In a memorandum issued by the law firm of Wachtell, Lipton, Rosen & Katz (Wachtell) last week, Do Activist Hedge Funds Really Create Long Term Value?, the firm’s founding partner Martin Lipton and another senior partner of the law firm criticize again my empirical study with Alon Brav and Wei Jiang, The Long-Term Effects of Hedge Fund Activism. The memorandum announces triumphantly that Wachtell is not alone in its opposition to our study and that two staff members from the Institute for Governance of Private and Public Organizations (IGOPP) in Montreal issued a white paper (available here) criticizing our study. Wachtell asserts that the IGOPP paper provides a “refutation” of our findings that is “academically rigorous.” An examination of this paper, however, indicates that it is anything but academically rigorous, and that the Wachtell memo is yet another attempt by the law firm to run away from empirical evidence that is inconsistent with its long-standing claims.
Archive for the ‘Program Research’ Category
This year’s list of the Ten Best Corporate and Securities Articles, selected by an annual poll of corporate and securities law academics, includes two selections from Harvard Law faculty associated with the Program on Corporate Governance: Professor Lucian Bebchuk and Professor John Coates.
The top ten articles were selected from a field of 550 pieces. Professor Robert Thompson of Georgetown Law School conducted the annual poll, and the selected articles will be reprinted in an upcoming issue of the Corporate Practice Commentator.
In a 17-page memorandum issued by the law firm of Wachtell Lipton (Wachtell), Empiricism and Experience; Activism and Short-Termism; the Real World of Business, the firm’s founder Martin Lipton put forward new criticism of our empirical study, The Long-Term Effects of Hedge Fund Activism. Lipton’s critique is based on a review of a large number of works which, he asserts, back up empirically the view that our study questions. Following our examination of each of the studies noted by Lipton, this post responds to Lipton’s empirical review. We show that Lipton’s review fails to identify any empirical evidence that is inconsistent with our findings or backs the claim of Wachtell that our study questions.
Our study shows that the myopic activisms claim that Lipton and his firm have long asserted—the claim that that interventions by activist hedge funds are in the long term detrimental to the involved companies and their long-term shareholders—is not supported by the data. Seeking to cast doubt on the validity of our finding, Lipton’s memorandum cites twenty-seven works by academics or policymakers, and asserts that these studies demonstrate that our conclusion—that the myopic activism claims is not supported by the data—is “patently false.” In this post, we explain that this assertion is not supported by the cited studies; most of the studies are not even related to the subject of the consequences of hedge fund activism, and those that are related to it do not provide evidence contradicting our findings.
Below we begin with discussing the relevant background and then review the cited studies and explain why, in contrast to the impression Lipton’s memo seeks to make, they do not provide an empirical basis for the myopic activists view. Instead of running away from the empirical evidence, while constantly shooting back, Wachtell Lipton should accept that its myopic activists claim is not supported by the data. Indeed, as one of us plans to discuss in a separate post, despite its repeated attacks on our study, Wachtell is shifting its position toward avoiding reliance on the myopic activism claim in its opposition to hedge fun activism, and this shift should lead Wachtell and its clients to rethink their attitude to hedge funds activists.
Toward Board Declassification in 100 S&P 500 and Fortune 500 Companies: The SRP’s Report for the 2012 and 2013 Proxy Seasons
The Shareholder Rights Project (SRP) just released its final report for the 2012 and 2013 proxy seasons, the SRP’s first two years year of operations. As the report details, major results obtained include the following:
- 100 S&P 500 and Fortune 500 companies (listed here) entered into agreements to move toward declassification;
- 81 S&P 500 and Fortune 500 companies (listed here) declassified their boards; these companies have aggregate market capitalization exceeding one trillion dollars, and represent about two-thirds of the companies with which engagement took place;
- 58 successful declassification proposals (listed here), with average support of 81% of votes cast; and
- Proposals by SRP-represented investors represented over 50% of all successful precatory proposals by public pension funds and over 20% of all successful precatory proposals by all proponents.
Towards Board Declassification at 100 S&P 500 and Fortune 500 Companies: Advancing Annual Elections in the 2014 Proxy Season
In a news alert released last week, the Shareholder Rights Project (SRP) announced the work that SRP-represented investors and the SRP are undertaking for the 2014 proxy season, and the significant contribution that this work is expected to make in moving 100 S&P 500 and Fortune 500 companies towards annual elections.
- 31 shareholder proposals for board declassification have been submitted to S&P 500 and Fortune 500 companies for a vote at their 2014 annual meetings (listed here);
- 7 companies—about one quarter of the 31 companies receiving proposals—have already entered into agreements to bring management declassification proposals to a shareholder vote;
- These 7 companies are in addition to 8 other S&P 500 and Fortune 500 companies that have committed to bring agreed-upon management proposals to a vote in future annual meetings following 2012 and 2013 precatory proposals by SRP-represented investors;
- The 15 agreed-upon management proposals to declassify, coupled with board declassifications that have already taken place at 80 S&P 500 and Fortune 500 companies as a result of the work by the SRP and SRP-represented investors (listed here), can be expected to contribute to the wide-scale move toward annual elections; and
- The agreements already obtained following the submission of 2014 proposals, and the ongoing engagements by the SRP and SRP-represented investors with companies receiving 2014 proposals that have not yet entered into such agreements, reinforce the SRP’s expectation that, as a result of the work by the SRP and SRP-represented investors, close to 100 S&P 500 and Fortune 500 companies will have moved toward board declassification by the end of 2014.
Last week the Securities and Exchange Commission released its regulatory agenda, and this agenda no longer includes rules requiring public companies to disclose their spending on politics. The agenda now includes only overdue rules that the SEC is required to develop under Dodd-Frank and the JOBS Act. While we are disappointed by the SEC’s decision to delay its consideration of rules requiring disclosure of corporate political spending, we hope that the SEC will consider such rules as soon as it is able to devote resources to rulemaking other than that required by Dodd-Frank and the JOBS Act. The submissions to the SEC over the past two years have clearly demonstrated the compelling case and large support for requiring such disclosure.
We co-chaired a committee of ten corporate and securities law professors that filed a rulemaking petition urging the SEC to develop rules requiring public companies to disclose their spending on politics. In the two years since the petition was submitted, the SEC has received more than 600,000 comment letters on our petition—more than on any other rulemaking project in the Commission’s history. The overwhelming majority of these comments—including letters from institutional investors and Members of Congress—have been supportive of the petition. At the end of 2012, the Director of the SEC’s Division of Corporate Finance acknowledged the widespread support for the petition, and the Commission placed the rulemaking petition on its regulatory agenda for 2013.
In a news alert released yesterday, the Shareholder Rights Project (SRP), working on behalf of SRP-represented investors, announced the substantial results of the work by the SRP and SRP-represented investors during 2012 and in 2013, the SRP’s first two years year of operations. (The results reported below reflect 2013 outcomes through the end of October 2013.)
As discussed in more detail below, major results obtained include the following (for full details on all outcomes see the SRP’s preliminary 2012-2013 Report released yesterday):
- 99 S&P 500 and Fortune 500 companies (see more details here) have entered into agreements to move toward declassification;
- 79 S&P 500 and Fortune 500 companies (listed here) have declassified their boards; these companies have aggregate market capitalization exceeding one trillion dollars, and represent about two-thirds of the companies with which engagement took place;
- 58 successful declassification proposals (listed here), with average support of 81% of votes cast; and
- Proposals by SRP-represented investors represented over 50% of all successful precatory proposals by public pension funds and over 20% of all successful precatory proposals by any proponents.
Expected Impact by End of 2014: As a result of these outcomes and the ongoing work of the SRP and SRP-represented investors, it is estimated that, by the end of 2013, the work of the SRP and SRP-represented investors will have resulted in:
- Close to 100 board declassifications by S&P 500 and Fortune 500 companies;
- Declassification of the boards of over 60% of the S&P 500 companies that had classified boards as of the beginning of 2012; and
- A decrease in the incidence of classified boards among S&P 500 companies to less than 10%.
Below are further details about these substantial results:
In two recent memoranda by the law firm of Wachtell Lipton (Wachtell), The Bebchuk Syllogism (Syllogism memo) and Current Thoughts about Activism (Current Thoughts memo), the firm’s founder Martin Lipton and several other senior Wachtell lawyers strongly criticize our recent study, The Long-Term Effects of Hedge Fund Activism. Our study empirically disproves the myopic activists claim that interventions by activist hedge funds are in the long term detrimental to the involved companies and their long-term shareholders. This post responds to the main criticisms of our work in Wachtell’s memos. Below we proceed as follows:
- First, we discuss the background of how our study meets a challenge that Wachtell issued several months ago;
- Second, we highlight how Wachtell’s critiques of our study fail to raise any questions concerning the validity of our findings concerning long-term returns, which by themselves are sufficient to undermine the myopic activists claim that Wachtell has long been putting forward;
- Third, we explain that the methodological criticisms Wachtell directs at our findings concerning long-term operating performance are unwarranted;
- Fourth, we show that Wachtell’s causality claim cannot provide it with a substitute basis for its opposition to hedge fund activism;
- Finally, we explain why Wachtell’s expressed preference for favoring anecdotal evidence and reports of experience over empirical evidence should be rejected.
Editor’s Note: Lucian Bebchuk is Professor of Law, Economics, and Finance at Harvard Law School. Alon Brav is Professor of Finance at Duke University. Wei Jiang is Professor of Finance at Columbia Business School. This post is based on their study, The Long-Term Effects of Hedge Fund Activism, available here. An op-ed about the article published in the Wall Street Journal summarizing the results of the study is available here.
We recently completed an empirical study, The Long-Term Effects of Hedge Fund Activism, that tests the empirical validity of a claim that has been playing a central role in debates on corporate governance – the claim that interventions by activist shareholders, and in particular activist hedge funds, have an adverse effect on the long-term interests of companies and their shareholders. While this “myopic activists” claim has been regularly invoked and has had considerable influence, its supporters have thus far failed to back it up with evidence. Our study presents a comprehensive empirical investigation of this claim. Our findings have important policy implications for ongoing policy debates on corporate governance and the rights and role of shareholders.
Below is a more detailed account of the analysis in our study:
In a news alert released yesterday, the Shareholder Rights Project (SRP), working on behalf of eight SRP-represented investors, announced the substantial results of the work by the SRP and SRP-represented investors during the first six months of 2013, as well as the aggregate impact of their work during 2012 and 2013.
Produced Large-Scale Reforms: As a result of the work of the SRP and SRP-represented investors, 77 S&P 500 and Fortune 500 companies declassified their boards of directors during 2012 or the first half of 2013. The companies that declassified: