Can We Do Better by Ordinary Investors? A Pragmatic Reaction to the Dueling Ideological Mythologists of Corporate Law
Leo E. Strine Jr.
Government of the State of Delaware - Supreme Court of Delaware; Harvard Law School; University of Pennsylvania Law School
March 1, 2014
Columbia Law Review, Vol. 114, No. 2, pp 449-502, March 2014
Harvard Law and Economics Discussion Paper No. 766
U of Penn, Inst for Law & Econ Research Paper No. 14-43
In his essay, The Myth That Insulating Boards Serves Long-Term Value, Professor Lucian Bebchuk draws a stark dichotomy between so-called “insulation advocates” and proponents of shareholder-driven direct democracy. This Essay begins by rejecting this crude divide between “good” and “evil,” and focuses instead on the practical realities surrounding increases in stockholder power in an era where there is a “separation of ownership from ownership.” That separation arises because the direct stockholders of private companies are typically not end-user investors, but instead money managers, such as mutual funds or hedge funds, whose interests as agents are not necessarily aligned with the interests of long-term investors. These practical realities suggest that Bebchuk’s crusade for ever more stockholder power may not actually be beneficial to ordinary investors, and that his contention — that further empowering stockholders with short-term investment horizons will not compromise long-term corporate value — is far from proven. This Essay concludes with some thoughts on improvements that could be made in the system that we have. These suggestions are not radical in either direction and they do not involve rolling back the rights of stockholders. Rather, these suggestions recognize that the fiduciaries who wield direct voting power over corporations should do so in a manner faithful to the best interests of those whose money they control, include proposals to require activist investors to bear some of the costs they impose and to disclose more information about their own incentives so that the electorate can evaluate their motives, and provide incentives that better align the interests of money managers and ordinary investors toward sustainable, sound long-term corporate growth. Taken as a whole, these suggestions would create a more rational accountability system by making all of the fiduciaries for ordinary investors focus more on what really matters for investors, citizens, and our society as a whole — the creation of durable wealth through fundamentally sound economic activity.
The article by Lucian Bebchuk to which this article responds — Bebchuk, "The Myth that Insulating Boards Serves Long-Term Value," Columbia Law Review, Volume 113, 2013, pp. 1637-1694 — is available on SSRN at: http://ssrn.com/abstract=2248111
Number of Pages in PDF File: 56
Keywords: Short-termism, myopia, corporate governance, shareholders, boards, managers, long-term value, investor horizons, shareholder rights, shareholder power, shareholder activism, takeovers, corporate elections, entrenchment, antitakeover defenses, market efficiency, hedge funds
JEL Classification: D21, G32, G34, G35, G38, K22
Date posted: April 8, 2014 ; Last revised: November 19, 2014