Counterparties: Listening board
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Isolate corporate boards from shareholders at your own risk. That‚Äôs the message of a new study by Lucian Bebchuk, a professor of law and economics at Harvard. There‚Äôs a popular school of thought which argues that corporate boards should be given extra ability to ignore demands from shareholders — like Bill Ackman‚Äôs adventures at JC Penney or David Einhorn‚Äôs 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 ‚Äúin hopes of creating a fleeting rise or fall in a company‚Äôs stock price‚ÄĚ. He quotes a memo from corporate lawyer Martin Lipton, assailing Einhorn‚Äôs attack on Apple:
The activist-hedge-fund attack on Apple ‚ÄĒ 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 ‚ÄĒ 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‚Äôt alone in his criticism, however. Jill Priluck thinks that ‚Äúwhile 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‚ÄĚ. Priluck identifies a key structural problem ‚Äď ostensibly longer-term institutional investors like pension and mutual funds have become increasingly allied with shorter-term, activist investors. ‚Äď Ben Walsh
On to today‚Äôs links:
How a student took on two of the world’ s most prominent economists — and won ‚Äď Reuters
Reinhart & Rogoff have it backwards: low growth causes higher debt to GDP ratios ‚Äď Arindrajit Dube
“Dube investigates the causal element, which is the one that’s relevant for policy purposes” ‚Äď Matt Yglesias
And, of course, there are many more links at Counterparties.