The Misguided Attack on Common Ownership

Lucian Bebchuk is the James Barr Ames Professor of Law, Economics, and Finance, and Director of the Program on Corporate Governance, at Harvard Law School. Scott Hirst is Associate Professor at Boston University School of Law and Director of Institutional Investor Research at the Harvard Law School Program on Corporate Governance. Related research from the Program on Corporate Governance includes The Agency Problems of Institutional Investors by Lucian Bebchuk, Alma Cohen, and Scott Hirst (discussed on the Forum here) and Index Funds and the Future of Corporate Governance: Theory, Evidence, and Policy by Lucian Bebchuk and Scott Hirst (discussed on the forum here).

We have posted to SSRN a presentation titled The Misguided Attack on Common Ownership. The document is based on the slides we prepared for presentation by one of us at FTC hearing on common ownership that took place last week. The slides discuss the implications of our research work—Bebchuk, Cohen, and Hirst, The Agency Problems of Institutional Investors (2017), and Bebchuk and Hirst, Index Funds and the Future of Corporate Governance: Theory, Evidence, and Policy (2018)—for the common ownership debate.

The claims of common ownership critics, we suggest, fail to take into account how the agency problems of investment fund managers provide them with incentives to under-invest in stewardship and to be deferential toward the corporate managers of portfolio companies. Given these problems, policymakers should be primarily concerned that investment fund managers engage too little and not that they engage too much. The measures advocated by common ownership critics are not merely unnecessary but would be counterproductive; they could well discourage investment fund managers from stewardship activities that should be encouraged.

The presentation is available here and any comments would be welcome.

The Causal Effect of Corporate Governance on Employee Satisfaction

Marco Menner and Frederic Menninger are from the University of Konstanz, Germany. This post is based on their recent paper.

Politicians, business lawyers, institutional investors, and academics in the field of finance are currently debating the corporate purpose beyond shareholder wealth maximization. United States Senator Elizabeth Warren has introduced the “Accountable Capitalism Act” in August 2018, which requires changes to the corporate governance of large corporations and forces companies to increase their focus on the well-being of their employees. Business lawyer Martin Lipton has published the corporate governance framework “The New Paradigm” (discussed on this Forum here), which promotes investments in the workforce to ensure long-term and sustainable growth. Investor Larry Fink, founder and CEO of ETF giant BlackRock, has used his annual letter to CEOs to criticize companies for underinvesting in skilled workforces (2015) and has reminded CEOs that companies must benefit all of their stakeholders, including their employees (2018). Academics have confirmed the importance of the workforce. Several empirical studies have found a positive relation between stock returns and employee satisfaction, as well as high monetary and non-monetary societal costs resulting from stress in the workplace.

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2018 Annual Corporate Governance Review

Brigid Cremin Rosati is Director of Business Development; Edward Greene is Managing Director; and John Carroll is Institutional Services Associate at Georgeson LLC. This post is based on a Georgeson/Proxy Insight publication.

We are pleased to present the 2018 Annual Corporate Governance Review. For the second year in a row, Georgeson partnered with Proxy Insight on the coordination of voting data and analytics. Proxy Insight was instrumental in sourcing the annual meeting and proxy voting data contained in this report.

New This Year

The 2018 report provides a comprehensive review of relevant corporate governance issues covering five sections: shareholder proposals on governance issues, shareholder proposals on environmental and social and issues, director elections, say-on-pay proposals and CEO pay ratio disclosure.

Based on reader feedback and trends in the current market, we have expanded our review of environmental, social and governance shareholder proposals that were the subject of a vote during the period July 1, 2017 through June 30, 2018. Consequently, this year we are providing additional information detailing voting decisions by institutional investors related to employment diversity shareholder proposals.

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Bebchuk-Hirst Study of Index Funds Wins IRRC Institute Prize

Itai Fiegenbaum is a co-Editor of the Forum and Fellow at the Harvard Law School Program on Corporate Governance.

The IRRC Institute has announced that its 2018 annual investor research prize will be awarded to a study by Lucian Bebchuk and Scott Hirst, Index Funds and the Future of Corporate Governance: Theory, Evidence, and Policy. Upon announcing the study winning the $10,000 prize, the IRRC Institute’s Executive Director Jon Lukomnik described the study as making “a substantial contribution to understanding big picture, weighty issues for investors and the global economy.”

According to the IRRC’s press release announcing the prize, the study “provides an analytical framework for understanding the incentives of index fund managers,” “provides the first comprehensive and detailed empirical account of the full range of stewardship activities that index fund managers do and do not undertake,” and “considers the significant policy implications of the  issues analyzed.”

The judges on the panel selecting the winning study were:

  • Robert Dannhauser, Head of Capital Markets Policy, CFA Institute
  • James Hawley, Professor emeritus and former Director of the Elfenworks Center for Fiduciary Capitalism at St. Mary’s College of California
  • Erika Karp, Founder, CEO and Chair of the Board of Cornerstone Capital
  • Nell Minow, Governance Expert and Huffington Post Columnist

Biographies of the judges are available here.

More information about the IRRC Institute award is available here. The Bebchuk & Hirst study for which the prize was awarded is available here, and is discussed on the Forum here.

Manager Sentiment and Stock Returns

Xiumin Martin is Professor of Accounting at the Washington University in St. Louis Olin Business School. This post is based on a recent article, forthcoming in the Journal of Financial Economics, by Professor Martin; Fuwei Jiang, Associate Professor of Finance at the Central University of Finance and Economics; Joshua Lee, Assistant Professor at the University of Georgia J.M. Tull School of Accounting; and Guofu Zhou, Frederick Bierman and James E. Spears Professor of Finance at the Washington University in St. Louis Olin Business School.

In this study, we investigate the asset pricing implications of manager sentiment, focusing on its predictability for future U.S. stock market returns. Intuitively, investors may simply follow managers’ sentiment in financial disclosures, even though this sentiment may not represent fully the underlying fundamentals of the firm. Hence, high manager sentiment may lead to speculative market overvaluations. When the true economic fundamentals are revealed to the market gradually, the misvaluation diminishes and stock prices reverse, yielding low future stock returns (Baker and Wurgler, 2007). However, it is an open empirical question whether such hypothesized effects are significant in the stock market.

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Corporate Governance Case Study: Tesla, Twitter, and the Good Weed

Justin Slane, Sharon Makower and Joe Green are editors for the Capital Markets & Corporate Governance Service at Thomson Reuters Practical Law. This post is based on a Practical Law article by Mr. Slane, Ms. Makower and Mr. Green.

Perhaps no company in the world has the perception of its brand being tied to one person more than Tesla Inc. (Tesla) and its CEO and now former chairman of the board, Elon Musk. As at least one journalist phrased it, “Elon Musk is Tesla. Tesla is Elon Musk.” And Musk is not just the face of Tesla, but a co-founder of PayPal and Solar City, the founder and current CEO of SpaceX and founder of its subsidiary, The Boring Company. He has crafted a “real-life Iron Man” persona, including all the eccentricity, and is undoubtedly one of the most recognizable and polarizing CEOs in the world.

But 2018 has not been the best year for Elon Musk. In what Musk would call negative propaganda pushed by short sellers, Tesla has faced heightened scrutiny and increasingly negative media attention related to a litany of issues, including cash burn, vehicle safety, production capabilities, and a string of employment-related lawsuits and executive exits (only made worse recently). Analysts and investors began to publicly cool on Tesla and question its long-term value, which Musk also attributed to short sellers.

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CEO Transitions: Mitigating Risks and Accelerating Value Creation

Rusty O’Kelley is Global Leader of the Board Advisory & Effectiveness Practice at Russell Reynolds Associates. This post is based on a Russell Reynolds memorandum by Mr. O’Kelley.

CEO transitions have always been challenging, but never more so than in today’s environment. As a board governance, leadership consulting and search firm, Russell Reynolds Associates is asked regularly to conduct CEO searches and support long-term CEO succession planning. We advise our clients not to forget about transition planning as a distinct process that needs attention and planning. We use succession planning and transition planning to describe different phases of a leadership transfer. Succession planning is first and includes the steps related to defining the success criteria, as well as the critical work related to identifying, assessing and developing potential CEO candidates. Transition planning encompasses the decision on which candidate to select (while it may not yet be formally announced) and the steps related to role transfer from the outgoing to the incoming CEO.

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SEC Rulemaking Over the Past Year, the Road Ahead and Challenges Posed by Brexit, LIBOR Transition and Cybersecurity Risks

Jay Clayton is Chairman of the U.S. Securities and Exchange Commission. This post is based on Chairman Clayton’s recent public statement, available here. The views expressed in this post are those of Mr. Clayton and do not necessarily reflect those of the Securities and Exchange Commission or its staff.

Thank you Jason [Healey] for that kind introduction. [1]

For many, December is a time to reflect on the past year and to look forward to what the New Year may bring. I believe organizations also should mark milestones, take stock of what has been done and what needs to be done, and adjust course accordingly.

My colleagues at the Commission and I go through this exercise relatively frequently, including to fulfill statutory reporting requirements—yes, like the public companies we regulate, we too have disclosure obligations.

In the past few months, we published a new, four year strategic plan and our annual report for fiscal year 2018. [2] We also participate in the annual report process for the Financial Stability Board and the Financial Stability Oversight Council. [3] In addition, our divisions and offices undertake similar reviews and, in some cases—notably, the Division of Enforcement and the Office of Compliance Inspections and Examinations—publish an annual report and exam priorities, respectively. [4]

Today [December 6, 2018], I would like to go through this exercise with respect to our rulemaking efforts. I will review our progress on the agenda for 2018, then discuss the agenda for 2019, and close with observations on certain of the key risks that we are monitoring—namely, Brexit, the LIBOR transition and cybersecurity risks.

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Opening Remarks at the Municipal Securities Conference

Jay Clayton is Chairman of the U.S. Securities and Exchange Commission. This post is based on Chairman Clayton’s recent remarks at the inaugural Municipal Securities Conference, available here. The views expressed in this post are those of Mr. Clayton and do not necessarily reflect those of the Securities and Exchange Commission or its staff.

Good morning and welcome. I am delighted to help kick off the inaugural Municipal Securities Conference, although I regret that because of other meetings and commitments, I am doing so from our New York office. Before going any further, I want to make it clear that my remarks are my own and do not necessarily reflect the views of the Commission or my fellow Commissioners.

I would like to thank Rebecca Olsen and the staff in our Office of Municipal Securities (“OMS”) for organizing and hosting the conference. The theme of today’s agenda—disclosure in an evolving market—is particularly appropriate. I am pleased to see the broad participation and diversity of perspectives here today, including panelists representing the views of investors, issuers, [1] broker-dealers, municipal advisors, and the MSRB, among others.

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Weekly Roundup: November 30-December 6, 2018


More from:

This roundup contains a collection of the posts published on the Forum during the week of November 30–December 6, 2018.



Online Digital Token Platforms as National Securities Exchanges


Spotlight on Boards


2018 Year-End Issues for Audit Committees



Virtual Currencies as Commodities?



State of Integrated and Sustainability Reporting 2018


Default Activism in the Debt Market


Why Common Ownership Is Not an Antitrust Problem



Universal Proxies: What Companies Need to Know



13F Analysis: Q3 2018


Dinosaur Governance in the Era of Unicorns


Acquirer Reference Prices and Acquisition Performance


Principles for a Responsible Civilian Firearms Industry

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