Who Bleeds When the Wolves Bite?

Leo E. Strine, Jr. is Chief Justice of the Delaware Supreme Court, the Austin Wakeman Scott Lecturer on Law and a Senior Fellow of the Harvard Law School Program on Corporate Governance. This post is based on Chief Justice Strine’s recent essay, Who Bleeds When the Wolves Bite? A Flesh-and-Blood Perspective on Hedge Fund Activism and Our Strange Corporate Governance System, forthcoming in the Yale Law Journal. Related research from the Program on Corporate Governance includes Can We Do Better by Ordinary Investors? A Pragmatic Reaction to the Dueling Ideological Mythologists of Corporate Law (discussed on the Forum here) and Securing Our Nation’s Economic Future (discussed on the Forum here), both by Chief Justice Strine, and The Long-Term Effects of Hedge Fund Activism by Lucian Bebchuk, Alon Brav, and Wei Jiang (discussed on the Forum here).

Leo E. Strine, Jr., Chief Justice of the Delaware Supreme Court, the Austin Wakeman Scott Lecturer on Law and a Senior Fellow of the Harvard Law School Program on Corporate Governance, recently issued an essay that is forthcoming in the Yale Law Journal, which is available here. The abstract of Chief Justice Strine’s essay summarizes it as follows:

This essay examines the effects of hedge fund activism and so-called wolf pack activity on the ordinary human beings—the human investors—who fund our capital markets but who, as indirect of owners of corporate equity, have only limited direct power to ensure that the capital they contribute is deployed to serve their welfare and in turn the broader social good.

Most human investors in fact depend much more on their labor than on their equity for their wealth and therefore care deeply about whether our corporate governance system creates incentives for corporations to create and sustain jobs for them. And because human investors are, for the most part, saving for college and retirement, they do not gain from stock price bubbles or unsustainable risk taking. They only gain if the companies in which their capital is invested create durable value through the sale of useful products and services.

But these human investors do not typically control the capital that is deployed on their behalf through investments in public companies. Instead, intermediaries such as actively traded mutual funds with much shorter-term perspectives and holding periods control the voting and buy and sell decisions. These are the intermediaries who referee the interplay between activist hedge funds and corporate managers, an interplay that involves a clash of various agents, each class of which has a shorter-term perspective than the human investors whose interests are ultimately in the balance.

Because of this, ordinary Americans are exposed to a corporate republic increasingly built on the law of unintended consequences, where they depend on a debate among short-term interests to provide the optimal long-term growth they need. This essay humanizes our corporate governance lens and emphasizes the living, breathing investors who ultimately fuel our capital markets, the ways in which they are allowed to participate in the system, and the effect these realities have on what corporate governance system would be best for them. After describing human investors’ attributes in detail—their dependence on wages and locked-in, long-term investment needs—this essay examines what people mean when they refer to “activist hedge funds” or “wolfpacks” and considers what risks these phenomena may pose to human investors. Finally, this essay proposes a series of reforms aimed not at clipping the wings of activist hedge funds, but at reorienting our corporate governance republic to truly serve the needs of those whose money it puts to work—human investors.

The full essay is available for download here.

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