Lucian Bebchuk

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.

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.

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.

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.

An article by Lucian Bebchuk and Roberto Tallarita: By 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.

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.”

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.

"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”.

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.”

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.

“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.”

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.”

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.

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.

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.

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.

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.

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.