John C. Coffee, Jr.
Sorry to be late and abbreviated in getting out my coverage of this great forum. Be sure to check out the Forum’s photo gallery, which contains many more and much better shots than what I took between cryptic notes and interesting conversations.
The first panel at this year’s Forum, which is now housed for a much better fit at Columbia Law School, discussed the impact of new patterns of corporate ownership. Do Changing Patterns of Ownership Require Rethinking Corporate Governance Standards and Norms? If So, by Whom?
Moderator: John C. Coffee, Jr., Adolf A. Berle Professor of Law and Director of the Center on Corporate Governance, Columbia Law School. Panelists included the following:
- Ronald J. Gilson, Marc and Eva Stern Professor of Law and Business, Columbia Law School; Charles J. Meyers Professor of Law and Business, Stanford Law School
Adam O. Emmerich
- Adam O. Emmerich, Partner, Wachtell, Lipton, Rosen & Katz
- Paul C. Hilal, Partner, Pershing Square Capital Management
- Robert J. Kueppers, Managing Partner, Center for Corporate Governance, Deloitte
There has been a massive concentration of ownership, as investments have moved from retail to institutional investors. Berle and Means theorized that specialized management allowed shareowners to diversify so they don’t have to bear the same risk as employees. Good governance aligns the role of specialized management with specialized shareowners.
In 1950, about 6% of stock was held by institutional investors. By 2009, it was about 67%. Mutual funds hold 25% but they also hold other accounts… enough to double to 50% of equities. This ownership pattern represents the new agency capitalism. Asset management – profits depend increasingly on scale. Cash flow depends on performance. Intermediaries better off selling because that improves performance relative to competitors, whereas stewardship does not. See my post on Agency Capitalism, Part 1, Part 2 and Part 3.
Paul C. Hilal
Activists are different. The good ones take a toe-hold stake and try to convince mainstream funds of wisdom of their alternative. Mutual funds will vote with whomever has the compelling case. Intermediaries have an incentive to vote rationally but not to come up with their own proposals. Reducing the time to trigger disclosure (reducing 13-d timing) would reduce the number of toe-holds taken. It makes no sense for the SEC to regulate based on where the capital markets used to be. Intermediation of equity ownership. It is a fiction that staff at Black-Rock aren’t smart enough. Delaware will eventually stop pretending they aren’t smart enough to evaluate.
Corporate governance is a system. UK has different system that is much more shareholder friendly in other areas. The genius of the pill was that shareowners didn’t have to approve it. Boards are much more sensitive. Changing 13-d rule. If can’t get board to approve, you go to the SEC.
The other side argues they are not seeking to perpetuate a rule that is outdated. Owners could decide what type of reporting they want. That’s private-ordering. Interesting comparison between Facebook disclosure and Microsoft. We’re trying to preserve 13-d regime with its original invention. Why not regulate the mutual fund industry, rather than the companies?
Activists are compensated on 2 and 20% basis. They are in it for the short-term. 13-d requirements are consistent with transparency. Efficiency/fairness owners should be known to the market. Not serving goal of entrenchment. World has changed because of derivatives and the ability to accumulate quickly. Others have adopted requirements to disclose much earlier. Let’s clean it up to bring more investor confidence. The case for this modest adjustment is straight-forward.
Robert J. Kueppers
Hedge funds are effective within the current framework. They are not practitioners of the “dark arts.” Several engagements were cited, such as Canadian Pacific, where mismanaged boards were not functioning well. Proxy fight was won by overwhelming margins, the trains are running on time, and pensions are better funded. They almost tripled the value of company in less than a year.
Strong opinion is that current rules have created a balance of power which enables entrenchment. However, institutional shareholders have the skills and incentive. Put time and effort in. Sector analysts. Not unwitting sheep. They feel powerless because information flow is up to management. We see ourselves as champions of shareowners. Finish more quickly so you can work on the rest of our portfolio. Activism is hard and expensive. Hope for wake-up call leading to quick change. To justify engagement, need to make profit. Management has access to the corporate treasury.
Proxy advisors contribute an enormous positive by helping shareowners vote more intelligently. Activist shareowners can only be effective based on reputation. Who would the beneficiaries of lowering thresholds be? Market participants and directors. but no institutional shareowners are pushing for it. In the UK 5% can call special meeting. 3% disclosure requirement to company (recorded publicly) keeps them out of the UK.
More views. Dodd-Frank allows the SEC to shorten the 10 day window for 13d filing. Also permits SEC to consider equity swaps like stock. Who has burden of proof? Sea change since Williams Act. SEC doesn’t need Congress to tell them they can review. Everything on a track for acceleration. No reason why this should be different. People will manage to the new standard, whatever it is.
Supplementary materials:
- Business Roundtable. BRT Principles of Corporate Governance 2012. Click here to view.
- Gilson, Ronald J. and Jeffrey Gordon. The Agency Costs of Agency Capitalism: Activist Investors and the Revaluation of Governance Rights. Columbia Law Review. 2013. Click here to view.
See also, Millstein Governance Forum: debating disclosure of equity ownership and ICGN panel debates value of investor activism (7/1/2013) in the Corporate Secretary (both by David Bogoslaw).
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