Beyond “Market Transparency”: Investor Disclosure and Corporate Governance

Alexander I. Platt is Associate Professor at the University of Kansas School of Law. This post is based on his recent paper, forthcoming in the Stanford Law Review. Related research from the Program on Corporate Governance includes The Law and Economics of Blockholder Disclosure by Lucian Bebchuk and Robert J. Jackson Jr. (discussed on the Forum here) and Pre-Disclosure Accumulations by Activist Investors: Evidence and Policy by Lucian Bebchuk, Alon Brav, Robert J. Jackson Jr., and Wei Jiang.

The ability to identify a firm’s shareholders is essential to modern corporate governance practice. Corporate managers, activist hedge funds, shareholder proposal sponsors, and other market actors all use this information in their efforts to shape corporate action.

This information—the identities of a company’s investors—seems elementary, if not downright primitive. In today’s world of algorithmic traders, machine learning, and robo-advisors, a list of a company’s shareholders doesn’t exactly get the blood pumping. It’s easy to see how it could come to be taken for granted.

And so it has. The best—and, in many cases, the only—source for information about a firm’s shareholders is produced under a mostly forgotten provision of the federal securities laws. For 40+ years, institutional investors (like mutual funds and hedge funds) have been disclosing their equity portfolio holdings every quarter as required under Exchange Act § 13(f) and the SEC’s rules promulgated under that statute (hereinafter collectively: 13F). And yet, the possibility that 13F plays a role in activism or other corporate governance interactions has been almost completely overlooked. Although countless studies in law and finance rely on 13F disclosures, none have turned the microscope around to examine the program itself. Accounts of the federal regulations that mediate the relationship between investors and corporations uniformly omit 13F.

But 13F can no longer be ignored. Last summer, the SEC pulled the provision out of obscurity and onto the chopping block—proposing to eliminate about 90% of current reports. Now, there is a concerted effort to significantly expand the reporting required under this regime. Although these reforms point in opposite directions, they have one thing in common: each of them ignores the impact of 13F on corporate governance.

My new paper, forthcoming in the Stanford Law Review, fills this gap. It presents an original holistic account of 13F’s impacts on corporate governance. It traces the impact of this provision and the information it generates across five key domains: hedge fund activism, shareholder proposals, shareholder litigation, engagement, and what I call “tacit shareholder influence.” In each area, the paper shows how 13F systematically alters governance outcomes by supplying actors with information they would not otherwise have had access to. All together, I map twenty discrete ways (across the five domains listed above) in which 13F is altering the corporate governance landscape—the overwhelming majority of which have never been previously been identified, much less closely examined.

As I show in the paper, 13F has played an important role in driving key governance trends that have been of particular interest for recent scholarship in law and finance. Among other findings, I show that 13F:

  • Mitigates the Short-Term Bias of Hedge Fund Activism—13F allows hedge fund activists to specifically tailor campaigns towards winning support from existing firm shareholders and, as a result, aligns activism with the interests of long-term investors.
  • Fosters “Collaboration” Between Shareholders and Managers—13F promotes settlements between managers and shareholders in the contexts of hedge fund activism, shareholder proposals, and litigation, and promotes direct engagement between shareholders and managers.
  • Facilitates a “Competition for Votes”—13F enables interested parties to lobby shareholders to support their side in corporate elections, in some cases skewing outcomes in favor of management.
  • Fosters Coordination Among Shareholders—13F enables information-sharing and other forms of coordination among shareholders on governance activities in voting and engagement.
  • Promotes Institutional Investor Support of “Stakeholder”-Friendly Policies—13F enables various key channels for institutional activists to advance progressive environmental, social, or governance (ESG) policies in their portfolio companies, including through activism, shareholder proposals, engagement, and public statements.
  • Facilitates the Anticompetitive Effects of Common Ownership—13F serves as a “causal mechanism” for the anticompetitive effects of common ownership because, as explicitly admitted by the National Association of Manufacturers and other key interest groups, corporate managers use 13F disclosures specifically to learn about the extent to which their companies’ own shareholders are also invested in competitors.

The original positive account provided in this paper shows that the consequences of the informational subsidy provided by 13F are complex. 13F does not uniformly favor a particular constituency; it advantages shareholders over managers in some domains, the opposite in others. Nor is there an easy conclusion regarding the net welfare effects of the program; some impacts seem obviously beneficial, while others seem just as obviously harmful, and many elide easy assessment.

Nevertheless, it is clear that no substantial reform of 13F may be responsibly undertaken without accounting for how the reform will alter the corporate governance landscape. To that end, the paper analyzes how each of the major proposed reforms would likely reshape the governance landscape by changing the impacts I track here. Contrary to conventional wisdom, I find that, in several areas, shareholders and/or other corporate stakeholders might be made better off with less transparency about institutional holdings.

My findings pose a direct challenge to a dominant theme in the universally hostile reaction to the SEC’s 2020 proposal to curtail 13F: that the 13F program’s core purpose is to promote “market transparency.” The proposals to expand the program are similarly grounded in the alleged importance of expanding “transparency.” I argue that this mode of analysis is misguided; “transparency” is not, by itself, a sound basis for policymaking in this domain. The information produced by 13F has unequal effects—advantaging certain groups over others and skewing the results of governance processes. Before undertaking any substantial reform, policymakers must look past the program’s effect on “transparency” to examine how the information is actually being used in the marketplace, by whom, and to what ends.

The complete paper is available for download here.

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