The new landscape for nonprofits.

For most of this century, society's caring functions have been the work of government and charities. But social services in the United States are in a period of transition. Today the U.S. government no longer considers nonprofits to be entitled--or even best qualified--to provide social services. Profit-seeking companies like Lockheed Martin are now winning contracts for such services. William Ryan describes how government outsourcing and a new business mind-set have changed the landscape of social services. The change raises fundamental questions about the mission and future of nonprofits. Ryan attributes the growth of for-profits in the social service industry to four factors: size, capital, mobility, and responsiveness. While those attributes give for-profits an advantage in acquiring new contracts, nonprofits have not yet lost their foothold. Ryan cites examples of organizations like the YWCA and Abraxas to demonstrate various ways that nonprofits are responding--from subcontracting to partnership to outright conversion to for-profit status. By playing in the new marketplace, nonprofits will be forced to reconfigure their operations and organizations in ways that could compromise their missions. Because nonprofits now find themselves sharing territory with for-profits, sometimes as collaborators and sometimes as competitors, the distinctions between these organizations will continue to blur. The point, Ryan argues, is not whether nonprofits can survive opposition from for-profits. Many have already adjusted to the new competitive environment. The real issue is whether nonprofits can adapt without compromising the qualities that distinguish them from for-profit organizations.     

Hamilton and the U.S. Financial Revolution

In these excerpts from their recently published collection of Alexander Hamilton's writings on “Finance, Credit, and Debt,” the authors provide an overview of “the neatest, quickest financial revolution in history”—the one that took place in the United States during the six‐year tenure of its first Treasury Secretary. Between Hamilton's appointment by Washington in September 1789 and his resignation in February 1795, and as foreshadowed in letters that Hamilton was writing as early as 1780 (as a 23‐year‐old colonel in the Revolutionary army), the new nation saw the emergence of virtually all of what the authors identify as the six key components of modern financial systems. The financial revolution that produced the American financial system was accomplished through the following six developments:

1. The establishment of effective institutions of public finance, including a well‐functioning Treasury debt market, that would enable the government to fund its operations, to restructure its then massive unpaid debts (much of it owed to foreigners), and, perhaps most important, to establish the public credit that would enable it to borrow ever larger amounts on favorable terms.
2. The founding, in 1791, of a central bank to aid and oversee the government's finances and serve as the main supervisor and coordinator of the country's emergent banking and financial systems. By 1795, the Bank of the United States had five offices in different states and thus the beginnings of a national branch banking system.
3. The creation, in 1791, of the U.S. dollar as the country's first national currency. With gold and silver as the monetary base into which bank notes and deposits were convertible, the dollar was endowed with the stability of value that would make it a sound basis for long‐term contracts (such as bonds) as well as a safe asset in which to hold savings. By 1795, all the states, which had earlier issued their own notes and currency, had become members of the national currency union.
4. The development of a private banking system by encouraging state governments to charter banks to support their own finances and lend to businesses and individual entrepreneurs. By 1795, the three state‐chartered U.S. banks that existed in 1789 had become 20, providing the beginnings, with the five offices of the central bank, of what would become a vibrant (if crisis‐prone) American banking system.
5. The establishment of securities markets designed to make financial assets—both government and private‐sector bonds, and equities (including stock in the Bank of the United States)—liquid and transferrable. By 1795, Philadelphia, New York, and Boston all had established organized exchanges for trading national as well as local bonds and, in some cases, stocks.
6. The growth of business corporations, financial (such as banks and insurance companies) as well as industrial (utilities, manufacturers, and road, bridge, and canal companies), thereby encouraging the pooling of individuals’ capital that would allow the creation of larger enterprises that could realize economies of scale.

Thanks to these six developments, the United States was transformed from a bankrupt and severely divided nation in 1789 with huge debts to overseas creditors to a country whose government in 1795 produced a large budget surplus and whose securities were viewed by foreigners as among the most creditworthy in the world. And that was important since, as Hamilton clearly foresaw from the start, the U.S. government would have to rely heavily on overseas capital to fund its operations.     

Session V: Macro Perspectives: Bigger Problems than Corporate Governance

Columbia Business School's well‐known authority on value‐based investing begins by attributing today's economic problems to a “global economic dislocation,” one that is rooted in the ongoing—and in Greenwald's view, inevitable—decline of manufacturing and displacement by services. Like the other example of dislocation in modern times, the Great Depression of the 1930s, the 2008 global financial crisis and protracted recession— still very much with us—are viewed as originating in the sharp decline of a major “sector” of the global economy. In the Depression of the ‘30s it was agriculture; in the recent financial crisis it was manufacturing. In both cases, technological advances and economy‐wide productivity increases led to huge increases in stock and financial asset prices—but also to sharp drops in the prices of farm and manufactured goods, and massive overcapacity and ruinous competition in both sectors. According to the author, the working off of overcapacity in the agricultural sector was accomplished largely by the effect of World War II in moving huge numbers off the farm and into the mainly urban industrial sector at government expense. This labor force relocation, which occurred in all developed economies, was essential to a global economic transformation that for the next 50 years provided high productivity growth and greater equality of income and wealth. More recently, however, the global economy has been confronted with the challenge of accomplishing a transition from manufacturing to services that will feature lower productivity growth and more inequality. Foreseeing a long, difficult process, Greenwald's biggest concern is that government intervention will distract businesses from making this transition effectively—which means continuing to operate as efficiently as possible, downsizing when necessary—and so make the problems worse. And while business focuses on preserving its own efficiency and value, Greenwald urges governments to look for more cost‐effective ways—for example, expanded use in the U.S. of the Earned Income Tax Credit—to cushion workers from the consequences. Nobel laureate Edmund Phelps, while agreeing with much of Greenwald's analysis, has a different explanation of the U.S. productivity dilemma. Innovation is viewed as the primary driver of the prosperity of the advanced economies. Higher income and wealth matter less than job satisfaction, participation, and an array of non‐material “modern values” that have somehow been lost and that, for Phelps, are the key to restoring economic growth and “mass flourishing.”     

The real new economy

During the soar-and-swoon days of the late 1990s, many people believed that information technology, and the Internet in particular, were "changing everything" in business. A fundamental change did happen in the 1990s, but it was less about technology than about competition. Under director Diana Farrell, the McKinsey Global Institute has conducted an extensive study of productivity and its connection to corporate IT spending and use during that period. The study revealed that information technology is important--but not central--to the fate of industries and individual companies. So if information technology was not the primary factor in the productivity surge, what was? The study points to competition and innovation. In those industries that saw increases in competitive intensity, managers were forced to innovate aggressively to protect their revenues and profits. Those innovations--in products, business practices, and technology--led to the gains in productivity. In fact, a critical dynamic of the new economy--the real new economy--is the virtuous cycle of competition, innovation, and productivity growth. Managers can innovate in many ways, but during the 1990s, information technology was a particularly powerful tool, for three reasons: First, IT enabled the development of attractive new products and efficient new business processes. Second, it facilitated the rapid industrywide diffusion of innovations. And third, it exhibited strong scale economies--its benefits multiplied rapidly as its use expanded. This article reveals surprising data on how various industries in the United States and Europe were affected by competition, innovation, and information technology in the 1990s and offers insights about how managers can get more from their IT investments.     

How Does the Corporate World Cope with Mega‐Terrorism? Puzzling Evidence from Terrorism Insurance Markets

Terrorist attacks that have succeeded abroad since 2001, as well as others that were prevented, indicate that the threat of a large‐scale attack is real and will be with us for a long time. Focusing on the United States, the United Kingdom, and Germany, this article analyzes the role that insurance can play in providing commercial enterprises with financial protection against the economic consequences of major terrorist attacks. The article begins by explaining the design and key features of terrorism insurance programs operating today in each of the three countries (TRIA in the U.S., Pool Re in the U.K., and Extremus in Germany). The authors then provide a detailed comparative analysis of the evolution of prices and take‐up rates (based on as yet unpublished data), with particular attention to financial institutions. For those who think the U.S. is the most likely target for mega‐terrorism, the findings are somewhat puzzling. On average, for example, companies in the U.S. do not pay even half as much for comparable coverage under TRIA as companies pay in Germany under Extremus, which raises the questions: Is terrorism coverage under the U.S. insurance program now drastically underpriced? If so, what would be the likely consequences of another large‐scale attack in the U.S.? On the demand side, the authors observe a dramatic increase in take‐up rates in the U.S. since 2003, revealing increased corporate concern. By contrast, the market penetration in Germany remains remarkably low. A better understanding of these programs and of the recent evolution of terrorism insurance markets in the U.S. and Europe should help corporate and government decision makers develop more effective protection against the economic consequences of mega‐terrorism.     

The State of the Public Corporation: Not So Much an Eclipse as an Evolution

By some measures, the U.S. public corporation appears to be in the midst of a significant decline, as Michael Jensen predicted 25 years ago in a Harvard Business Review article called “The Eclipse of the Public Corporation.” Based on an analysis of ten industries during the 48‐year period from 1966 through the end of 2013, the author reports a 60% drop in the number of publicly traded U.S. companies, as measured from each of the industry peaks to the end of 2013. Mergers and acquisitions, together with the private‐equity transactions hailed by Jensen in his 1989 HBR article, have contributed significantly to this reduction in numbers. But so has the remarkable growth of “uncorporate” (or pass‐through) structures such as Master Limited Partnerships (MLPs) and Real Estate Investment Trusts (REITs), both of which address governance as well as tax problems faced by public C‐corporations. But along with this drop in numbers, the author's analysis of the performance of U.S. public companies—as measured both by operating returns on equity and Tobin's Q ratios—also shows a growing separation of the “best” from the “rest” over time. Intense global product market competition, the growing benefits (and urgency) of achieving efficient scope and scale, high U.S. corporate income tax rates, and a vigorous market for corporate control are all significantly “thinning the herd” of public corporations. The “winners” have been emerging as larger, more efficient, and more influential enterprises than ever before, as the rise of massive U.S. multinationals (and, in countries outside the U.S., state‐owned enterprises) over the past two decades has increasingly blurred the line between private business and government. Viewed in this light, the overall trends, both in the U.S. and abroad, suggest an evolution rather than an eclipse of the public corporation. Such trends also suggest that over the next 25 years, the success of the public corporation will increasingly depend on issues such as its ability to resolve conflicts between controlling shareholders (including sovereign governments) and minority shareholders, regulatory (in particular, antitrust) policy, and the role (and investment horizons) of activist shareholders.     

CARE Conference Hong Kong Polytechnic University,June 9, 2014: Equity Financing for Early‐Stage Companies in China

Many of the smaller private‐sector Chinese companies in their entrepreneurial growth stage are now being funded by Chinese venture capital (VC) and private equity (PE) firms. In contrast to western VC markets, where institutional investors such as pension funds and endowments have been the main providers of capital, in China most capital for domestic funds has come from private business owners and high net worth individuals. As relatively new players in the market who are less accustomed to entrusting their capital to fund managers for a lengthy period of time, Chinese VCs and their investors have shown a shorter investment horizon and demanded a faster return of capital and profits. In an attempt to explain this behavior, Paul Gompers and Josh Lerner of Harvard Business School have offered a “grandstanding hypothesis” that focuses on the incentives of younger, less established VCs to push their portfolio companies out into the IPO market as early as they can—and thus possibly prematurely—to establish a track record and facilitate future fundraising. This explanation is supported by the under‐performance of Chinese VC‐backed IPOs that has been documented by the author's recent research. Although they continue to offer significant opportunities for global investors, China's VC and PE markets still face many challenges. The supervisory system and legal environment need further improvement, and Chinese funds need to find a way to attract more institutional investors—a goal that can and likely will be promoted through government inducements.     

The State of Sustainability in China

China has experienced remarkable economic growth since the reforms of Deng Xiaoping in the late 1970s. This growth has come at a significant environmental and social cost, raising the question of whether the country needs to focus more on sustainable development than on economic growth for its own sake. Moreover, there is growing recognition in China that more attention needs to be paid to achieving environmental and social as well as economic goals. This recognition has come in the form of changes in public policy, in pronouncements by Party leaders, and in the research and writings of academics, think tanks, and industry associations. As the authors also point out, sustainable development on a global scale is now as dependent on the actions of large corporations as on government policies. And one way of assessing China's commitment to sustainability is to compare the behavior of its largest 100 companies to that of the largest 100 corporations in the United States. In making this comparison, the authors use two, admittedly imperfect, indicators of sustainability that suggest that the extent of the commitment to sustainability is roughly comparable in both countries. The first of the two indicators is membership in the UN Global Compact. On that score, the authors report that exactly 15 of the top 100 companies in both China and the U.S. have formally endorsed its ten principles regarding human rights, labor, the environment, and anticorruption. The second indicator is the percentage of the largest 100 companies that produce a sustainability report based on the guidelines of the Global Reporting Initiative. Using that measure, the authors report that about half of China's largest companies produce a sustainability report based on the GRI guidelines. Although that percentage is smaller than the two‐thirds of U.S. companies that now provide such reports, the authors are encouraged by the trend, and by the pattern of adoption in which larger companies are clearly leading way.     

The Elusive Underpinnings of U.S. Venturesomeness (If Not Prosperity)*

This article explores the question of how the U.S. economy has managed to maintain (or even increase) its lead over other nations in per capita income and the average productivity of its workforce. The answer provided in the author's recent book is that such productivity depends on the greater willingness and effectiveness of U.S. consumers and businesses in making use of innovations in products and business processes. But this begs the question: What accounts for the increase in the innovative capabilities or effectiveness of U.S. consumers and businesses, both over time and relative to that of their global counterparts? After starting with the conventional “supply‐side” focus on low taxes, limited regulatory barriers, and strong property rights, the author goes on to shift the main emphasis to the following six “institutional” contributors to U.S. prosperity:

• ? Breadth of participation: the modern U.S. economy draws, to a greater extent than either its global competitors or the U.S. of a century ago, on the contributions of far more individuals both as developers and as users of new products.
• ? Organizational diversity and specialization: the evolution of new forms of organization in the U.S., from small venture capital‐backed firms to huge public corporations with dispersed ownership, has enabled the system to use the contributions of many individuals more effectively.
• ? Changes in common beliefs and attitudes: greater receptiveness to technological change has accelerated the adoption of new products in all countries, but especially in the U.S.
• ? Increased pressure for growth: the “grow or die” imperative faced by U.S. businesses has encouraged them to look for help from new technologies.
• ? The professionalization of management and sales functions—a distinctively U.S. phenomenon whose beginnings can be traced to IBM in the 1920s—has improved the capacity of modern U.S. organizations to develop markets and use new products.
• ? The expansion of higher education, to a far greater extent in the U.S. than elsewhere, has increased the supply of individuals with habits and attitudes that improve their ability to develop and use innovations.

     

International Business Cycle and Financial Intermediation

The paper extends a standard two‐country international real business cycle model to include financial intermediation by banks of loans and government bonds. The paper contributes an explanation for both the United States relative to the Euro‐area, and the United States relative to China, of cross‐country correlations of loan rates, deposit rates, and the loan premia. It shows a type of financial retrenchment for the United States relative to both Europe and China following a negative bank productivity shock, such as during the 2008 crisis. After 2008, results suggest that the Euro‐area has been more financially integrated with the United States, and China less financially integrated.     

University of Texas Roundtable on Financing and Managing Energy Investments in a Low‐Price Environment

During the past 18 months, the U.S. oil industry has seen oil prices plunge from well over $100 a barrel to under $30. In a session that was part of a recent Private Equity Conference at the University of Texas in Austin, the CEO of a small independent producer and a representative of a large global oil and gas company discussed the challenges of financing and operating energy companies in today's low‐price environment with the director of energy research at a brokerage firm, the senior partner responsible for the natural resource investments of a well‐known private equity firm, and the head of the oil and gas restructuring practice of a national law firm. The panelists appeared to reach a consensus on at least the following three arguments:

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Smart Growth—Creating Real Long-term Value

Most U.S. business leaders appear to believe that all businesses either “grow or die”—and many act as if they believed that all growth is good, and that public companies should grow in a linear, continuous manner as reflected in ever-increasing quarterly earnings. But if these tenets of “the U.S. Growth Model” inform the short-term business view that prevails in many C-suites and boardrooms, there has been surprisingly little analysis of the extent to which the pursuit of continuous growth translates into longer-run success. In this article, the author reports finding no theoretical or empirical support in the fields of economics, finance, strategy, organizational design (or biology) for the idea that continuous growth is either a realistic possibility or a useful corporate objective. In business organizations, the pursuit of continuous growth can drive bad corporate behavior and inhibit real growth and innovation. Based on extensive research, the author suggests a new model of “smart growth”—one in which companies grow successfully by building internal comprehensive systems designed to encourage growth through specific kinds of culture, leadership, and processes. Smart-growth companies use experimental learning processes designed to test growth ideas and build diversified “growth portfolios” while also attempting to limit the risks associated with the pursuit of growth.     

University of Texas Roundtable on The State of the U.S. Private Equity Market

In this discussion that took place at the 2017 University of Texas Private Equity conference, the moderator began by noting that since 2000, the fraction of the U.S. GDP produced by companies that are owned or controlled by global private equity firms has increased from 7% to 15%. What's more, today's PE firms have raised an estimated $1.5 trillion of capital that is now available for investing. And thanks in part to this abundance of capital, the prices of PE transactions have increased sharply, with EBITDA pricing multiples rising from about 8.8X in 2012 to 11.5X at the beginning of 2017. Partly as a consequence of such abundant capital and high transaction prices, the aggregate returns to U.S. private equity funds during this four‐year period have fallen below the returns to the stockholders of U.S. public companies. Nevertheless, the good news for private equity investors is that the best‐performing PE firms have continued their long history of outperforming the market. And the consistency of their performance goes a long way toward explaining why the overwhelming majority of the capital contributed by limited partners continues to be allocated to funds put together by these top‐tier PE firms. In this roundtable, a representative of one of these top‐tier firms joins the founder of a relatively new firm with a middle‐market focus in discussing the core competencies and approaches that have enabled the best PE firms to increase the productivity and value of their portfolio companies. Effective financial management—the ability to manage leveraged capital structures and the process of readying their companies for sale to potential strategic or financial investors—is clearly part of the story. But more fundamental and critical to their success has been their ability to find undervalued or undermanaged assets—and either retain or recruit operating managements that, when effectively monitored and motivated, are able to realize the potential value of those assets through changes in strategy and increases in operating efficiency.     

Disclosure Practices of Foreign Companies Interacting with U.S. Markets

We analyze the disclosure practices of companies as a function of their interaction with U.S. markets for a group of 794 firms from 24 countries in the Asia‐Pacific and Europe. Our analysis uses the Transparency and Disclosure scores developed recently by Standard & Poor's. These scores rate the disclosure of companies from around the world using U.S. disclosure practices as an implicit benchmark. Results show a positive association between these disclosure scores and a variety of market interaction measures, including U.S. listing, U.S. investment flows, exports to, and operations in the United States. Trade with the United States at the country level, however, has an insignificant relationship with the disclosure scores. Our empirical analysis controls for the previously documented association between disclosure and firm size, performance, and country legal origin. Our results are broadly consistent with the hypothesis that cross‐border economic interactions are associated with similarities in disclosure and governance practices.     

Changes in Korean Corporate Governance: A Response to Crisis

In the last months of 1997, the value of the Korean currency lost over half its value against the dollar, and the ruling party was swept from power in presidential elections. One of the fundamental causes of this national economic crisis was the widespread failure of Korean companies to earn their cost of capital, which contributed to massive shareholder losses and calls for corporate governance reform. Among the worst performers, and hence the main targets of governance reform, were family‐controlled Korean business groups known as chaebol. Besides pursuing growth and size at the expense of value, such groups were notorious for expropriating minority shareholders through “tunneling” activities and other means. The reform measures introduced by the new administration were a mix of market‐based solutions and government intervention. The government‐engineered, large‐scale swaps of business units among the largest chaebol—the so‐called “big deals” that were designed to force each of the groups to identify and specialize in a core business—turned out to be failures, with serious unwanted side effects. At the same time, however, new laws and regulations designed to increase corporate transparency, oversight, and accountability have had clearly positive effects on Korean governance. Thanks to reductions in barriers to foreign ownership of Korean companies, such ownership had risen to about 37% at the end of 2006, up from just 13% ten years earlier. And in addition to the growing pressure for better governance from foreign investors, several newly formed Korean NGOs have pushed for increased transparency and accountability, particularly among the largest chaebol. The best governance practices in Korea today can be seen mainly in three kinds of corporations: (1) newly privatized companies; (2) large corporations run by professional management; and (3) banks with substantial equity ownership in the hands of foreign investors. The improvements in governance achieved by such companies—notably, fuller disclosure, better alignment of managerial incentives with shareholder value, and more effective oversight by boards—have enabled many of them to meet the global standard. And the governance policies and procedures of POSCO, the first Korean company to list on the New York Stock Exchange—as well as the recent recipient of a large equity investment by Warren Buffett—are held up as a model of best practice. At the other end of the Korean governance spectrum, however, there continue to be many large chaebol‐affiliated or family‐run companies that have resisted such reforms. And aided by the popular resistance to globalization, the lobbying efforts of such firms have succeeded not only in reducing the momentum of the Korean governance reform movement, but in reversing some of the previous gains. Most disturbing is the current push to allow American style anti‐takeover devices, which, if successful, would weaken the disciplinary effect of the market for corporate control.     

Is ERM Legally Required? Yes for Financial and Governmental Institutions,No for Private Enterprises

We examine whether enterprise risk management (ERM) is legally required for financial institutions (e.g., banks, securities brokerage firms, insurance, hedge funds and mutual funds), government entities, publicly traded companies, and private enterprises. We find that ERM is legally required for U.S. financial institutions and for some government‐sponsored enterprises. Legally required means required by U.S. statutes, federal case law, or U.S. regulatory agencies (e.g., Securities and Exchange Commission [SEC]). ERM is an important factor for rating organizations (e.g., Standard & Poor's [S&P]), but not legally required. We found no U.S. statutes or federal court cases requiring an ERM framework for private enterprises, although ERM is accepted as a value‐contributing best practice, and elements of ERM are practiced by some private enterprises. For publically traded companies, elements of ERM are required by federal statute, by the SEC, and by S&P. We suggest that if a private enterprise is sued in U.S. federal court alleging breach of a legal duty to practice ERM, the suit will likely be dismissed. We trace the development of ERM from a traditional risk management (TRM) base. Fortunately, ERM is recognized as a value‐contributing best practice in corporate governance even when legal standards do not require it.     

Asian Corporate Governance—and the Case of Dual‐Class Shares: CARE Conference | Hong Kong Polytechnic University | June 9, 2014

The case of the Alibaba IPO illustrates the divergence of corporate governance standards between the United States and many other markets, and reopens the debate on the one‐share one‐vote principle. Since corporate governance standards develop in ways that reflect the history and legal and political environments of different countries, we should not expect to see a global convergence of these standards—nor is it generally desirable to transplant policies from one market to another without understanding their historical backgrounds. Nevertheless, the U.S. approach to regulation raises the concern that competition among exchanges will cause issuers to “shop around” and tempt the exchanges to relax their standards in a race to the bottom. While market participants and regulators outside of the U.S. debate whether and how to modify the one‐share, one‐vote rule, they face challenges in coming up with new rules that strike the right balance between effective corporate governance and market development.     

The Venturesome Economy: How Innovation Sustains Prosperity in a More Connected World*

Many observers have warned that the next stage of globalization—the offshoring of research and development to China and India—threatens the foundations of Western prosperity. But in this article, the author explains why the doomsayers are likely to be wrong. Using extensive field studies on venture capital‐backed businesses to examine how technology is really used to create value in modern economies, this article explains how and why scientific advances abroad generally contribute to prosperity at home, and why trying to maintain the U.S. lead by subsidizing more research or training more scientists is likely to do more harm than good. When breakthrough ideas have no borders, a nation's capacity to exploit cutting‐edge research regardless of where it originates is the key to its economic competitiveness. “Venturesome consumption”—that is, the willingness and ability of businesses and consumers to use products and technologies derived from scientific research in the most effective ways—is far more important than having a share of the research. And for this reason, well‐developed and “venturesome” economies like the U.S. benefit disproportionately from scientific innovations abroad. To cite just one example discussed at length in this article, the success of Apple's iPod owes much to technologies that were developed largely in Asia and Europe. The proven ability of the United States to remain at the forefront of the global “innovation game” reflects the contributions of many players—not just a few brilliant scientists and engineers, but literally millions of U.S. entrepreneurs, managers, financiers, salespersons, and, to a very large degree, U.S. consumers. As long as their venturesome spirit remains alive and well, advances abroad should not be feared but welcomed.     

The Rise of Agency Capitalism and the Role of Shareholder Activists in Making It Work

The past 50 years have seen a fundamental change in the ownership of U.S. public companies, one in which the relatively small holdings of many individual shareholders have been supplanted by the large holdings of institutional investors, such as pension funds, mutual funds, and bank trust departments. Such large institutional investors are now said to own over 70% of the stock of the largest 1,000 U.S. public corporations; and in many of these companies, as the authors go on to note, “as few as two dozen institutional investors” own enough shares “to exert substantial influence, if not effective control.” But this reconcentration of ownership does not represent a complete solution to the “agency” problems arising from the “separation of ownership and control” that troubled Berle and Means, the relative powerlessness of shareholders in the face of a class of “professional” corporate managers who owned little if any stock. As the authors note, this shift from an era of “managerial capitalism” to one they identify as “agency capitalism” has come with a somewhat new and different set of “agency conflicts” and associated costs. The fact that most institutional investors hold highly diversified portfolios and compete (and are compensated) on the basis of “relative performance” provides them with little incentive to engage in the vigorous monitoring of corporate performance and investor activism that could address shortfalls in such performance. As a consequence, such large institutional investors—not to mention the large and growing body of indexers like Vanguard and BlackRock—are likely to appear “rationally apathetic” about corporate governance. But, as the authors also point out, there is a solution to this agency conflict—and to the corporate governance “vacuum” that has been said to result from the alleged apathy of well‐diversified (and indexed) institutional investors: the emergence of shareholder activists. The activist hedge funds and other specialized activists who have come on the scene during the last 15 or 20 years are now playing an important role in supporting this relatively new ownership structure. Instead of taking control positions, the activists “tee‐up” strategic business and financing choices that are then decided upon by the vote of institutional shareholders that are best characterized not as apathetic, but as rationally “reticent”; that is, they allow the activists, if not to do their talking for them, then to serve as a catalyst for the expression of institutional shareholder voice. The institutions are by no means rubber stamps for activists' proposals; in some cases voting for the activists' proposals, in many cases against them, the institutions function as the long‐term arbiters of whether such proposals should and will go forward. In the closing section of the article, the authors discuss a number of recent legal decisions that appear to recognize this relatively new role played by activists and the institutions that choose to support them (or not)—legal decisions that appear to confirm investors' competence and right to be entrusted with such authority over corporate decision‐making.     

The Role of Corporate Boards: A Roundtable Discussion of Where We're Going and Where We've Been

In this roundtable that took place at the 2016 Millstein Governance Forum at Columbia Law School, four directors of public companies discuss the changing role and responsibilities of corporate boards. In response to increasingly active investors who are looking to management and boards for more information and greater accountability, the four panelists describe the growing demands on boards for both competence and commitment to the job. Despite considerable improvements since the year 2000, and especially since the 2008 financial crisis, the clear consensus is that U.S. corporate directors must become more like owners of the corporation who “truly represent the long‐term interests of all of the shareholders.” But if activist investors appear to pose the most formidable new challenge for corporate directors—one that has the potential to lead to shortsighted managerial decision‐making—there has been another, less visible development that should be welcomed by wellrun companies that are investing in their future growth as well as meeting investors’ expectations for current performance. According to Raj Gupta, who serves on the boards of HewlettPackard, Delphi Automotive, Arconic, and the Vanguard Group,

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