Tag Archives | Lucian Bebchuk

Jill Fisch: Index Funds Investors Can Switch

Jill Fisch, et al. addresses a central myth around index funds and investors in Passive Investors (June 29, 2018). Her research has implications applicable to recent analysis and recommendations by Delaware Supreme Court Chief Justice Leo E. Strine Jr., Professor Lucian Bebchuk and others.  The following is the central highlight:

Our key insight is that although index funds are locked into their investments, their investors are not. Like all mutual fund shareholders, investors in index funds can exit at any time by selling their shares and receiving the net asset value of their ownership interest. This exit option causes mutual funds – active and passive – to compete for investors both on price and performance. While the conventional view focuses on the competition between passive funds tracking the same index, our analysis suggests that passive funds also compete against active funds. Passive fund sponsors therefore have an incentive to take measures to neutralize the comparative advantage enjoyed by active funds, that is, their ability to use their investment discretion to generate alpha. Because they cannot compete by exiting underperforming companies, passive investors must compete by using “voice” to prevent asset outflow.

In the case of Strine’s concerns with political contributions, use of “voice” would be voting in favor of measures requiring shareholder approval or at least transparency of political contributions. While Strine’s paper was based on actual behavior, Fisch points to potential, if funds operate logically. The potential for “voice” to ensure competitiveness with active investors also addresses, at least in part, some of Bebchuk’s concerns.

Fisch also points out in another paper (Shareholder Collaboration) that passive investors are increasingly engaged in information production of their own, not “just as ‘reticent’ supporters of initiatives undertaken by activist hedge funds.” Because of their size, huge passive index funds often cast deciding votes. Because of their market-wide focus, they often have information the firm insiders do not have. In many cases the potential rewards for index funds can be disproportionately high, compared to their investment in time, since they typically hold a significant portion of the outstanding stock at most large firms.

Fiduciary obligations are complicated.  “Mutual funds’ fiduciary duties require them to vote in a manner that benefits their investors, not each company that they hold in their portfolio.” (Passive Investors) For example, holding both target and bidder might lead to a different vote than holding only one.

Most troubling was the following:

Delaware law provides shareholders with the right to vote their shares as they see fit and does not impose any obligation on shareholders to vote unselfishly or to further the economic interests of the corporation. [See, e.g., Ringling Bros.-Barnum & Bailey Combined Shows, Inc. v. Ringling, 53 A.2d 441, 447 (Del. 1947) (“Generally speaking, a shareholder may exercise wide liberality of judgment in the matter of voting, and it is not objectionable that his motives may be for personal profit, or determined by whims or caprice, so long as he violates no duty owed his fellow shareholders.”).]

Given that funds operate within such a weak standard, it is important that individuals, the real Main Street investors in index funds, have ready access to voting records in an easily compared format. Keith L. Johnson, et al., point out the importance of fiduciaries conducting “congruity analyses of proxy votes” with public statements statements by delegated fund managers.

As an example of how such potential inconsistencies might present, BlackRock states in its Investment Stewardship 2018 Annual Report, “During our direct engagements with companies, we address the issues covered by any shareholder proposals that we believe to be material to the long-term value of that company. Where management demonstrates a willingness to address the material issues raised, and we believe progress is being made, we will generally support the company and vote against the shareholder proposal.” (Emphasis added.)

On the surface, this stated practice of voting against shareholder resolutions that have been determined to be in the best interests of the company suggests there is a preference for supporting management over the interests of clients in improving company performance as soon as practical. The resulting disconnect between value creation and proxy voting sends mixed signals to clients, the company and the marketplace. It could have the practical effect of giving companies more room to ignore or delay value enhancing actions.

Fisch argues that index fund investors can switch and some can. However, many employer sponsored 401(k) and other plans provide few choices. Main Street investors are often, as Strine notes, “forced capitalists.” If their 401(k) plan administrators take little or no initiative to investigate potential conflicts or breaches of fiduciary duty, how would they know? Like index funds themselves, the only tool “forced capitalists” might have is “voice.” However, like index funds, they need information before they can voice concerns.

Under the current system, proxy votes only need to be disclosed once a year and can be in a format that makes sorting and analysis difficult. More frequent, transparent and user friendly proxy voting records would make it easier for employees to argue for investment options better aligned with value creation. Such information would also make it more difficult for employers to ignore their fiduciary duties.

Real-time, or close to real-time, proxy voting disclosures using an internet window into each fund’s existing proxy voting platform would facilitate the ability of Main Street investors, the beneficial owners, to hold companies accountable through the complex chain of ownership. Several public pension and “socially responsibe” mutual funds have made such disclosures for many years. (See an incomplete list in our Shareowner Action Handbook.)

I will address more of the rationale and benefits of “real-time” disclosure in an upcoming post. Check back or subscribe to email notifications.

   

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Big Three Index Funds: Bebchuk, Hirst and More

Lucian Bebchuk has given more thought to the issues surrounding the Big Three Index Funds than other researchers. He and Scott Hirst recently provide a “comprehensive theoretical, empirical, and policy analysis of index fund stewardship.” Reference also Strine: Big 4 Responsible to “Forced Capitalists,” as well as The Untenable Case for Keeping Investors in the Dark by Bebchuk, et al. as we examine further strategies to make large investors work more effectively for those who use their services.  Continue Reading →

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ICGN Boston 2015, Part 3: Differential Voting Rights

ICGNThis the third part of my coverage of this year’s ICGN event in Boston. These posts haven’t been checked for accuracy and I haven’t taken the time to edit the prose to make complete well-flowing sentences. Still, I hope you find them of some value.

Morning keynote on Differential Voting Rights: Corporate governance and investor protection in companies with a controlling shareholder

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Recent Research in Corporate Governance: Part 1

Recent Corporate Governance Research Part 1 2015Now that proxy season is finally winding down, I had a few minutes to take a quick glance at recent research reported on SSRN. Below I am simply including a few citations and abstracts of studies that might be useful for shareholder advocates in the U.S. I’m sure I included some that are strictly academic and missed many more that would be useful. I would welcome  guest posts on such research from authors, critics or other interested parties. Please contact me via e-mail or by leaving comments below. Continue Reading →

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Visa: Simple Majority – Win or Lose?

VisaManhattan InstituteThe Manhattan Institute‘s Proxy Monitor Project would call it another failure by gadfly shareholders, since Visa Inc. (V) filed a no-action request with the SEC and is very likely to receive the go-ahead to exclude our Simple Majority proposal from their proxy. If that happens, there is no way it will receive a majority vote from shareowners. Therefore, the Proxy Monitor Project will count the proposal as a loss for shareowners and a waste of money for the corporation. Continue Reading →

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Shareholder Primacy: Paradigm or GroupThink

PeterTunjicGuest post from Peter Tunjic – Commercial lawyer, idea inventor, framework builder, business designer, board advisor and advocate and defender of free corporations. Peter writes at On Directorship and is “re-inventing the boardroom from capitalism’s forgotten first principles.” Thanks to Peter for permission to republish his following thought provoking post. Comments are always welcome but must come to me by e-mail so I can filter out the spam. 

Shareholder primacy is a norm of corporate governance that requires the allegiance of a corporation’s board of directors to the single objective of shareholder wealth maximization.   To think otherwise is considered a form of “corporate deviance.” Continue Reading →

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IRRCi Award Winners Announced

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Lucian Bebchuk & Edward Waitzer

Two seminal research papers have won the Investor Responsibility Research Center Institute’s (IRRCi) prestigious annual researchcompetition focused on the interaction of the real economy with investment theory. One research paper highlights the financial market’s ability to learn the value of corporate governance, and the second explores evolving fiduciary responsibilities resulting from the need for long-term value creation. IRRCi Chair Linda Scott announced the 2013 prize recipients yesterday at the Columbia University Millstein Governance ForumCorporate Governance in the New ‘Normal’: The Impact of New Patterns of Corporate Ownership. Continue Reading →

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Harvard's Shareholder Rights Project

Lucian Bebchuk

This guest post by Lucian Bebchuk originally appeared on the Harvard Law School Forum on Corporate Governance and Financial Regulation on April 9, 2013 as Wachtell Lipton Was Wrong About the Shareholder Rights Project and is reproduced here with Professor Bebchuk’s permission.  Martin Lipton quickly rebutted in a post entitled A Reply to Professor Bebchuk.

The Shareholder Rights Project (SRP) is a clinical program operating at Harvard Law School and directed by Professor Lucian Bebchuk. The SRP works on behalf of public pension funds and charitable organizations seeking to improve corporate governance at publicly traded companies, as well as on research and policy projects related to corporate governance. Continue Reading →

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Support Petition to Disclose Corporate Political Spending

More than $6 billion was spent on this year’s presidential/congressional elections, too much of it by unknown sources. Are your companies opposing candidates you support or supporting those you oppose?  If so, do those contributions add to the value of your companies?  If they don’t disclose the expenditure, how would you ever know? Sick of that situation?  Want a change?

The WSJ reports that the SEC is actively considering an 8/3/2011 rulemaking petition submitted by a committee of ten law professors that urged the SEC to adopt rules that would require public Continue Reading →

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ICGN Awards Neuville, Bebchuk and Davis

Madame Colette Neuville received the prestigious ICGN Life-time Achievement Award in Corporate Governance at its Annual Conference. Madame Neuville, known as a stark defender of minority shareholder rights in France for the last 20 years, is recognised for her defence in cases such Vivendi vs Havas in 1998, Schneider vs Legrand in 2001 and Renault vs Nissan in 2002.  An economist and lawyer, Madame Neuville has organised her efforts through Association de Defense de Actionnaires Minoritaires (ADAM). She has been a member of the European Corporate Governance Continue Reading →

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