Counterparties: Listening board
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Isolate corporate boards from shareholders at your own risk. Thatâ€™s the message of a new study by Lucian Bebchuk, a professor of law and economics at Harvard. Thereâ€™s a popular school of thought which argues that corporate boards should be given extra ability to ignore demands from shareholders — like Bill Ackmanâ€™s adventures at JC Penney or David Einhornâ€™s agitation with Apple, for example — because they will lead to short-term, unsustainable gains.
Bebchuk writes that “empirical evidence provides no support for the claim that board insulation is overall beneficial in the long term; to the contrary, the body of evidence favors the view that shareholder engagement, and arrangements that facilitate it, serve the long-term interests of companies and their shareholders”. Bebchuk also finds that keeping a board isolated will cause more long-term problems than it solves.
Bebchuck’s findings run counter to the recent arguments against the increasing antagonismÂ of activist investors. Andrew Ross Sorkin thinks shareholder democracy can become just a way for billionaires to very publicly sue each other â€śin hopes of creating a fleeting rise or fall in a companyâ€™s stock priceâ€ť. He quotes a memo from corporate lawyer Martin Lipton, assailing Einhornâ€™s attack on Apple:
The activist-hedge-fund attack on Apple â€” in which one of the most successful, long-term-visionary companies of all time is being told by a money manager that Apple is doing things all wrong and should focus on short-term return of cash â€” is a clarion call for effective action to deal with the misuse of shareholder power.
Lipton, who has made a career insulating corporate boards from the power of shareholders, is far from a disinterested party. He isnâ€™t alone in his criticism, however. Jill Priluck thinks that â€śwhile shareholders can be disciplinarians who right the wrongs of abusive directors, many boardroom activists advance some of the most destructive short-term thinking in business todayâ€ť. Priluck identifies a key structural problem â€“ ostensibly longer-term institutional investors like pension and mutual funds have become increasingly allied with shorter-term, activist investors. â€“ Ben Walsh
On to todayâ€™s links:
How a student took on two of the world’ s most prominent economists — and won â€“ Reuters
Reinhart & Rogoff have it backwards: low growth causes higher debt to GDP ratios â€“ Arindrajit Dube
“Dube investigates the causal element, which is the one that’s relevant for policy purposes” â€“ Matt Yglesias
And, of course, there are many more links at Counterparties.