We've been following the debate between Lucian Bebchuk and Martin Lipton on the value of activist shareholders with interest, and it still seems as if the protagonists see the world very differently. The debate has been occasioned by a paper from Bebchuk and his co-authors arguing, essentially, that activist shareholders increase returns to investors:
We find no evidence that interventions are followed by declines in operating performance in the long term; to the contrary, activist interventions are followed by improved operating performance during the five-year period following these interventions. These improvements in long-term performance, we find, are present also when focusing on the two subsets of activist interventions that are most resisted and criticized – first, interventions that lower or constrain long-term investments by enhancing leverage, beefing up shareholder payouts, or reducing investments and, second, adversarial interventions employing hostile tactics.
We also find no evidence that the initial positive stock price spike accompanying activist interventions fails to appreciate their long-term costs and therefore tends to be followed by negative abnormal returns in the long term; the data is consistent with the initial spike reflecting correctly the intervention’s long-term consequences. Similarly, we find no evidence for pump-and-dump patterns in which the exit of an activist is followed by abnormal long-term negative returns. Finally, we find no evidence for concerns that activist interventions during the years preceding the financial crisis rendered companies more vulnerable and that the targeted companies therefore were more adversely affected by the crisis.
In this round, Lipton offers a literature review of the case for the other side, which is motivated by the plausible assumption that activist shareholders tend not to buy and hold:
numerous empirical studies over the years have produced results that conflict with those Prof. Bebchuk espouses. These other studies generally find that activism has a negative effect or no effect on long-term value, particularly when controlling for the skewing impact of a takeover of the target (which generally occurs at a premium regardless of whether the target is the subject of activism).
Some of the studies cited are quite old, and not all of the journals are top-drawer. But others seem quite on point. Perhaps the disputants will next be able to identify some empirical propositions with which they agree, and others with which they do not (other than, you know, sample selection).
We're looking for someone in a business field this year; I'm happy to answer questions. The announcement is below.
The Wharton School of the University of Pennsylvania invites applications for a tenure-track position (including applicants who may already have achieved tenure at a business or law school) in corporate and/or securities law for its Department of Legal Studies and Business Ethics. At full strength, the Department’s nineteen full-time faculty teach a wide variety of business-oriented courses in law and ethics in the undergraduate, MBA, and Ph.D. programs. Their research is regularly published in leading legal and other journals. The Wharton School has one of the largest and best-published business school faculties in the world and enjoys a premier, long-standing reputation in the area of finance.
Applicants must, at a minimum, have a J.D. from an accredited institution (an expected completion date no later than June 30, 2014 is acceptable). Applicants should further have a demonstrated commitment to scholarship in corporate and/or securities law or a closely related, core business law field (such as financial regulation) in the domestic or global legal environment.
The Wharton School offers a uniquely rich scholarly environment for anyone working in the corporate and/or securities law research areas. The School has particular strengths in its global reach and perspective, as well as an interdisciplinary approach to business issues, through its ten academic departments and over twenty research centers.
Applicants are requested to submit electronically a letter of introduction, c.v., and one selected article or writing sample in PDF format via the following website, http://lgst.wharton.upenn.edu, by December 3, 2013. As decisions for interviews will be made on a rolling basis, candidates are encouraged to apply early. It is expected that the successful candidate will take up this appointment as of July 1, 2014.
The University of Pennsylvania values diversity and seeks talented students, faculty, and staff from diverse backgrounds. The University of Pennsylvania is an equal opportunity, affirmative action employer. Women, minorities, veterans, and individuals with disabilities are encouraged to apply.
We've got a nice donnybrook going between Lucian Bebchuk and Marty Lipton on the positive long term returns to companies subjected to campaigns by activist shareholders. Lipton believes they do not exist, Bebchuk believes they do.
Our study empirically disproves the myopic activists claim that interventions by activist hedge funds are in the long term detrimental to the involved companies and their long-term shareholders. This post responds to the main criticisms of our work in Wachtell’s memos. Below we proceed as follows:
- First, we discuss the background of how our study meets a challenge that Wachtell issued several months ago;
- Second, we highlight how Wachtell’s critiques of our study fail to raise any questions concerning the validity of our findings concerning long-term returns, which by themselves are sufficient to undermine the myopic activists claim that Wachtell has long been putting forward;
- Third, we explain that the methodological criticisms Wachtell directs at our findings concerning long-term operating performance are unwarranted;
- Fourth, we show that Wachtell’s causality claim cannot provide it with a substitute basis for its opposition to hedge fund activism;
- Finally, we explain why Wachtell’s expressed preference for favoring anecdotal evidence and reports of experience over empirical evidence should be rejected.
It is all getting quite tasty indeed, and Bebchuk's memo is pretty compelling stuff. He's of course not alone, either. To name but one paper I've seen recently, Paul Rose and Bernie Sharfman have a new paper that also reviews the economic literature, and concluding that "Empirical studies have repeatedly shown that certain types of offensive shareholder activism lead to an increase in shareholder wealth."
The empirical question, it seems to me, is not a straightforward one - it is difficult to compare firms that activists do target with firms that they do not, and difficult of course to know what would have happened had a firm not been targeted. I take it that the case against activist shareholders is unimpeachably logical, and very Chicago. In efficient markets it should not be possible to realize long terms gains through management changes, for the companies targeted would be making said changes anyway. And for examples of studies along these lines, you can look at this or this case.
But this is not meant as a critique, rather as a scene setter - if you want critique, you'll have to read the papers themselves. As long as we see more tasty memos in this fight, you can expect to see them on this here blog.
Some interesting cases on the duties of independent directors coming out of Delaware...I have yet to read either of them, but there's a holiday weekend coming up, and its sounds like they'll make for some excellent beach reading for the corporate faithful. They are Rich v. Chong, C. A. No. 7616-VCG (Del. Ch., April 25, 2013) and In re Puda Coal Stockholders’ Litigation C.A. No. 6476-CS (Del. Ch. Feb. 6, 2013) (bench ruling).
David A. Katz of Wachtell and Laura A. McIntosh connect the cases by posing an intriguing question on the CLS Blue Sky Blog: Can an independent director just resign from the board of a troubled company? Answer: No, you lily-livered slacker. You've got to stay put and make things right. Or, as they put it:
In both of the cases discussed above, the Delaware Chancery Court was critical of the independent directors’ decision to resign. Chancellor Strine observed: “[T]here are some circumstances in which running away does not immunize you. It in fact involves breach of duty…. If these directors are going to eventually testify that at the time that they quit they believed that the chief executive officer of the company had stolen the assets out from under the company, and they did not cause the company to … do anything, but they simply quit, I’m not sure that that’s a decision that itself is not a breach of fiduciary duty.” Similarly, Vice Chancellor Glasscock commented in a footnote in Rich v. Chong, “It may be that some of the former independent directors … attempted to fulfill their duties in good faith…. Nonetheless, even though [two of them] purported to resign in protest against mismanagement, those directors could still conceivably be liable to the stockholders for breach of fiduciary duty…. I do not prejudge the independent directors before evidence has been presented, but neither are those directors automatically exonerated because of their resignations.” Both decisions found it “troubling that independent directors would abandon a troubled company to the sole control of those who have harmed the company.”
There's more on Rich v. Chong from Francis Pileggi. The oddest thing about the case for me, based on Francis' summary, is that the plaintiffs made a demand on the board. What was that about? You never made a demand on the board, because then you're stuck with near-impossible wrongful refusal standard: you concede the board's independence and capacity to evaluate the demand. The board gets business judgment rule protection, and you lose. Which is why everyone pleads demand futility, to the sorrow and confusion of BA students each year.
But the Rich v. Chong plaintiffs made a demand. Who does that? Next to no one, right? And yet plaintiffs lucked out because the defendants sat on the demand for 2 years. They not only failed to respond, but started an investigation, uncovered evidence of mismanagement, didn't do anything about it, and abandoned the investigation. So plaintiffs survive a motion to dismiss on Caremark claims, which also never happens.
See? Told you it sounded interesting...
Coinciding with Con-Op's Larry Cunningham's book of essays on Warren Buffett, said blog has put together a pretty stellar set of contributions about the investor and his world. It has Berkshire insiders:
● Robert Mundheim, who worked with Buffett and Lorne at Salomon and is now of counsel at Shearman & Sterling
● Donald Graham, Chairman and CEO of The Washington Post Co.
And it has professors
● Kelli Alces (Florida State)
● William Bratton (Penn)
● Deborah DeMott (Duke)
● Jill Fisch (Penn)
● Steven Davidoff (OSU)
Among others, too. It's off to a great start, so do give it a look.
Over at HBR, Mayer, the former dean of the Said Business School at Oxford, decries British best-in-breed corporate governance. A taste:
The form of capitalism that has emerged in Britain is the textbook description of how to organize capital markets and corporate sectors. It features dispersed shareholders with powers to elect directors and remove them with or without cause, large stock markets, active markets for corporate control, a good legal system, strong investor protection, a rigorous anti-trust authority — the list goes on.
The downside, though, is that exemplary as a form of control the British financial system might be, it systematically extinguishes any sense of commitment — of investors to companies, of executives to employees, of employees to firms, of firms to their investors, of firms to communities, or of this generation to any subsequent or past one. It is a transactional island in which you are as good as your last deal, as farsighted as the next deal, admired for what you can get away with, and condemned for what you confess.
While incentives and control are center-stage in conventional economics, commitment is not. Enhancing choice, competition, and liquidity is the economist's prescription for improving social welfare, and legal contracts, competition policy, and regulation are the toolkit for achieving it. Eliminate restrictions on consumers' freedom to choose, firms' ability to compete, and financial markets' provision of liquidity and we can all move closer to economic nirvana.
Cross-posted at SocEntLaw.
"Branding" is one area where proponents of the Model may argue that the Model is better than the PBC. As mentioned in my first substantive post, the PBC favors private ordering more than the Model, which makes the PBC more flexible, but also makes it more difficult to maintain a consistent brand. Branding could be useful to investors, consumers, and governments that wish to quickly identify socially responsible companies.
Some proponents of the Model may point to the required annual report (PBC only requires a biennial report) and the requirement of measuring general public benefit against a third party standard (optional under the PBC) as building the Model’s brand. In my opinion, however, neither the required annual report nor mandatory use of a third party standard is likely to facilitate creation of a useful brand under the current language of the Model.
First, the Model does not expressly provide an enforcement mechanism for assuring the public posting of an annual report and the use of a third party standard. Currently, a number of benefit corporations are in violation of the statute, but nothing seems to be done about the violations. Second, most of the few annual reports available are full of fluffy self-promotion and do not include much of value. Third, the available third party standards vary wildly, so simply requiring a third party standard is not likely to lead to a consistent and valuable brand. The updated version of the Model requires that the third party standard be “comprehensive,” “independent,” “credible,” and “transparent,” but those requirements will be difficult to enforce and, in any event, do not appear aimed at creating a consistent brand. A benefit corporation that does not see the value in using a third party standard may use the lowest standard available, provide little to no useful information to the market, and waste company resources in the process.
If the Model proponents wished to create a brand via statute they would do better requiring an annual charitable giving floor and a partial asset lock, as I suggest here. In my opinion, however, the heavy lifting in the branding department of social enterprise should be left to private organizations like B Lab. The social enterprise space is evolving quickly, and I think it unlikely the state governments would keep up with the changes and engage in the type of enforcement needed to maintain a valuable brand. Also, the term “social good” means very different things to different people, and therefore it is likely better to have private organizations develop various standards and allow the market to determine which standards, if any, are useful and valuable.
From the Harvard Law School Forum on Corporate Governance and Financial Regulation, via Allen M. Terrell, Jr. of Richards, Layton & Finger, comes a summary of proposed amendments to the Delaware General Corporation Law. I had heard about the elimination of the vote in second-step mergers, but the public benefit corporation was news to me.
It sounds a lot like the benefit corporation legislation that's been spreading across the country (see this chart by Haskell Murray. At first blush I was surprised to see Delaware contemplating this kind of social enterprise legislation, since it's not really a stakeholders' rights kinda state. But on further reflection I guess a "let a thousand flowers bloom" attitude makes sense for Delaware's let-the-market-decide, opt-in attitude. Here's the description:
In general, under the proposed legislation, a public benefit corporation would be a corporation managed in a manner that balances the stockholders’ pecuniary interests, the interests of those materially affected by the corporation’s conduct, and one or more public benefits identified in its certificate of incorporation. To this last point, each public benefit corporation would be required, in its certificate of incorporation, to identify itself as a public benefit corporation and to state the public benefits it intends to promote. The proposed legislation generally defines “public benefits” as positive effects (or minimization of negative effects) on persons, entities, communities or interests, including those of an artistic, charitable, cultural, economic, educational, literary, medical, religious, scientific or technological nature.
Central to the proposed new subchapter’s operation is the statutory mandate that would be imposed on directors. The new subchapter would provide that directors, in managing the business and affairs of the public benefit corporation, shall balance the pecuniary interests of the stockholders, the interests of those materially affected by the corporation’s conduct, and the identified public benefits. The new subchapter also would provide that directors shall not have any duty to any person solely on account of any interest in the public benefit and would provide that, where directors perform the balancing of interests described above, they will be deemed to have satisfied their fiduciary duties to stockholders and the corporation if their decision is both informed and disinterested and not such that no person of ordinary, sound judgment would approve.
The new subchapter would impose special notice requirements on public benefit corporations, mandating periodic statements to stockholders regarding the corporation’s promotion and attainment of its public benefits. The new subchapter also would provide a means of enforcing the promotion of the public benefits. By statute, stockholders holding at least 2% of the corporation’s outstanding shares (or, in the case of listed companies, the lesser 2% of the outstanding shares or shares having at least $2 million in market value) would be able to maintain a derivative lawsuit to enforce specified requirements in the subchapter.
Update: Steve Bainbridge makes a good point: Delaware is moving to protect its market share.
What you see is what you get with Warren Buffett. When he writes to his shareholders, he talks about not just the numbers in their annual report, but about himself, what he thinks, and how Berkshire Hathaway has come to be where it is today. The book is a compilation of Warren Buffett’s annual letters to Berkshire Hathaway shareholders from 1979 to 2011, and reads as sound investment strategy and business practices, with abundant offerings of good horse sense. He believes if "you can't understand a footnote or other managerial explanation, it's usually because the CEO doesn't want you to."
The first edition of The Essays of Warren Buffett: Lessons for Corporate America was the focus of a symposium held twenty years ago and was the standard textbook for a specialized course taught by the author, Professor Lawrence A. Cunningham of George Washington University Law School. It has since been adopted by many law and business schools for study in investment, finance and accounting. Investment firms have used this book in their staff and investor training programs. However, the layman should not be put off by these credentials as the book is an approachable guide to understanding investment. Buffett quotes Twain, Churchill and even Woody Allen. If it's a matter of faith in Warren's wisdom, you may be reassured by the sprinkling of Biblical references used to illustrate his points.
A sampling of Buffett's sage advice to shareholders includes, "Beware of companies displaying weak accounting." If you question what you see, "it is likely they are following a similar path behind the scenes. There is seldom just one cockroach in the kitchen." Berkshire Hathaway's board of directors do not receive company stock as part of their compensation, they "purchased their holdings in the market just as you did...I love such honest-to-God ownership. After all, who ever washes a rental car?" Another gem, "...lemmings as a class may be derided but never does an individual lemming get criticized."
Organized by topic rather than chronologically, the words of Mr. Buffett are the words of every man - there is extremely little corporate lingo and no baffling verbiage. His plain-speak is valuable guidance to learning the history of investing in the U.S., the good and the bad, and to understanding how you can make an intelligent investment decision if effort is put into researching the integrity and focus of company and management behind the investment.
The table of contents is well organized and the book includes a concept glossary and a disposition summary to help readers familiar with the previous editions of this book.
Berkshire Hathaway Inc. is a holding company owning subsidiaries involved in business activities including insurance and reinsurance, freight rail transportation, utilities and energy, finance, manufacturing, services, and retailing. They hold interests in 28 newspapers, even with the overwhelming influence today of the Internet.
I typically review biographies and lifestyle publications, and have been an admirer of Warren Buffett for many years so, naturally, I wanted very much to read this book. Clearly, is it a valuable tool for training anyone in anyway connected with handling the money of others, and I would highly recommend this book to investment clubs and to anyone giving serious thought to planning their retirement portfolio, be they in their 20's or their 60's.
One of my colleagues said that my latest article (written with one of my excellent students, Jordan Lee) sounds like an R-rated movie. The title is Discretion, and here is the abstract:
Discretion is an important feature of all contractual relationships. In this Article, we rely on incomplete contract theory to motivate our study of discretion, with particular attention to fiduciary relationships. We make two contributions to the substantial literature on fiduciary law. First, we describe the role of fiduciary law as “boundary enforcement,” and we urge courts to honor the appropriate exercise of discretion by fiduciaries, even when the beneficiary or the judge might perceive a preferable action after the fact. Second, we answer the question, how should a court define the boundaries of fiduciary discretion? We observe that courts often define these boundaries by reference to industry customs and social norms. We also defend this as the most sensible and coherent approach to boundary enforcement.
I wrote an article about a decade ago called "The Critical Resource Theory of Fiduciary Duty" that still gets downloaded and cited a fair amount, at least for a fiduciary duty article. It is about the structure of fiduciary relationships, and I wanted to do a follow on article about how courts know when someone has breached a fiduciary duty. I actually had a fairly long draft of an article that was just horrible, and I never published it, but I kept thinking about and teaching about this problem. Earlier this year, I had a brainstorm about the subject, and the result is this new article.
By the way, interest in fiduciary law seems to have exploded in the past decade. Some of that interest stems from Tamar Frankel's book and the accompanying conference at Boston University. Some of the interest stems from the fact that fiduciary law is interesting in many countries outside the United States, where much of the best writing on this subject is found (see Paul Miller, for example). I look forward to a new surge in interest this summer, as Andrew Gold and Paul Miller have organized an excellent conference on The Philosophical Foundations of Fiduciary Law, to be held in Chicago. I am writing a paper entitled "True Loyalty" for that conference and very much looking forward to reading the other contributions.
Andrew Mason, the CEO of Groupon, wrote a pretty nice exit letter when the board fired him. But the annotation by Marc Andreesen and Bo Horowitz is also illuminating, if you like that tech start-up kind of thing.
HT: Felix Salmon
Our own Christine Hurt will be featured in the Business Associations section ...
Business Associations and Governance in Emerging Economies
Moderator: Brett H. McDonnell, University of Minnesota Law School
Virginia Harper Ho, University of Kansas School of Law
Nicholas C. Howson, The University of Michigan Law School
Christine Hurt, University of Illinois College of Law
Kellye Y. Testy, University of Washington School of Law
Commentator: Jodie Kirshner, University Lecturer, University of Cambridge F aculty of Law, Cambridge, United Kingdom
Emerging economies such as China, India, and Brazil play an increasingly important role in the world economy. Companies based in these economies face their own particular set of challenges in corporate governance. In some ways these problems are the same as those faced in developed economies, and in some ways they are quite different. The challenges, and solutions to those challenges, also vary among emerging economies. Panelists will discuss those challenges and how participants in emerging economies are meeting them. Some panelists are drawn from a Call for Papers; other panelists will comment upon those papers and use them as a launching point for a general discussion of corporate governance in emerging economies.
My department is hiring at the junior and senior level, and, although we're casting the net broadly, is very interested in the subjects in which the readers of this blog are interested. So if you think you'd be interested, please do apply! The announcement is below. We want your application!
FACULTY POSITIONS IN BUSINESS LAW AND BUSINESS ETHICS
The Wharton School at the University of Pennsylvania invites applications for tenured and tenure-track positions in its Department of Legal Studies and Business Ethics. The Department has seventeen full-time faculty who teach a wide variety of business-oriented courses in law and ethics in the undergraduate, MBA, and Ph.D. programs and whose research is regularly published in leading journals. The Wharton School has one of the largest and best-published business school faculties in the world.
Applicants should have either a J.D. or a Ph.D. from an accredited institution (an expected completion date no later than July 1, 2014 is acceptable) and a demonstrated commitment to scholarship in business law, business ethics, or a combination of the two fields. Specific areas of potential focus for hiring include corporate governance, financial regulation, health law/bioethics, securities regulation, and social impact/sustainability. In addition, the Wharton School has particular strengths in its global reach and perspective, as well as an interdisciplinary approach to business issues (embracing ten academic departments and over twenty research centers).
Please submit electronically your letter of introduction, c.v., and one selected article or writing sample in PDF format via the following website by December 15, 2012: http://lgst.wharton.upenn.edu. Decisions for interviews will be made on a rolling basis, so candidates are encouraged to apply early.
The University of Pennsylvania is an equal opportunity, affirmative action employer. Women and minority candidates are strongly encouraged to apply.