Lucian Bebchuk

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.

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.

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.

... 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.

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.

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.

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.

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.

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.”

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.”

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."

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.

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.

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.

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.

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."

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.”