Counterparties: Listening board

April 18, 2013

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Isolate corporate boards from shareholders at your own risk. That’s the message of a new study by Lucian Bebchuk, a professor of law and economics at Harvard. There’s a popular school of thought which argues that corporate boards should be given extra ability to ignore demands from shareholders — like Bill Ackman’s adventures at JC Penney or David Einhorn’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 antagonism of activist investors. Andrew Ross Sorkin thinks shareholder democracy can become just a way for billionaires to very publicly sue each other “in hopes of creating a fleeting rise or fall in a company’s stock price”. He quotes a memo from corporate lawyer Martin Lipton, assailing Einhorn’s attack on Apple:

The activist-hedge-fund attack on Apple — 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 — 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 isn’t alone in his criticism, however. Jill Priluck thinks that “while 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 today”. Priluck identifies a key structural problem – ostensibly longer-term institutional investors like pension and mutual funds have become increasingly allied with shorter-term, activist investors. – Ben Walsh

On to today’s links:

Where the world’s poorest people live, according to the World Bank – WSJ

Must Read
Gabby Giffords’ devastating op-ed on the Senate’s failure to pass background checks for gun buyers – NYT

How a student took on two of the world’ s most prominent economists — and won – Reuters
Reinhart & Rogoff have it backwards: low growth causes higher debt to GDP ratios – Arindrajit Dube
“Dube investigates the causal element, which is the one that’s relevant for policy purposes” – Matt Yglesias

EU Mess
Was the gold sell-off triggered by a European collateral squeeze? – Izabella Kaminska

Good Luck With That
The next generation of house flippers are convinced that this time it’s different – Reuters

Legitimately Good News 
From 2005 to 2011, US infant mortality fell 12% – NYT

Morgan Stanley still trying to figure out this whole bond-trading business – John Carney

Data Points
Evidence that “Americans simply don’t know one another very well” – Esquire

Rich Ricci, Barclays’ head of investment banking, is stepping down – DealBook

How Quaint! 
A dairy company is narrowing its pension gap with “20 million kilograms of maturing cheese” – FT

Your Daily Outrage
Suze Orman is teaching a personal finance class at a for-profit college that loads students with debt – Huffington Post

And, of course, there are many more links at Counterparties.


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