 million from the company, Intercontinental Exchange, according to a review of securities filings by The New York Times, Ms. Loeffler’s financial disclosure form and interviews with compensation and accounting experts. That was on top of her 2019 salary and bonus of about $3.5 million...The generous dispensations are not illegal or against any congressional rule, but they are certain to feed questions about how the Senate’s newest and wealthiest member has handled her finances, an issue that has emerged as a potential risk in her campaign...Corporate governance experts generally frown upon companies handing such parting gifts to senior executives because they do not serve a clear business purpose and, in cases where the executive is taking a government job, they risk creating the appearance that the company is trying to curry political favor. “From a corporate governance perspective, large payments to executives are appropriate only if they serve an adequate corporate purpose,” said Lucian A. Bebchuk, the director of the Program on Corporate Governance at Harvard Law School. He added that shareholders in Intercontinental Exchange “should not view this arrangement to have been on the up-and-up.”

  • Hotelier’s Push for $126 Million in Small-Business Aid Draws Scrutiny

    May 4, 2020

    Monty Bennett’s sprawling hospitality company is the biggest known applicant of the government’s small-business relief program. The Texas conservative has remained unwilling to return his loans even as public anger builds over large companies getting the funds — a fact now drawing the scrutiny of a key lawmaker. Hotels and subsidiaries overseen by Mr. Bennett’s firm, Ashford Inc., have applied for $126 million in forgivable loans from the Paycheck Protection Program. According to company filings, about $70 million of that has been funded. By comparison, the average loan size in the program’s first round was $206,000. On Friday, Senator Chuck Schumer, the Democratic leader, sent a letter to the Small Business Administration demanding a thorough review of use of the program by Mr. Bennett’s companies, saying that he is “deeply concerned that large, publicly traded companies, like Ashford, may be exploiting” it...A board oversees the company’s operations, but it is filled with people with close ties to Mr. Bennett, including one director whose wife’s firm provides services to the company. Mr. Bennett recently married former board member Sarah Zubiate Darrouzet. A former Texas politician, Matt Rinaldi, to whom Mr. Bennett had donated, sits on one of the real estate investment trusts’ board. “The executive pay arrangements reflect a substantial disconnect between pay and performance, and raise serious corporate governance concerns,” said Lucian A. Bebchuk, director of the Program on Corporate Governance at Harvard Law School.

  • BlackRock’s choice: Investment fiduciary or political activist?

    May 4, 2020

    “Since January, the coronavirus has overtaken our lives and transformed our world,” said Larry Fink, chairman and CEO of BlackRock, in his January 2020 letter to the global investment firm’s shareholders. “For the private sector, it has upended how companies operate. … In my 44 years in finance, I have never experienced anything like this.” Yet, something more disruptive and longer lasting than COVID-19 is at work in BlackRock’s New York offices — and its implications may well extend beyond one financial firm and its shareholders. Astonishingly, BlackRock now threatens to vote against directors who don’t incorporate its views on environmental and social issues, the “E” and the “S” in ESG social-investing criteria...In their critique of the Business Roundtable’s recent adoption of such stakeholder capitalism, former Secretary of State George Shultz and his coauthors suggest that the demotion of profit and shareholder accountability should be seen as a response to a resurgence of a socialist impulse in American politics; it will result in decisions that sacrifice shareholder value and is a formula for endless legal wrangling and litigation. In a March 2020 working paper, “The Illusory Promise of Stakeholder Governance,” Harvard Law School’s Lucian Bebchuk and Roberto Tallarita conclude that the stakeholderism advocated by the Business Roundtable and BlackRock should be viewed “largely as a PR move.”

  • Wall Street firm offered 175% returns to investors using US aid programs

    April 10, 2020

    A New York investment firm pitched wealthy investors in recent days on a way to make returns of 22 percent to 175 percent using US government programs designed to help Americans keep their jobs and boost the coronavirus-stricken economy, according to a marketing document seen by Reuters. Following questions posed by Reuters, Arcadia Investment Partners, which has about $1 billion under management, said it had put its plans on hold. The idea was in “formative stages” and the firm was not “presently moving forward with this strategy given reasons that include uncertainty surrounding the regulations,” Dahlia Loeb, managing director at Arcadia, told Reuters in an e-mail on Wednesday. She did not elaborate further...Had Arcadia proceeded with its plan, its investors would have profited handsomely from a virtually risk-free investment. Arcadia typically generates returns to investors of between 8 percent and 12 percent, depending on the type of investment, according to a March regulatory filing. The potential returns would also be far above other options available to investors. The US 10-year Treasury note, for example, currently yields around 0.77 percent. Lucian Bebchuk, a corporate governance expert at Harvard Law School who reviewed key assumptions of Arcadia’s pitch for Reuters, said that the potential returns, assuming they are estimated correctly, “suggests a design flaw on the part of the government’s program.”

  • Detail of Austin Hall

    Harvard Law excels in SSRN citation rankings

    April 6, 2020

    Statistics released by the Social Science Research Network (SSRN) indicate that, as of the beginning of 2020, Harvard Law School faculty members featured prominently on SSRN’s list of the most-cited law professors.

  • HLS faculty maintain top position in SSRN citation rankings

    More than 1,000 empirical studies apply the Entrenchment Index of professors Bebchuk, Cohen and Ferrell

    March 25, 2020

    A study by professors Lucian Bebchuk, Alma Cohen, and Allen Ferrell that puts forward a corporate governance index—the Entrenchment Index (E Index)—for assessing the quality of corporate governance in public companies has been applied and used over 1,000 times in empirical analyses as of the end of 2019.

  • We should beware the rise of stakeholderism

    March 17, 2020

    Every now and then, an idea comes along about how businesses should be run. And right now, the idea in vogue is “stakeholderism”. Basically, it’s a response to the bashing business leaders have taken for the downsides of modern shareholder capitalism: whether the excessive pay of chief executives and fund managers, or the spillover effects from heedless shareholder-focused entities that can hurt communities by squeezing wages, closing factories or polluting the environment...But is there much more to all this gush than an urge for self preservation? Not according to a new working paper from the academics Lucian Bebchuk and Roberto Tallarita. They claim the public declarations are little more than PR releases. And thank goodness, say the authors, because real stakeholder capitalism would not benefit those it purports to help. Their analysis divides stakeholderism into two categories. First, there’s the halfway house of “enlightened shareholder value” where directors still work for shareholders, but are supposed to “take into account” other interests. (This is the sort of “directors’ duties” regime the UK’s Companies Act prescribes). The authors regard it as being mainly wallpaper, with almost no direct effect.

  • Academics make an empirical case again stakeholderism

    March 17, 2020

    Each of our stakeholders is essential.” Those words were part of a declaration signed last August by 181 bosses of big American companies belonging to the Business Roundtable (BRT), an eminent lobby group. It seemed to represent quite a u-turn—nothing short of a repudiation of America Inc’s shareholder-first orthodoxy. As investors pour billions into funds promoting environmental, social and governance objectives beyond profitability, a vision of a cuddlier capitalism has taken hold. Or has it? In a new paper Lucian Bebchuk and Roberto Tallarita of Harvard Law School pore over data from the companies of some of the brt signatories and find little evidence (so far) that the declaration has altered corporate behaviour. For example, they found that only three of the 20 companies whose ceos sit on the brt’s board—Boeing, Stryker and Marriott—have amended their corporate-governance guidelines in any way since the declaration. And none of the amendments had anything to do with stakeholder welfare, the authors say.

  • Robinhood Picked a Bad Day to Break

    March 5, 2020

    It is well known that one of the best services a retail broker can provide is not answering the phones during a crash. The market is down, the customers panic, their timing is terrible, they want to sell at the bottom, they call you up to say “sell everything,” you say “we’re sorry all our representatives are assisting other customers, your call is important to us,” they hang up and get distracted, the market rallies, they forget about selling, you have saved them a fortune, good work. I don’t think any retail broker has this as an official policy; it seems legally dicey and hard to pull off in practice.  ...But here are a blog post and paper from Lucian Bebchuk and Roberto Tallarita about “The Illusory Promise of Stakeholder Governance.” As the title suggests, they are skeptical. For one thing, unlike a lot of stakeholder-governance advocates, they try to draw a clear distinction between the second and third theories, and dismiss the second theory as just another form of shareholder value.

  • Harvard prof: ‘Stakeholder’ corporate paradigm is just P.R. – and bad for everyone

    March 5, 2020

    Fashions change and presidential administrations come and go, but the feud between corporate guru Martin Lipton of Wachtell Lipton Rosen & Katz and Harvard law professor Lucian Bebchuk will apparently always be with us. On Tuesday night, Wachtell put out a client alert castigating Bebchuk for a new paper, "The Illusory Promise of Stakeholder Governance." (Bebchuk summarized the paper in a March 2 post at the Harvard Forum on Corporate Governance.) Lipton, as you probably know, has been a leading advocate for the new corporate paradigm of directors and officers considering the interests not just of shareholders but of an array of stakeholders, from employees and suppliers to those who live in environments affected by the corporation’s actions.

  • Passive Corporate Governance

    February 18, 2020

    Index funds—the low-cost mainstay of retirement accounts and college funds—are so popular that they now hold a surprisingly large share of U.S. corporations. These passive investment vehicles purchase shares of companies so that their holdings mirror common measures of market performance, such as the S+P 500, which is weighted by market capitalization. Now, a series of papers from the Law School’s Program on Corporate Governance sounds the alarm about the ways index-fund managers are using their expanding influence—or not. Ames professor of law, economics, and finance Lucian Bebchuk, director of the program, shows through empirical analysis that index funds often vote against the financial interests of investors...BlackRock, State Street Global Investors, and Vanguard, the so-called “Big Three” index-fund investors, collectively cast about 25 percent of proxy votes in all S+P 500 companies (a common benchmark for large, publicly held corporations), Bebchuk says, a percentage that he and his coauthor, legal scholar Scott Hirst of Boston University, expect to increase. “If trends of the past two decades continue for another two decades, the ‘Big Three’ will grow into what we term the ‘Giant Three,’” he says, projecting that they would cast up to 40 percent of such votes by 2040.

  • The Hidden Dangers of the Great Index Fund Takeover

    January 16, 2020

    If you hold a stock market index fund, congratulations. The S+P 500’s total return was a thumping 31.5% in 2019, and a fund that passively tracks that benchmark delivered almost all those gains, minus a tiny fee—perhaps just 0.04% of assets. Now here’s something you probably weren’t thinking about when you clicked on the box to choose an index fund in your 401(k) or IRA: You were also part of one of the biggest shifts in corporate power in a generation...Lucian Bebchuk, a Harvard law professor, says index fund managers don’t have incentives to invest the time into actively supervising companies. That’s because any effort to increase the value of a company would also increase the value of the index, which in turn benefits every fund that tracks the index. As a result, the fund that pushes management can’t stand out from its peers and attract more money—yet it incurs higher stewardship costs. The concern is that such deference will “result in insufficient checks on corporate managers,” Bebchuk says.

  • The Hidden Dangers of the Great Index Fund Takeover

    January 10, 2020

    The potential impact of common ownership reaches beyond antitrust matters to questions about how companies are run. Index fund managers may follow passive investment strategies, but they don’t blindly choose stocks and sit back, says John Coates, a Harvard law professor. Fund companies have multiple tools to influence corporate behavior, such as developing preferred policies on executive compensation, carbon footprints, gender diversity, and other governance matters. They often do this in coordination with other industry leaders, Coates says. “A small number of unelected agents, operating largely behind closed doors, are increasingly important to the lives of millions who barely know of the existence much less the identity or inclinations of those agents,” Coates wrote in a widely cited 2018 paper. The agents, in this case, are the managers of fund companies—and the most important of those are the index giants...Lucian Bebchuk, a Harvard law professor, says index fund managers don’t have incentives to invest the time into actively supervising companies. That’s because any effort to increase the value of a company would also increase the value of the index, which in turn benefits every fund that tracks the index. As a result, the fund that pushes management can’t stand out from its peers and attract more money—yet it incurs higher stewardship costs. The concern is that such deference will “result in insufficient checks on corporate managers,” Bebchuk says. In a 2019 paper, he writes that the Big Three spent minuscule amounts on stewardship. According to Morningstar, Vanguard employed 21 people to do the work of corporate oversight at a cost, by Bebchuk’s estimate, of about $6.3 million—a drop in the bucket considering Vanguard’s trillions of dollars under management.

  • Activists thought BlackRock, Vanguard found religion on climate change. Not anymore

    October 15, 2019

    In the history of the earth’s climate two years is a infinitesimal blip, but in the recent history of investor-led efforts to push for action on climate change from corporations, two years has meant a great deal. In 2017, the two biggest U.S.-based fund managers, BlackRockand Vanguard — which control a combined $12 trillion in assets — both voted to require Exxon Mobil to produce a report on climate change. It was a seen as watershed moment showing what can occur when the biggest index funds punch their weight at the annual meetings of corporations, and join other shareholders in supporting proxy proposals covering social issues. Until it wasn’t the watershed everybody thought it was. Since that 2017 vote, multiple analyses of proxy votes have shown BlackRock and Vanguard to have among the worst voting records when it comes to social issues supported by other shareholders, including many of their peers among the world’s largest asset managers...Concerns about conflicts of interest were recently studied by Harvard Law School corporate governance expert Lucian Bebchuk and Boston University law professor Scott Hirst, who also is the director of institutional investor research at Harvard Law’s corporate governance program. They concluded there were incentives for the biggest index fund companies to “defer excessively” to corporate managers. While they looked at “say-on-pay” proposals where the big index funds were more pro-management than actively managed funds, similar reasoning would apply to environmental issues.

  • Is Your Retirement Fund Ruining Our Economy?

    October 8, 2019

    In the mid-2000s, Michael Burry smelled trouble in the housing market, realizing that big banks were packaging shady subprime mortgages and reselling them as surefire investments. He concluded that it would lead to a spectacular collapse, made a huge bet against the market and, ultimately, tons of money. His story was dramatized in the book The Big Short by Michael Lewis and in a Hollywood movie in which he was played by Christian Bale. ... Legal scholars Lucian A. Bebchuk and Scott Hirst recently published a working paper called "The Specter of the Giant Three." The vast majority of money flowing into index funds are run by three companies: Vanguard, BlackRock, and State Street Global Advisors. Their combined average stake in each of the top 500 American corporations (the S&P 500) has gone from 5.2% in 1998 to 20.5% in 2017.

  • Redefining capitalism: bosses eye purpose beyond profit

    September 17, 2019

    ... But history can move in unexpected ways. Last month, 181 American chief executives issued a collective “statement on the purpose of a corporation” that abandoned their long adherence to shareholder primacy. Instead, the group – which was organised by the Business Roundtable under the leadership of Jamie Dimon, head of JPMorgan – pledged “a fundamental commitment to all our stakeholders”. ... In universities, economists such as Eugene Fama declared that free markets were the only valid engine of growth and value, while law professors such as Lucian Bebchuk insisted corporate boards had no right to ever overrule investors, however short-term their focus. ... Shareholder rights are essential for keeping managers and directors accountable,” insists Bebchuk, who often exchanged bitter words with Lipton.

  • Three fund managers may soon control nearly half of all corporate voting power, researchers warn

    July 23, 2019

    A decade after some of the nation’s largest U.S. banks helped to bring the financial system to its knees, a new kind of “too big to fail” risk may be emerging in a very different corner of the market: index funds. Three index fund managers currently dominate ownership of shares of publicly traded companies in the U.S., and their control is likely to tighten in coming years, according to a June research report. Concentrated ownership — what the authors refer to as the “Giant Three scenario” — means investors and policy makers need to keep a careful eye on the role of fund managers in upholding corporate governance, argue authors Lucian Bebchuk of Harvard Law School and Scott Hirst of Boston University in a working paper titled The Specter of the Giant Three.

  • Indexing giants may be falling short on governance

    July 16, 2019

    As index investing giants exert a stronger grip on public companies, they have an opportunity to change the way such companies do business for the better. But according to new research, the indexing giants may not be doing such a good job. A new report from The Wall Street Journal cites researchers Lucian Bebchuk, professor of law, economics and finance at Harvard Law School, and Scott Hirst, law professor at Boston University School of Law. The duo recently published two papers on the power held and wielded by BlackRock, Vanguard, and State Street over US public companies. “Together, [they] control an average of one in five shares of S&P 500 companies, and that portion is likely to jump to more than 33% of shares over the next two decades,” the Journal said, citing a working paper issued in June by the National Bureau of Economic Research. The three fund managers also reportedly own 16.5% of shares in members of the Russell 3000 index, and could grow to hold 30.1% over the next two decades.

  • Index-Fund Firms Gain Power, but Fall Short in Stewardship, Research Shows

    July 9, 2019

    The three largest index-fund managers have grown so big that they ultimately could hamper the performance of public companies and the economy, according to research from corporate-governance scholars. The researchers—Lucian Bebchuk, professor of law, economics and finance at Harvard Law School, and Scott Hirst, a law professor at Boston University School of Law—recently published two papers that raise issues for investors...“We show and document that the Big Three have incentives to underinvest in stewardship and to be excessively deferential to the corporate managers of portfolio companies,” says Prof. Bebchuk. “Given this analysis and empirical evidence, we worry that the increased concentration of shares in the hands of institutional investors will not produce the improved oversight of public companies that would be beneficial for public companies and the economy,” he says.

  • Too easy?

    June 17, 2019

    Back in 2009, median pay for FTSE 100 bosses was £2.19m compared with £21,580 for the average UK worker. That meant the 2009 ratio of boss-to-worker pay was 102:1. Then, between 2009 and 2017, bosses’ median pay grew by 7.3 per cent a year while the average UK worker’s pay grew annually by just 1.8 per cent. The effect of those differing growth rates was to take the boss-to-worker ratio to 155:1...It would be fatuous to suggest that the average boss had somehow become 50 per cent more capable than the average worker in that period. Yet, in effect, this is what the apologists for UK corporate governance would have us believe...It fools no one. For example, Lucian Bebchuk, a professor at Harvard Law School who specialises in executive pay, is in no doubt that rising executive pay since the 1980s is all about power and rent extraction under the cloak of corporate-governance rules. These rules are chiefly framed by what Professor Bebchuk labels “the optimal contracting approach”, which attempts to overcome the core problem present in almost every organisation, namely that the people hired to run it don’t have the same interests as the people who hired them.

  • Do the Index Giants Have Too Much Control Over Corporate Voting?

    May 30, 2019

    BlackRock Inc. (BLK), Vanguard, and State Street Global Advisors, a division of State Street Corporation (STT), were the subject of a May 2019 treatise from Harvard’s John M. Olin Center for Law, Economics, and Business. The report, entitled “The Specter of the Giant Three,” asserts that corporate voting will be dominated by the “the big three,” given that index funds are expected to continue to grow at a rapid pace. Report writers Lucian A. Bebchuk and Scott Hirst “document that the Big Three have almost quadrupled their collective ownership stake in S&P 500 companies over the past two decades.” More importantly, “they have captured the overwhelming majority of the inflows into the asset management industry over the past decade.”

  • HLS faculty maintain top position in SSRN citation rankings

    Bebchuk’s study of index fund stewardship wins prizes from ECGI and IRRC

    May 20, 2019

    The European Corporate Governance Institute awarded its 2019 prize for best working paper in law to a paper by Harvard Law School Professor Lucian Bebchuk LL.M. ’80 S.J.D. ’84.

  • DealBook Briefing: Everything You Need to Know About the Pinterest I.P.O.

    April 15, 2019

    Good Sunday morning, and welcome to a special edition of the DealBook Briefing, where we’ll take a deep dive into Pinterest’s upcoming public offering. It’s the second of many decacorns — $10 billion-plus start-ups — to go public this year. And it could be an indicator of what’s to come during the rest of 2019. ... But the practice is increasingly controversial among governance experts. And Kobi Kastiel and Lucian Bebchuk from Harvard Law School have warned that the dual-class structure may “significantly decrease the economic value of Pinterest’s low-voting shares.”

  • Harvard researchers: Lyft investors will regret dual-class structure

    April 8, 2019

    Lyft shareholders could come to regret giving up substantial power to CEO Logan Green and President Josh Zimmer, the company's cofounders. Lyft shares closed at $74.55 on Friday, nearly $4 below its first trade when the company went public on March 29. While the stock has seen a slight recovery from its all-time-low of $66 in its first week of trading, Wall Street isn't quite certain on how to treat the stock in the long-term. In a post published Wednesday, Harvard Law School's Lucian Bebchuk and Kobi Kastiel argue that Lyft's corporate governance structure "can be expected" to decrease Lyft's per-share value in the future, and increase the discount at which Lyft's low-voting shares trade. "Each of these effects would operate over time to reduce the market price at which the low-voting shares of public investors would trade," wrote Bebchuk and Kastiel. "These effects should thus be taken into account by any public investors that consider holding Lyft shares."

  • Illustration with books

    Law’s Influencers

    February 26, 2019

    HLS faculty blogs on law-related topics are reaching thousands—sometimes millions—and have become required reading for experts.

  • The dark side of diversification

    January 24, 2019

    The death last week of the founder of Vanguard, Mr John Bogle, offers a timely reminder of the upheaval in the asset management industry brought about by the advent of index investing around four decades ago. Index investing had its antecedents in the development of modern portfolio theory. ...In a similar tradition to Berle and Means, Professor Lucian Bebchuk, Alma Cohen and Scott Hirst from Harvard University suggests that the institutionalisation of stock markets exacerbates the conflict of interest (The agency problems of institutional investors, Journal of Economic Perspectives 2017). In a world of diffuse and dispersed share ownership, institutional investors are reluctant to engage in monitoring in the knowledge that their competitors also benefit from their own time consuming and expensive monitoring activities. Index funds in particular, face weak incentives to engage in stewardship activities that improve governance and value because they bear the full cost of such activities but not the full benefits.

  • HLS faculty maintain top position in SSRN citation rankings 2

    HLS faculty maintain top position in SSRN citation rankings

    January 18, 2019

    Statistics released by the Social Science Research Network (SSRN) indicate that, as of the end of 2018, Harvard Law School faculty members have continued to feature prominently on SSRN’s list of the 100 most-cited law professors.

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

    Bebchuk’s study of index funds wins IRRC Institute prize

    January 4, 2019

    The Investor Responsibility Research Center Institute awarded its 2018 investor research prize to a study by Harvard Law School Professor Lucian Bebchuk LL.M. ’80 S.J.D. ’84, that examines the resources and decisions of index fund managers.

  • Mutual Fund Managers Try a New Role: Activist Investor

    January 2, 2019

    Benjamin Nahum’s letters to corporate executives don’t set off alarm bells like those from billionaire investors like Carl Icahn or Dan Loeb. Make no mistake, though, the Neuberger Berman Group LLC portfolio manager is increasingly borrowing a page or two from their playbook: He’s willing to scrap with the chief executives and board members of the small-cap companies whose shares his firm owns. ... Lucian Bebchuk, a Harvard Law School professor, said it is still rare for a traditional manager to be openly critical of companies. “Like index funds, most of the major mutual fund families that focus on active funds display a deferential attitude toward corporate managers in their stewardship choices and activities,” he said.

  • Does Delaware law preclude mandatory arbitration of federal securities claims?

    November 29, 2018

    The debate over corporations imposing arbitration on shareholders through corporate charters and bylaws is still mostly in the realm of theory and academic furor. The Securities and Exchange Commission, as you know, is contemplating the issue, though SEC Chair Jay Clayton has said he’s in no rush to decide whether the commission will end its longtime policy of squelching proposed mandatory arbitration provisions for companies going public...In the new paper, the securities law professors – including, among other luminaries, John Coffee of Columbia, Lucian Bebchuk and John Coates of Harvard, Ann Lipton of Tulane, James Cox of Duke and Donald Langevoort of Georgetown - contend that federal securities claims are outside the scope of corporate charters and bylaws governed by Delaware law. Corporations can’t impose mandatory arbitration of federal securities claims through charters and bylaws, according to the profs’ argument, because compacts between corporations and shareholders are limited to state law governance issues, not disputes under federal securities law.

  • Bankers’ liability and risk taking

    October 10, 2018

    In 2015, seven years after the failure of Lehman Brothers brought the financial world to the brink of collapse, Dick Fuld, the former CEO, sold his Idaho mansion for around $30 million dollars, setting a record for private home auctions. It seems he was ready to leave his private trout-fishing stream and return to the world of high finance. Naturally, Dick Fuld lost significant sums of money when his bank collapsed. [Lucian] Bebchuk et al. (2010) calculate that, in 2000, Fuld owned about $200 million of Lehman Brother stock, which would eventually become worthless. Nevertheless, Fuld withdrew about $520 million from the bank between 2000 and 2008 in the form of cash bonuses and equity sales, none of which was accessible to Lehman’s creditors.

  • Elon Musk’s Ultimatum to Tesla: Fight the S.E.C., or I Quit

    October 3, 2018

    Securities and Exchange Commission officials were understandably taken aback on Thursday morning when Tesla’s board — and its chairman, Elon Musk — abruptly pulled out of a carefully crafted settlement....Independent directors frequently face difficulty asserting themselves in any company with an outsize figure like Mr. Musk, whether it be a founder, controlling shareholder or powerful chief executive, said Lucian Bebchuk, a professor at Harvard Law School and an expert in corporate governance. Such people can often replace any director who crosses them, he said. "Adding two independent directors can be expected to help, but its impact is likely to be limited," Professor Bebchuk said. "As courts and governance researchers have long recognized, the presence of a dominant shareholder is likely to reduce the effectiveness of independent directors as overseers of the C.E.O.'s decisions and behavior."

  • A Battle for Control of CBS, With Far-Reaching Consequences

    May 17, 2018

    It’s no secret that the proposed reunion of CBS and Viacom hasn’t been a Hollywood romance. But simmering tensions erupted into open warfare this week, with far more at stake than control of two legendary entertainment companies...The Harvard Law School professor Lucian A. Bebchuk used the Redstone example in an argument that dual-share class structures typically outlive their utility, and should be phased out by a company at some point. “Concerns about the emergence of inferior leadership over time are further aggravated when the dual-class structure enables a transfer of the founder’s lock on control to an heir who might be unfit to lead the company,” he wrote last year in an article titled “The Untenable Case for Perpetual Dual-Class Stock” in Virginia Law Review. He cited a “wide range of distorted choices” that are “aimed at increasing private benefits of control at the expense of the value received by other shareholders.”