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Copyright Information
2014 NATIONAL LAWYERS CONVENTION
MILLENNIALS, EQUITY, AND THE RULE

OF LAW
CORPORATIONS: THE SHORT-TERMISM

DEBATE
Panelists:
PROFESSOR LUCIAN A. BEBCHUK, William J. Friedman

and Alicia Townsend FriedmanProfessor of Law, Economics,
and Finance and Directorof the Programon Corporate
Governance, HarvardLaw School
PROFESSOR JONATHAN R. MACEY, Sam Harris

Professorof CorporateLaw, CorporateFinance, and Securities
Law, Yale Law School
PROFESSOR ROBERT T. MILLER, Professor of Law and F.

Arnold Daum Fellow in CorporateLaw, University of Iowa
College of Law
STEVEN A. ROSENBLUM, Partner, Wachtell, Lipton, Rosen

& Katz
Moderator:
HON. E. NORMAN VEASEY, Former Chief Justice, Delaware

Supreme Court
11:45 a.m. to 1:45 p.m.

Thursday, November 13, 2014
Mayflower Hotel
Washington, D.C.
697
698 MISSISSIPPI LAW JOURNAL [VOL. 85:3
JUDGE E. NORMAN VEASEY: I'm Norm Veasey, and I

was Chief Justice of the Delaware Supreme Court for a twelve-
year term, until 2004. Before that I was a corporate litigator at
Richards, Layton & Finger in Wilmington, Delaware, where I live.
After I left the court in 2004, I was a senior partner at Weil,
Gotshal & Manges in Wilmington and in New York. I left Weil
Gotshal at the end of 2013 because I wanted to do more
arbitrations and mediations, and I was being conflicted out of a lot
of those engagements, so I went to a small firm in Wilmington,
Delaware, called Gordon, Fournaris & Mammarella, and that's
where I've been concentrating on that work ever since.
It's a pleasure for me to be here and relive some of these
experiences in corporate law, which I watch with great interest
and sometimes I have an arbitration or mediation case involving
them. But I'm no longer on the court, as I mentioned earlier. I've
been off for ten years. In that ten-year period, the composition of
the Delaware Supreme Court and the Delaware Court of Chancery
has changed. When I was on the court, Randy Holland was on the
court. He's still on the court but he's the only one who's still on the
court. The new Chief Justice is Leo Strine, and we have Justice
Valihura and Justice Vaughn. We have a vacancy, because Justice
Ridgely has announced his retirement, coming up soon. His
retirement will not be effective until January 31st.
We have a new Chancellor, Andre Bouchard, and I haven't
seen any significant change in the jurisprudence. So one of the
things that's good about Delaware law is its stability. We have, as
you know, over sixty percent of the Fortune 500 companies
incorporated in Delaware and about half of the major public
corporations in the United States. So, there is a lot of litigation in
Delaware involving corporate governance and the like.
The Delaware Supreme Court has about 700 cases every
year, for five members, and they churn them out in an average of
about forty-five days. The Court of Chancery is even faster. But
the Supreme Court has a small amount of its docket on corporate
law. They do everything-death penalty, worker's comp, and the
like-and they take all these cases. Delaware has no intermediate
appellate court.
2016] THE SHORT- TERMISM DEBATE 699
So when we talk about corporate governance, we talk a lot

about Delaware jurisprudence. I'm going to introduce the panel in
a minute, but one of the things that I've found interesting is an
article by Professor Mark Roe at Harvard, that I was asked to
review for the Business Lawyer. It was published in the Business
Lawyer, and it is called "Corporate Short-Termism in the
Boardroom and in the Courtroom." It is in 68 Business Lawyer
978, August 2013. He talks about whether the short-termism,
long-termism debate or issue is something that lawmakers in
Delaware, or elsewhere, should get engaged in, and he said no.
So I think that what we need to talk about here is those
kinds of things and how they play into the corporate law. Now
there are some members of the Delaware judiciary who have said
things about short-termism versus long-termism. Chancellor
Chandler recently addressed that question in the Airgas case, in
the context of a poison pill, and Chief Justice Strine has written
about it. So there are a lot of those materials that are out there. I
think that you have to balance the business judgment rule with
getting involved in these kinds of things. So in the context of a
poison pill, it seems that one of the issues is, is there a threat to
the corporation, and is the threat related to short-termism, long-
termism issues. That's what Chancellor Chandler talked about a
bit in the Airgas case.
I know our panel, who are experts in corporate law, corporate
governance, and economics, will be addressing a lot of these
issues, and I look forward to hearing from them.
We're going to start off with Professor Bebchuk. Lucian
Bebchuk is certainly known to almost everybody in this field. He
is Professor of Law, Economics, and Finance and Director of the
Program on Corporate Governance at Harvard Law School. He
holds an LL.M. and an S.J.D. from Harvard Law School and an
M.A. and Ph.D. in economics from the Harvard Economics
Department. He is the author or co-author of more than 100
research papers, as well as the widely acclaimed book, Pay
Without Performance: The Unfulfilled Promise of Executive
Compensation. He has been a frequent contributor to
policymaking, practice, and public debate in the fields of corporate
governance and financial regulation, and was included in the list
of the 100 Most Influential Players in Corporate Governance.
He will go first and he will speak for about twenty-five

minutes, and he has some slides. He will be followed by Steve
Rosenblum. Steve is a partner at Wachtell, Lipton, Rosen & Katz.
Steve has been a partner at Wachtell Lipton since 1989 and serves
as co-chair of the firm's corporate department. He focuses on
mergers and acquisitions, buyouts, takeover defense, shareholder
and hedge fund activism, proxy fights, joint ventures, corporate
governance, and securities laws. So he is in the trenches in these
areas. He does it every day and he does it well, and he's
recognized by Chambers Global as one of the world's leading
transactional lawyers. He received his J.D. from Yale Law School
in 1982 and his B.A. from Harvard College magna cum laude and
Phi Beta Kappa in 1978. He's a member of the ABA Committee on
Corporate Laws, and I'm on that committee, too, so we're
colleagues there. He's written and participated in panels on a
number of topics, including mergers and acquisitions, shareholder
and hedge fund activism, corporate disclosure, proxy reform, and
corporate governance.
Jonathan Macey is a Professor at Yale Law School. He is a
professor of corporate law, corporate finance, and securities law,
and he is also a professor at the Yale School of Management, so
he's got a foot in both camps. He is the author of several books,
including the two-volume treatise, Macey on CorporationLaw, co-
authored two leading casebooks, and so forth. He was awarded the
Paul M. Bator Prize for Excellence in Teaching, Scholarship, and
Public Service, and awarded the teaching award by the Yale Law
Women, in recognition of his committed excellence in teaching,
mentoring, and inspiring. He earned his B.A. cum laude from
Harvard, his J.D. from Yale Law School, and his Ph.D. Honoris
Causa from Stockholm School of Economics.
Last but not least is Robert Miller. Robert Miller is Professor
of Law and the Arnold F. Daum Fellow in Corporate Law at the
University of Iowa. His scholarship includes concerns about
corporate matters, securities law, the economic analysis of law,
and the philosophy of law. He received his J.D. from Yale Law
School, where he was Senior Editor of the Yale Law Journal. He
earned his M.A. and M.Phil.-Master of Philosophy-degrees from
Columbia. He earned his B.A. in philosophy and mathematics
from Columbia College. He teaches mergers and acquisitions, law
and economics, corporate finance, business associations, antitrust,

and contracts. Before entering academia, Professor Miller was an
associate at Wachtell Lipton.
So without further ado from me, I would like to invite
Professor Bebchuk to come to the podium.
PROFESSOR LUCIAN A. BEBCHUK: Thank you very
much. I'll be sharing with you the findings of a paper that is
jointly written with Alon Bray and Wei Jiang, "The Long-Term
Effects of Hedge Fund Activism." It's forthcoming next spring. For
anyone who is interested, it's available on SSRN and on my home
page.
What we tried to do is to resolve empirically and test the
validity of a claim that has been playing a key role in the debate
on short-termism. There is a claim that we refer to as the "myopic
activists" claim. The claim is that interventions by investors that
do not have very long investment horizons-and people often refer
to activist hedge funds as the most significant investors of this
kind-that interventions by them produce short-sighted, myopic
corporate changes, which come at the expense of long-term
performance and value. Therefore, on this view, activist
interventions are, in the long term, detrimental both to companies
and to their long-term shareholders.
This is a claim that has been put forward, forcefully and
impassionately, by a great number of writers. Many have been on
the perspective of an issuer or an issuer advisor. Just to quote two
examples of strongly expressed views about this claim, William
George, recently in an op-ed in the New York Times, says that
activist investors are trying to drive up the share price and book
quick profits, but then they bail out and they leave corporate
management to clean up the mess. Similarly, a Wachtell Lipton
memo on activism expresses a similarly strong view. It says that
activist investors are preying on American corporations to create
short-term increases in the market price of the stock at the
expense of long-term value.
So this is a claim that is frequently involved and forcefully
put forward. The stakes are also significant, because it's a claim
that has been raised in a wide range of corporate contexts and
corporate debates to support arrangements that reduce the power
and the influence of activist investors. Just to give you a few
examples, it's used to argue for tightening certain rules, for low-
threshold, ten percent poison pills, for maintaining staggered
boards, which institutional investors have long been resisting, and
to advocate for changes that would limit the rights of short-term
shareholders. And, in particular, activist engagements disclaim
it's used as the basis for an approach that is advocated for boards
to follow. What is suggested is that, by and large, boards should
"circle the wagons" and view activists as an adversary that the
best outcome would be if it could be defeated.
Now, this is a claim that, in our view, requires testing. If you
take the view that market prices are efficient, which John Macey
here subscribes to, then you can rule out this view on the basis of
your assumptions about market efficiency because, if the stock
prices in the short term fully reflect long-term values, then this
problem goes away. But what we are doing in our work is we are
willing to accept that markets sometimes might be inefficient, but
even if they are inefficient, as I show in a paper published last
year in the Columbia Law Review, it doesn't follow that this
problem exists. It could exist, but it wouldn't necessarily exist
because there are effects going in both directions, and, therefore,
the short-termism claim, the myopic activism claim is really a
testable, empirical position, and even though this claim has been
around and has been put forward forcefully for about three
decades, the people supporting it have not provided empirical
support.
Last year, Marty Lipton and I had a debate at The
Conference Board in New York, and following this debate,
Wachtell Lipton issued a memo authored by Marty in which he
challenged me, kind of accepting the need for empirical testing,
that the important question for resolving the different views
between him and me with respect to hedge fund activists. The
important question, Marty said, was to study for companies that
are the subject of hedge fund activism and remain independent.
What is the impact on the operational performance and stock price
performance relative to the benchmark after a 24-month period?
So he was urging that empirical work be done that doesn't look
just at short-term consequences but looks at stock price and
operating performance after a 24-month period. And Mike
Weisbach and I, we took up this challenge, and we undertook a
2016]1 THE SHORT- TERMISM DEBATE 703
direct empirical test of this very question, based on the full

universe of about 2,000 activist interventions that took place
during the period of 1994 to 2007.
So what we see is that when we look at two standard metrics
for measuring operating performance financial economists used,
return on assets and Tobin's Q-and these are the averages for
the targets of activist interventions for a 5-year period. So we take
a long-term, 5-year-out look at the data, and what we see is the
targets, by and large, are underperforming relative to their
industry, so they start low, and following the activist intervention,
things improve. Now, the myopic activist claim, except that things
improve after a year or two, but it takes the view that those
improvements are transient, that what is happening is that firms
cut their investments, pay dividends, do things that improve
operating performance in the short term, but cannibalize-come
at the expense of long-term results. But what we see is that things
don't return to a point below the starting point, as is feared by the
myopic activist claim, but rather five years out operating
performance using those two metrics is significantly better than
when the activists emerged.
This was just looking at averages, but if you look at the study
you see this comes up very clearly in a regression analysis, which
is what one should rely on, so controlling for the relevant
characteristics we find that 3, 4, and 5 years out after the activist
intervention the levels of both Q and ROA are higher than at the
time of the intervention. Moreover, the difference is both
statistically significant and economically meaningful.
We next looked at what might be the most important
measure of all, and that is the impact on stockholder wealth. The
graph now that you see in front of you is just the short-term
reaction when activists emerge and they make certain defilings
that lets the world know of their existence. What you see in this is
just document results that have been known for some time, much
before our work, that the market reacts very positively to the
emergence of activists. There is about six percent positive
abnormal return, on average. Those who put forward the myopic
activist claim accept this pattern, but what they have been
arguing strongly, for a long time, is that this is a short-term spike
in the market, but the markets are inefficient in pricing in the
short term. Those initial increases are later on reversed when the
long-term consequences of the activism come to the surface, and
the long-term reversal, in the long term, makes shareholders
worse off.
What we do is we look using a number of alternative ways
that financial economists use for such purposes. We look at stock
returns three years out and five years out, starting in months
after the activists emerge, so right after the short-term spike that
I just showed you. And what we see is that three- and five-year
returns, depending on the specification, are either practically zero
or positive, but in no specifications are the statistics significant.
So the long-term reversal that issuers have been asserting is
simply not coming up in the data. It's not there. Rather, markets,
by and large, do not fail to appreciate the long-term consequences
of activist interventions, and the short-term spikes that the
companies assert in the filings by and large are an accurate, on
the average, pricing of the long-term consequences.
We next look at another concern that those who advance the
myopic activist claim have been putting forward, and that's the
concern that the hedge fund activists are making money and so do
their investors, but the bill is footed, as it were, by the long-term
shareholders that remain after the activists bail out. So what we
do is we test this pump-and-dump view by looking at returns in
the 3 years that follow when the activists exist, and again we see
this long-term reversal that has been feared is not there in the
data.
We also look at subsets of activist interventions, those
subsets that seem to have produced the strongest fears and
resistance from issuers. One subset is the subset of "adversary
interventions." Those are the interventions where the emerging
activist takes a somewhat adversarial approach, perhaps
threatens a proxy fight or takes a similar step, and we see the
pattern that we saw earlier, that there is no long-term
deterioration and no long-term damage to companies and their
shareholder is there. What we see is that five years out the
companies are doing better off than when the activists emerged.
And the same holds true for activist interventions that are
followed either by a reduction in long-term investment or by an
increase in dividend payouts, so the things that critics have been

concerned reduce long-term value.
We also tested another concern that has been raised that
activist interventions make companies more vulnerable to
downturns, and especially had this effect during the financial
crisis. We test this and the regression analysis shows that this
concern, again, does not show up in the data, that the targets of
activist interventions did not fare worse during the financial
crisis.
So those are our findings. Since we issued the primary
versions of our study, the study has received some attention but it
has also been strongly criticized in three long and detailed memos
that Wachtell Lipton published. Steve might speak to this, but let
me explain briefly what we explained in our response to those
memos, which we published, why we do not find this detailed
criticism to hold and to provide a basis for Wachtell's opposition to
relying on the findings of our study.
All the memos are available on the Harvard Law School
Corporate Governance blog, but to summarize them very quickly
we find in them a number of claims. One claim is that Q and ROA
are imperfect measures of operating performance. We agree there
is no measure of operating performance that is perfect, but those
are really the standard measures and the most widely used by
financial economists. And, interestingly, Wachtell did not
advocate, nor does it advocate now, an alternative measure. It just
seeks to avoid reliance on empirical work. And that is something
that Wachtell also said explicitly in its memos. It took the view
that given the inherent imperfections of empirical analysis, it is
better not to rely on empirical analysis in this debate, but rather
rely on the depths of real-word experience of business leaders and
their advisors. But that doesn't seem right to me. Given that what
the debate is about-stock returns and operating performance-
and that those are parameters for which objective data is
available and can be used, empirical evidence provides a superior
tool to report from involved individuals on either side of this
practice.
A third claim that was made is that activists do not produce
improvements but are simply good stock pickers. We discussed in
our paper a number of reasons why our finding suggests that, at
least partly, there is causality going from interventions to the

improvements in stockholder wealth and operating performance,
as we document. But in any event, if issuers were to shift to a
stock-picker's claim, this would represent a new position that does
not provide a basis for opposing and for trying to limit activist
interventions.
Fourth, Wachtell has a long, about twenty-page, memo that
has a long list of twenty-seven studies suggesting that the
evidence is mixed, but we did a review of all the twenty-seven
studies-it's available, again, on the Harvard Law School
Corporate Governance Blog and if you want to form a judgment on
this issue, look at it-but our conclusion was that not a single
study of the twenty-seven listed and cited contradicts or is even
inconsistent with our findings.
The last claim is that even if hedge fund activists do not hurt
the target companies with which they engage, they might have
some negative effects on companies that are not targeted, that
might begin to behave in a shortsighted fashion. But it's
interesting to see this kind of claim coming from Wachtell,
because as an advisor to boards, Wachtell should take the view
that corporate directors should focus on the interests of their
shareholders rather than on what happens to other companies,
and relying on externalities when there is something that is
beneficial for your own company cannot really provide the basis
for taking an adversarial approach to activist interventions.
Let me then end with our conclusions. What we find is that
the myopic activist claim that has been around for a long time is
one that clearly has been strongly felt by participants in the
debate but is just not empirically supported, is just not there in
the data, and I would like to stress that our data is not based on a
sample but on the universe of all activist interventions during a
long period of time. So, going forward, in our view, policymakers,
institutional investors, and boards should, first of all, not accept
arguments that are based on the claim that activist interventions
tend to be detrimental to long-term value, and that the result
rejects calls that are made that advocate legal and corporate
arrangements that impede and discourage interventions by
shareholders.
Thank you.
[Applause.]
JUDGE E. NORMAN VEASEY: Steve Rosenblum.

STEVEN A. ROSENBLUM: Hi. Well, I don't have a slide
set but I guess I should be somewhat flattered that Lucian spent
so much time attacking our firm, because at least it shows he's
paying attention. I will start by acknowledging that I don't have a
Ph.D. in economics and I don't have the qualifications to do
regression analyses and statistical studies, and try to attack
Lucian's methodology. A couple of my partners do have more
economic background, and I think one of the memos Lucian cited
does indicate some of the flaws that we see in the methodology,
which Lucian doesn't think are flaws, not surprisingly. More
recently there are a couple of papers that have been written by an
economist named Yvan Allaire, who has a Ph.D. from M.I.T., so he
is certainly more qualified than I am, and he raises some issues
and concerns about Lucian's methodology.
I think the Allaire paper does appeal or has some points that
appeal to my view of the world based on over thirty years of
advising companies and boards, but I don't think that I can really
sit here and say Lucian's methodology is right or wrong. I think
there are questions about it that others have raised, and I'll let
those speak for themselves.
I can, however, make a few comments on these issues based
on my real-world experience. I know Lucian doesn't really like
real-world experience. He tends to dismiss it as anecdotal evidence
and believes that these studies and regression analyses and so
forth are really the right way of looking at these issues. I tend to
be somewhat skeptical about statistical studies because I think,
perhaps intuitively, but I do think that you can use statistics to
prove almost anything. Lucian sometimes asks, "Well, why don't
we run our own studies?" and I guess my response is we all have
day jobs at Wachtell Lipton. But it does somewhat surprise me
that the academic world seems to be monolithic in its distrust of
corporations and managements and boards. Some of the pieces
that my classmate, Jon Macey, has written take this up. Even
when I was in law school, I took corporations with a new young
professor who was focused on the central problem of corporations
being an agency problem and selfish managers stealing money
from the shareholders. I wonder why there's not a similar agency
problem with money managers who are agents for other people's
money as well.
What I'd like to do, though, rather than trying to assess or
critique Lucian's methodology, is to say let's assume that Lucian is
right, that this study and all of his observations are completely
accurate and that, on average, the five-year performance of about
2,000 companies that experienced activist activity from 1994 to
2007, that those companies outperformed the market over a three-
year and five-year period thereafter. Assuming all that is true, I'm
not really sure what it proves. Lucian talked about causality, and
the paper actually concedes that causality is a harder thing to
prove. But let's take one hypothesis as to what might explain that,
assuming that Lucian's numbers are true, and it's a hypothesis
that, I think, has some basis in what I've seen in terms of the way
companies are run.
Let's assume that companies tend to underperform when
they're spending a lot of money on investments for the future.
They ramp up their CAPEX spending, they ramp up their
investment in long-term R&D, and that hurts earnings in the near
term. So for some period of time those companies are
underperforming. Let's assume that those companies are more
likely to be targeted by activists, and I think that's one of the
points that Lucian's paper does make, which he didn't cover in his
presentation, but that underperforming companies tend to be
disproportionately targeted by activists. And let's assume that the
companies respond to the activist activity by reversing course,
cutting back on investment, cutting back on CAPEX. They will
experience, for some period of time, an increase in earnings and
an increase in performance, and perhaps a corresponding increase
in stock price, and you can sustain that for some period. It's not
black and white. You don't suddenly flip a switch from one to the
other, but you can sustain that performance after you've been
investing for some period of time and underperforming. You can
sustain outperformance for some period of time, even a three-year
or five-year time period. Lucian views three to five years as long-
term. I don't view that as long-term. I think long-term is much
longer than three to five years.
So if the scenario I just hypothesized is what's happening,
then even if Lucian's numbers are correct, it doesn't mean that the
activity is healthy in the long run, and that's just one example. I
could probably come up with other examples of what might
explain the numbers, if they're true, that don't result in the policy
conclusions that Lucian reaches from his numbers.
I think equally importantly, from my perspective in advising
companies and boards for quite a long time, the problem of short-
termism goes way beyond activism and activist interventions.
Really, every publicly traded company is subject to what I think of
as the tyranny of quarterly earnings. If you miss your quarterly
earnings, you get punished, and that's just a fact of life for every
public company, and that's been true before activists. I think
activists may exacerbate the issue but it's an issue that overlays
every board and every management of a public company, and they
respond to it. If you talk to managers, if you talk to boards, they
do want to invest for the long term and they do want to do what's
right for the company, but they also feel constrained and feel the
need to manage within the constraints of meeting their quarterly
earnings, and that drives a lot of activity that I think is not
healthy for companies in the long term.
Take one example. Last year Michael Dell took Dell, Inc.,
private, and in the interest of full disclosure we represented
Michael in that transaction. And the motivating factor in his
decision to take the company private was that he felt he could not
take, as a public company, the steps that he needed to take to
transform the company for the future. He basically said, "What I
need to do here will hurt short-term earnings, it'll punish the
stock price, and we won't be allowed to get to the long-term
because somebody will come in and intervene before we can get
there." So he spent the entire year waging a battle to take the
company private and endured a lot of criticism. People said he was
doing it for the money. I mean, he's worth enough that he's not
doing it for the money. He was doing it for the future of the
company, and there are other examples of people taking
companies private for exactly that reason.
A few minutes ago I said I didn't feel qualified to critique the
methodology of Lucian's study but there is one observation I do
feel qualified to make, because it's essentially definitionally true,
which is that you can't measure the world that might have been,
By that I mean you can't measure the world in which companies
are not surrounded by short-term pressures and where they have

the unconstrained ability to manage for the long term, because
that world doesn't exist, and it hasn't existed for quite some time,
if ever. And here's where I think we really do need to listen to
experiential evidence, or what Lucian dismisses as anecdotal
evidence, because in the real world there really is widespread
consensus among managers, among boards, even among major
institutional shareholders, that there are short-term pressures
that are causing boards and managers to manage their companies
suboptimally, and it's something that needs to be addressed.
Finally, I feel the need to comment on Lucian's claim that my
firm, I think his words were we "advise boards to circle the
wagons and take an adversarial approach towards activists," and
then, in his conclusion, "the adversarial approach towards
activists that Wachtell recommends." Actually, we don't
recommend that. I will tell you the advice that I gave a board last
week in dealing with an activist, and it's the same advice I've
given many boards and that my senior partner, Marty Lipton, has
given many boards, which is that you should talk to the activist,
you should listen to the activist, you should consider the activist's
ideas, and if the activist's ideas make sense you shouldn't have
pride of authorship. The duty of the board is to pursue what is
best for the company. There's a point, I think, that Lucian and we
can agree on. That is the duty of the board.
By the way, that's not the duty of the activist. The activist
doesn't have duties to the company the way the board has duties
to the company. And our advice to boards is that if the activist's
ideas make sense, adopt them. And we advise boards to think
about what an activist would propose if an activist were to get into
the stock, and think about whether those ideas make sense. But
our advice is also that the board is the proper body to make the
final decision. It feels sometimes that Lucian would like to put
boards and managers in a box and tell them, "Your role is to do
whatever the activist or the institutional shareholder tells you to
do." From my point of view, in the real world, that would be a
formula for disaster.
So those are my comments.
[Applause.]
JUDGE E. NORMAN VEASEY: Professor Macey.

PROFESSOR JONATHAN R. MACEY: Thank you. Thank
you very much. It's really terrific to be here and to join in this
debate on short-term and long-term. I have just a few basic
comments that I'd like to make to provide my perspective on a
couple of these issues.
I'm a part of the monolith. There are a couple of monoliths.
One is the Wachtell monolith and the other, I guess, is what was
described as the academia monolith, and I'm kind of unapologetic
about it. I do think it's not such a bad life to exist in an evidence-
based world, and I want to kind of defend the kind of evidence it is
that we're talking about.
First, I want to run through what's at stake in this argument
and in extremely simple terms, which I hope will be not only
simple but also maybe a little bit controversial, what is at stake
here. I thought in Steven's comments he actually did an excellent
job of teeing up what some of these issues are. One is the comment
that was made about management-what is it that academia has
against management? Here the answer is nothing, that I do agree
with Steven that the agency cost model, certainly in my own
research, teaching and orientation, something that's very much on
the floor, the notion is not that management is bad. The notion is
simply that we can all do a better job. We can all do a better job in
what we do and that there's some value to having monitoring and
oversight of the people who have their fiduciary responsibility to
run companies.
Now, it's possible that we could say, well, we could have this
oversight simply by operation of law. We impose the fiduciary
duties of care, and we impose the fiduciary duty of loyalty, and
that's enough. What the monolith side says, and what I say is it's
not a bad thing to have-and this is hypocritical, I realize, coming
from a Yale person-but it's not such a bad thing to have grades
for corporate management.
[Laughter.]
PROFESSOR JONATHAN R. MACEY: And the grades

that we have for corporate management are share prices.
Managers can say, "Well, I don't like the grading system. I don't
like the grading system. It makes me do homework a lot and I'd
rather have more time for reflection and repose." The controversy
goes deeper than that though. It's also a question about how much
power should management and the board of directors have over
the corporations that they're entrusted to run on behalf of the
shareholders. I don't think that shareholders have a lot of power
right now. I'm not saying it's a bad thing. I'm just saying it's a
descriptive matter. It is the law in every state, most notably, and
importantly, Delaware, that the business and affairs of a
corporation are run by or under the direction of the corporation's
board of directors. And so all that this debate really is about is
around the edges, should management really be able to deprive
shareholders of a potential to have an activist investor come in
and agitate for change in ways that management finds
uncomfortable or maybe a little embarrassing or things like that?
So, really, what this debate is about is accountability.
Now, I want to talk a little bit about the counter-factual, and
make three very quick points. One is, the study that Lucian and
his co-author did, and that Steve is criticizing basically says, look,
an activist investor comes in, and when the activist investor comes
in there's an immediate and very significant, in the twenty
percent range, increase in the stock of the company that is the
subject of the activist investor's investment. And then, at the
behest of Marty Lipton, who now says he doesn't like data, Lucian
went out and collected all this data, and says, "Well, the share
price stays up for three or five years." Now we're told, "Well, these
aren't good measures. They're the only measures available, and
three to five years is not a particularly good amount of time. Let's
look at a longer period of time."
There are two issues I have with that. Number one is, this is
not true, but let's assume that after a three-year period of big-time
share increase after an activist investor comes in, let's say the
share price of the target company plummets to twenty percent
below the activist investor price. I think that would be a bad thing
but it would in no way cause me to think that, gee, we should
somehow exalt incumbent management over activist investors?
Why? Well, the reason is very simple. If I'm a shareholder in a
target company and somebody comes in and purchases shares and
causes the value of my equity to go up in a very short period of
time by twenty percent, and even if I think the share price may
drop in thirty-five years, I can respond to that problem so simply

by selling my shares now. So the idea is if people don't like activist
investors, if they think that they're going to destroy long-term
value, I don't like to do things in a hurry but I could probably
mosey over to my computer and log on and sell shares that I have
in a company if I'm given a three- to five-year period to do so. So
I'm simply not particularly worried about this plummet, although
it would be very strange and interesting if the share price
somehow did go down in this longer three- to five-year period. It
would be very interesting to see that and logically and
econometrically it would be challenging to figure out how this
would be somehow attributable to an action by an activist investor
that occurred five years prior, and who's no longer involved in any
way in the company. It's conceivable. It just doesn't seem very
logical to me.
The second thing I want to say is to talk about, what exactly
is it that we mean when we talk about the long term? So it's
longer than five years. I teach a course with a guy from Morgan
Stanley named Greg Fleming, and he graciously told me he likes
these slides and asked that I use them. The slides are essentially
showing how the long term and the short term are converging.
One slide here is simply looking at a number of different
technologies, starting with the light bulb that took forty-six years
to become part of mainstream use, to things like the cell phone
and other more modern technologies, where entire mass patterns
of individual consumption at the retail level are occurring in a
shorter time span than we want to give management to worry
about things. Obviously there are famous stories about changing
in computing power. My personal favorite is, let's look at the
installation of a new pope in Saint Peter's Square in 2005.
Everybody is sitting around, watching and waiting, and then we
fast forward to 2013, the same exact scene, and we see clearly a
major difference in technology with respect to how people are
receiving this. So we're moving in a pretty fast world.
This slide is just the previous two, side by side. The next slide
is basically saying that companies don't last particularly long
these days in comparison with the past. If you look at the
population of U.S. companies in the S&P 500, they don't stay
there very long. There's constant change and flux. Again, I feel a
little bit uncomfortable saying this, having the benefit of tenure,

but things out in the real world, I do realize that they're
different-that's why, Steve, I'm so happy in academia, I suppose.
I just don't think that the world as it exists gives us the time that
we may need.
This final slide simply shows, again, kind of how much more
quickly things are moving these days. In the far left column we
see these iconic American companies-Coca-Cola, Boeing, Lilly-
taking a century, essentially, to reach a market capitalization of
$100 billion. We flash forward today and we see Google and
Facebook going in less than ten years-a tremendous increase-
and there's no reason to believe that this rate of acceleration is
going to slow down. Similarly, we see equal rapidity with respect
to a value destruction, that is the speed with which companies like
BlackBerry, Sony, Kodak can lose billions of dollars or all of their
market capitalization, all of their value for shareholders.
With respect to this long-term, short-term debate and the
position that's taken, I'm reminded that one of my favorite movies
Apollo 13, starring Tom Hanks, where he and his colleague on the
LEM device are hurtling back to the United States and they're
asked to make various adjustments, and Tom Hanks says to the
Space Control Center in Houston, "We simply don't have that
much time."
Thank you.
[Applause.]
PROFESSOR ROBERT T. MILLER: Let me first say that

we had hoped to have Bill Allen, former Chancellor Allen of the
Delaware Court of Chancery, here instead of me, but
unfortunately his health doesn't permit him to be with us today.
Besides being on the faculty at New York University, Bill is, of
course, of counsel at Wachtell Lipton. He would probably be more
inclined to agree with Steve than with Lucian or Jon. Although
I'm responsible, and not Bill, for everything I'm about to say, I see
my job here as to try to put the best case forward for there being a
legitimate problem with short-termism.
Thinking about that issue, the first thing that struck me was
that there are many people concerned about short-termism
(Professor Bebchuk lists lots of them in the first section of his
Columbia Law Review article from last year), and it may be that
these people are not all concerned about quite the same problem.
In most cases, they're motivated by what they think of as clear
examples of activist shareholders, along with the market more
generally, pushing boards of directors to engage in short-term
rather than long-term projects, and they see this as being bad.
And they certainly start off with nothing like Professor Bebchuk's
evidence, but sort of an intuition or an impression that something
is wrong here.
From that, it's not immediately clear exactly what the
problem is. In a very interesting section of Professor Bebchuk's
paper-the section I think is actually the more important and
revealing-he has to take about three or four pages to nail down
precisely what the supposed problem is before he can go out and
do an empirical study on the issue as he finally defines it. So he
has to do a bit of interpretation on what the problem is in order to
formulate a proposition that is sufficiently specific to be proved or
disproved by statistical, empirical evidence. And what I'm going to
suggest is that the interpretation that Professor Bebchuk uses,
which is undoubtedly one that many people actually have in mind,
is nevertheless not the only interpretation of the alleged problem
with short-termism. In fact, there is another interpretation of
what the problem is, and this interpretation is not touched one
way or the other by Professor Bebchuk's statistical analysis.
Moreover, I think that this interpretation probably better captures
what the best informed people who worry about short-termism are
actually concerned about.
As you'll recall, Professor Bebchuk's interpretation includes
the idea that activist shareholders, along with the market
generally, force boards of directors to undertake actions that cause
share prices to go up in the short term (however you define that)
but down in the long term (however you define that), and he very
rightly points out that this is only possible if markets are
informationally inefficient in some pretty important ways. For, if
markets are informationally efficient and if this problem really
exists, it's impossible to see why, if we all know the price is going
to go down in the long term, the price doesn't also go down in the
short term as well. If we all know the price is going down
tomorrow, that means the price is going to go down today, so the
problem can't exist. In Professor Bebchuk's formulation-and as I
say, this is the formulation that a lot of people do have in mind-
there is an assumption that the market is, in this very important
and systematic way, inefficient.
The interpretation I'm about to give you is one that's
consistent with the market being efficient in all relevant ways. So
what is this other possible interpretation? I ask you to take a step
back and imagine that there is a given investment and two
investors each considering whether or not to make the investment.
What should they do? Well, the first thing they have to do is they
have to determine what they think the future cash flows of this
investment will be. Let's assume they agree completely on what
those cash flows are likely to be.
The next thing they have to do is discount those cash flows
back to present value to figure out how much they should pay for
them today. So, what rate should they use? Well, that depends on
the riskiness of the cash flows. Let's say they agree on that (you
can imagine them agreeing on the variance or standard deviation
of the expected cash flows, for example). Do the two investors then
necessarily agree on the discount rate? Answer-no, because they
might have different risk tolerances. Let's assume they have the
same risk tolerance as well. At this point, will they agree on the
discount rate? The answer is again no. And one of the reasons that
this will be, the primary one, I think, is that different people have
different values for the pure time value of money. Some people
want their money faster than others.
Everyone prefers money faster rather than slower, but for
some people the preference is stronger and for other people the
preference is weaker. Because of this, the people who want their
money back faster will tend to use high discount rates. The people
who are willing to get their money back later will use lower
discount rates. So even when people agree completely on the
objective characteristics (expected values, standard deviations) of
the future cash flows related to the investment, they might value
it differently if they have different discount rates, because of when
they want their money back and what their preferences are, how
much they're willing to sacrifice today in order to get a dollar
tomorrow.
This is very important in this debate. Imagine two investors,

one of whom wants his money back faster than the other-i.e., one
of whom has a higher discount rate solely because of time-value of
money concerns. Imagine these two investors are now considering
two separate investments. In one the cash comes back quickly. It's
front-end-loaded on cash flows. In the other, the cash comes back
later. It's back-end-loaded on cash flows. These two people may
agree on all the objective characteristics of two investments
(expected cash flows, standard deviations, etc.) but nevertheless
disagree on which investment they'd prefer to have. People with
higher discount rates will tend to favor the investment with front-
end-loaded cash flows. People with lower discount rates will tend
to favor the investment with back-end-loaded cash flows. Even
though they agree completely on everything about the
characteristics of the two investments, one could choose one and
one could choose the other, because of their different discount
rates that they're applying. And I'm eliding over a few details at
this point, but, in general, if you have a higher discount rate you
will tend to be a short-termer, and if you have a lower discount
rate, you will tend to be a long-termer.
Now, why is this important? Well, consider the short-term,
long-term problem like this. There are lots of people who invest in
the market, individuals who are investing because they are
investing for their retirement, they are investing to pay for their
children's college, they're investing to pay for their children's
wedding, and they want their money back in twenty or thirty or
forty years. I'm forty-four years old; I still think of myself as
having a thirty-year time horizon on my investments. I'm still in
low-cap, high-risk stocks. Other people are going to want their
money back faster. Those would be, for example, activist
shareholders, and possibly-and Steve touched on this point-the
large mutual funds who are managed by agents on generally
behalf of small, long-term investors, which agents nevertheless
themselves have shorter time horizons and so higher discount
rates because they are judged according to whether or not they
beat the market over short periods of time, such as quarters or
years. They are judged on rather short-term results. Their
compensation is based on short-term results. It's possible that the
people running the mutual funds and running the money market
funds and so on are looking for short-term results and so have

higher discount rates than the individuals who are investing for
the long term.
Now, imagine we have a company whose board of directors
has decided on a certain project. The project is basically a long-
term project. If you discount the cash flows from this project at
lower rate, reflecting a lower time-value of money, it turns out the
shares should be worth $60 a share. But, the company's shares
trade in a market dominated by large institutions, and the people
who are running these institutions are going to be applying higher
discount rates reflecting a higher time-value of money. So when
you get the market rate, which is a blend of everybody's rate, the
shares don't trade at $60; they're trading at $50.
And then along comes an activist shareholder. He requests a
meeting with the board of directors, and he says to the directors,
"You guys are all wet. You shouldn't have these long-term
projects. You should have a shorter-term project. Let me show you
what it is. If you switch to the short-term project and you apply
higher discount rates to it, you know what? Your share price will
go up from $50 to $55." And this can be completely correct. The
board of directors, knowing that the money managers and the
active shareholders and ISS will tend to favor this, capitulates.
They change their project from the long-term to the short-term
project. The market, with its preference for higher rates reflecting
a high time-value of money, likes this. The company's share price
goes up from $50 to $55, and it stays there, completely consistent
with everything Professor Bebchuk has found. However, if the
company had stayed with the long-term project, and if the lower
discount rate reflecting a lower time-value of money were given
effect in the market, the shares would actually trade at $60.
Does this actually happen? My guess is sometimes yes, it
does. How often does it happen? I have no idea. The people to
whom it does happen tend to hire Steve, so Steve probably sees a
lot of examples like this, and that may be why, in his experience,
short-termism seems to be a significant problem. Is Steve's
experience representative of the market as whole, or does he just
see a self-selecting group of companies who tend to have this
problem? I don't know, but I leave you with one suggestive fact
about how often problems like this may actually happen.
Whenever there is a contested shareholder election and the

activists are pitted against management in a proxy contest,
whether to take over the board or just to elect a short slate, there
is one constituency among the shareholders that very consistently
votes for management by large majorities. Do you know who those
people are? Retail investors, the people who undoubtedly have
long-term goals in mind.
Now, you may say, yes, those people who are generally
unsophisticated and they're bamboozled by management. Possibly.
Nowadays, however, when activist shareholders wage very public
campaigns in proxy contexts, it would seem that unsophisticated
retail investors are just as likely to be bamboozled by the activists
as by the directors. Thus, it may be that the retail investors are
getting it right. The large institutional shareholders tend to do
what ISS tells them to do, and sometimes they vote with
management and sometimes they vote with the activists, probably
with a strong tilt towards voting with the activists. Maybe, the
institutional shareholders are smarter, but maybe too they're
suffering from the agency problem and they're implementing
higher discount rates for reasons of their own, not the lower
discount rates the individuals who invest for their retirements
would prefer.
So I think it's possible in this interpretation that the market
is perfectly efficient, Professor Bebchuk's results are absolutely
correct, and, nevertheless, there is a significant problem with
short-termism in the market. Thank you.
[Applause.]
JUDGE E. NORMAN VEASEY: Okay. I sat down there so I

could see the slides, see the speakers better. But now we'll let the
games begin. First of all, why don't we take some questions and
then I'll have the panel interact with each other.
PROFESSOR LUCIAN A. BEBCHUK: Could we do
reactions first?
JUDGE E. NORMAN VEASEY: Yes, but first we'll take
some questions.
PROFESSOR RICHARD EPSTEIN: [Speaking off mic.]
JUDGE E. NORMAN VEASEY: Who wants to take that
one on? All right, Robert.
PROFESSOR ROBERT T. MILLER: Could you just say it

a little more clearly, because I'm not sure I quite followed it, how
the market would get segmented into long-term and short-term?
Do you mean by different companies?
PROFESSOR RICHARD EPSTEIN: Assuming the market
is efficient, if there are different projects, some of which have
front-end loaded cash flows and others of which have back-end
loaded cash flows, wouldn't you expect that these projects would
get separated and that they'd each get done, each backed by the
investors who, because of their difference discount rates, value the
project mostly highly?
PROFESSOR ROBERT T. MILLER: I think the answer to
that is it doesn't work that way, because what you're talking about
is whether the particular assets of the corporation are going to get
deployed into this use or that use. It's not physically possible to do
both projects. And we might be able to think of cases where, if we
have a long-term business and a short-term business, and you
spin one out or something like that, but in general, no. We're
talking about which way particular goods and services inside the
business are going to get used. I know you had a second question
too, and but all I heard of it was, "Am I right that . . . ?" The
answer to that second question is probably yes, but the only
reason I have for that Richard is that I think you're usually right.
[Laughter.]
JUDGE E. NORMAN VEASEY: Okay. Lucian?

PROFESSOR LUCIAN A. BEBCHUK: Richard, you are
usually right but in this case you might be right but I think you
are focusing, on Robert did, on a situation which is not part of our
work, just factually. So both of you are concerned, and Steven was
concerned before, about what happens after five years, and if
things turn badly after five years, you are concerned that some
retirees would suffer. And Steven was saying, "Why did you
choose to look for five years?" So, a few reactions to this. One is we
chose to look-and Robert was saying we spent some time defining
the question-we actually took our question from Martin Lipton. I
had a quote on the slide, Martin Lipton said, "Look at the
operating performance and the stock returns after two years." So
Steven says you look for two after five. You academics have a lot of
time. You did two to five. Why don't you look five to eight?
Probably if we didn't find anything there you would say, look from
ten to twenty.
So the reasons are the following. One is CEOs right now have
an average tenure which is not higher than five years. If you take
just an inside, on average, given those numbers, they probably
have, from this point on, a horizon that isn't longer than three
years. So the idea that if we insulated the CEO, and the CEO has
a horizon of four years, you would get someone that focuses ten
years from now. It's probably not there. More importantly, I think
we have every reason to believe that this effect doesn't show up
after five years. It can be done, but if you really believed that you
have this effect, then, Steve, you could become even wealthier
than as a partner at Wachtell Lipton. You can just have an index
fund that takes the shorts companies five years after activism,
and if you are right that there is a decline, that ETF would be
better for us to invest for retirement than an ETF that holds
companies five years.
Now, nobody in the market is trying to do this, which
suggests to me that there isn't really any significant belief in this
world that five years out there is a reversal. But if you want we
can go and do this. The only thing that I would like you to do say
to this wonderful audience is if we do-because Martin says the
important question is to look after two years. So my sense was if
the numbers come out differently, that might lead him to refine
his views somewhat. Now, when I listen to you it seems that you
remain kind of completely with the same view, even though the
numbers came differently. If you tell me, if you look at the
numbers from five years to ten years, and if you don't see a
reversal, that would affect my view, we'll be happy to do the study
for you.
STEVEN A. ROSENBLUM: I don't know what the study
would show if you did it because every study you've done supports
your world view and your ideology, so that's why I'm a skeptic
about statistics. I concede that I don't have the economics
background to attack the methodology. I think I was trying to
make a different point, which is that even if the studies are right,
there's just no doubt in my mind-and you can say it's anecdotal
and I've only seen a small subset, and you can do a study of a
universe of 2,000 to disprove what I'm about to say-but there's no

doubt in my mind that companies and managers and boards are
constrained by short-term pressures in the decisions they make
day to day, and that there's no way to test whether the world
would be better or worse if they weren't constrained.
PROFESSOR LUCIAN A. BEBCHUK: There's no piece of
evidence in the world that would convince you to change your
views?
STEVEN A. ROSENBLUM: As to what I see, in terms of
the actions taken and the thought processes taken by the
companies that we interact with, no, I wouldn't change my view
because it's what I've seen.
JUDGE E. NORMAN VEASEY: Jon.
PROFESSOR JONATHAN R. MACEY: I have to jump in
just for a moment on Steve's side, in the following way, which is
what Steven said was that there's no doubt in his mind, and,
frankly, there's no doubt in my mind either that managers are
constrained by the short term. Now, what comes next is what's
important, which is Steven says that bad, and I'm saying it's good,
and to that I want to add that-and this is the agency cost view
and I will plead guilty-is I think it's a good thing. This is a
manifestation of the agency view that I embrace. I think it's a
good thing for managers to be constrained.
I'd like to spend just twenty seconds pondering the following
question, which is, how would we organize a world such that
management is not constrained in the short term? So it's not
enough to get rid of activist investors. As Steven said-and I think
he was absolutely right-in his remarks initially, this is a broader
question than just activists. The first thing we would have to do, I
think, is to get rid of quarterly reporting, because what's
happening is managers have the market, analysts who follow
stock are coming up with numbers, whisper numbers, consensus
numbers about what earnings are going to be per share in a
particular time period, the quarter, and people are really focused
on that, and the earnings may be disappointing, and the stock
goes down, the earnings may be better than expected and the
stock price goes up-this is causing managers to focus on the short
term.
Now, my point is twofold. Number one, I think the cure would

be way worse than the disease of getting rid of financial reporting,
so there was no benchmark against which to base, and that one of
the things I'd really like to hear from the kind of alternative camp
is if we are going to move to a world in which we seriously try to
address what is, in my view, improperly but is being characterized
as a problem of focusing on short-termism, what is going to
replace it? Because right now what we have-and here's the one
example of the academic world not being monolithic-there's a
person at Cornell, Lynn Stout, who has written this book that's
very consistent with the sort of Wachtell view of the world, saying
managers should be unconstrained, that that's the approach. The
approach seems to be either we have a world in which people are
cowering in the face of stock prices and are having to focus too
much on the short term, or on the short term, or a world in which
we have unconstrained management. We're not going to find a
utopia where we somehow wave a wand and everybody is happy
with the way U.S. public companies are being run, or with the
performance of such companies.
So I guess in an imperfect world, where I'm forced to choose
between an unconstrained management model and a world in
which management feels pressure to perform in order to avoid
shareholder activism or takeovers or board anxiety and pressure,
you know, I'd take the short-term world.
STEVEN A. ROSENBLUM: Jon, I think you're creating a
binary choice. Those aren't the only two choices. For example,
there are jurisdictions where you don't have quarterly financial
reporting. That doesn't mean that you get rid of financial
reporting all together.
PROFESSOR JONATHAN R. MACEY: I just said get rid
of quarterly-
STEVEN A. ROSENBLUM: Or you could have annual-
PROFESSOR JONATHAN R. MACEY: Right, or every five
years.
STEVEN A. ROSENBLUM: I actually think it would be
good to get rid of quarterly financial reporting.
PROFESSOR JONATHAN R. MACEY: Wow. Okay. Thank
you for letting me know that. All right.
[Laughter.]
PROFESSOR JONATHAN R. MACEY: I thought it was

just a ten-day window. This is getting better all the time.
[Laughter.]
STEVEN A. ROSENBLUM: We were talking before the

panel about an article that Marty and I did back in 1991,
proposing five-year terms for boards and having them elected once
every five years, but having full proxy access. We've been opposing
proxy access in its current incarnation, but in that context we
proposed having a full proxy access system. We're not trying to get
rid of accountability. As I said before, we counsel our clients to
talk with activists. Certainly every company, every responsible
company, is out on a regular basis with a very significant program
to talk to their major shareholders and get input and consider
ideas. And maybe this is where we differ. My experience is that
boards tend to be responsible. Not every board is responsible-I
can't say I've never seen a bad board-but boards tend to be
responsible. Directors tend to want to do the right thing. And the
goal is putting them in a position where they can.
JUDGE E. NORMAN VEASEY: Lucian, go ahead.
PROFESSOR LUCIAN A. BEBCHUK: Steven, can you
maybe explain to us-you have this strong preference not to use
empirical evidence and to rely on impressions by significant
individuals, and I understand that you talk with a lot of people
who are your clients who say, "We feel this adversely affects our
companies." Now, you probably have, on the other side, if some
hedge fund activist told you our experiences, that we produce huge
amount of value, you would probably not be willing to have public
policy be based on the impressions of the activist, and I wouldn't
do so either. That's why I think we need empirical evidence to
somehow resolve when you have impressions on both sides, when
both sides have their interests.
So the idea that, in this area of public policy, we would put
aside the evidence and would base them on the views of one side of
the practice-does that seem to you the best way?
STEVEN A. ROSENBLUM: Lucian, I think the kind of
studies that you run, and I think Norm said you have over 100
research papers, are inherently limited. I'm not saying that you
shouldn't run them-they're interesting to read-but I don't think
that's the sole basis for setting policy and I think your
unwillingness to go out into the real world and understand how
businesses are run and what people are thinking is equally subject
to criticism as your criticism of us for not accepting your studies at
face value.
PROFESSOR LUCIAN A. BEBCHUK: There is a
marketplace of ideas in financial economics, so when I write a
paper, there are a lot of financial economists who are interested in
publishing papers, and if you see there are many issues Corporate
Finance where people are coming up with mixed evidence and
evidence on both sides, and people are working on those issues. I
understand that you don't find my study, but doesn't it bother you
that there isn't a study which is the opposite conclusion, and does
it bother you, or wouldn't you want to try to facilitate people who
would study this? Because Martin, in his memo, said the
important question was not what business leaders think but the
important question is what is the effect on stock returns and
operating performance. Those are hard numbers.
JUDGE E. NORMAN VEASEY: Before you answer that,
Jon wants to say something.
PROFESSOR JONATHAN R. MACEY: I'm learning a lot
and enjoying myself tremendously. I would like to focus on this
comment about should we get rid of quarterly reports and move to
some other timing sequence for reporting such that we don't focus
people very much on the short term, and the first thing I thought
to myself is, this would be a great study because we could take a
bunch of companies that did only annual financial reportings and
some that did quarterly, but we're never going to be able to do
that because the companies that only did this annually would be
in violation of the federal securities laws. But we do have a set,
which are companies that are closely held-limited liability
companies, companies that aren't subject to the securities laws'
reporting requirements; they're only subject to state law, and
state law only requires annual reporting, but we observe that
these companies, nevertheless, provide their investors with
quarterly reports. That is, people aren't willing to invest in
companies and wait a year prior to looking at financial results.
That, to me, is some evidence that the quarterly reporting system
is superior.
One question that maybe we should address frontally is this

issue of in an equation and deciding corporate policy, how much
weight should we give to what managers say as distinct from what
investors say? The investor argument is it's their money. The
management argument is the one that you make, which is
certainly right, which is, well, management are inside the
company, the investors are outside the company. They have all
this institutional knowledge and detail.
My preferences are pretty well known at this point, but I do
think that's an interesting data point is to just observe what
companies do when they're not constrained.
JUDGE E. NORMAN VEASEY: Steve.
STEVEN A. ROSENBLUM: I think in the U.S. it's true that
when a company gets taken private it continues with quarterly
reports because that's what investors are used to in the U.S. It's
not the case in every jurisdiction around the world that you have
quarterly financial reporting. The other thing is private companies
tend to want to be at least in a position to go public at some point.
So I think to some extent it's inertia and custom that causes the
private companies to continue with the quarterly reporting. But I
do think private companies have an advantage in the short-term
versus long-term issue because I think private companies tend to
have, anyway, a core of share owners who are a cohesive, smaller
group, who do have a longer time horizon. They don't have an
infinite time horizon but they're looking at a three-year to five-
year time horizon. Private equity firms will tell you they want to
know the quarterly earnings because that's what they're used to,
but if you miss a quarter, or two quarters, or three quarters, as
long as they're happy with why you're doing it and where you're
going with it in the longer term, they're fine.
JUDGE E. NORMAN VEASEY: Let's let Robert jump in
here, if he wants to.
PROFESSOR ROBERT T. MILLER: I do. Here are two
points about what we mean by the short or the long term, and
they sort of pull in opposite directions. Imagine an investment
banker is valuing a company. What the bankers usually start with
are five-year cash flow projections for the company, and then they
have to have some notion the value of all cash flows after those
five years, and that's called the terminal value in the discounted
cash flow analysis. It turns out that probably, depending on the

rates you're using and the growth rates and so on, more than half
of the value of the company, maybe a lot more, is in that terminal
value, and the way you calculate the terminal value is you take
the cash flow in year five, and you assume it's going to grow at a
certain rate from now until the end of the world. You treat it as a
growing annuity. So most of the value of the company is stuff that
happens after five years, so that tells you that the "long term"
should be understood to be the period that's way out there, beyond
five years, because it's assumptions about that time period that
are determining more than half the value of the shares today.
On the other hand, everybody knows that you can't
realistically plan a business more than five years in advance.
Almost no businesses make make ten- and fifteen-year plans.
When the bankers come to the company and they say, "Give us
your cash flow projections," the company sometimes only has three
years, and they have to create the fourth and fifth year specifically
for the bankers. So we are always attributing large values to
companies based on our expectations about events far in the
future, after five years, when we know we don't really have any
good ability to plan that far. So where should the long-term be?
Standard valuation techniques suggest both that it should be
beyond five years and that anything beyond five years is largely
unknowable. This is paradoxical, at best, simply incoherent at
worst.
PROFESSOR LUCIAN A. BEBCHUK: I think that both
Robert and Steven have skepticism about the wisdom of investors
that is not warranted. Both of you say, look, this is this long tail,
and the investors can't really appreciate it. Only the managers can
see and place value on it. But if any of you just looked at stock
prices, you'll see that that's unlikely to be true. Just look at high-
tech companies. So, on the one side, we have Apple that trades at
the low PE ratio. Why does it trade at the low PE ratio? Exactly
because there are investors who are looking out six, seven-I
mean, if everybody was not looking seven years from now, it would
trade at the much higher multiple, but they are looking seven
years from now, and they are doubting that they would be able,
correctly or incorrectly- they would be able to maintain the kind
of earnings.
At the same time, there are companies that trade at massive
multiples, like Twitter or Facebook. Why? Because there are
investors who are looking out and they are speculating that in
seven years or in twelve years from now that we'll be making
profits. Now, those are people who invest massive resources, who
spend a lot of time thinking about those issues, and it seems to me
that both Robert and Steven are just not placing appropriate
weight on the wisdom of investors in understanding the world.
JUDGE E. NORMAN VEASEY: We have people at the
microphones and others who want to ask questions. Please get in
line at the microphone, but please go ahead, sir.
ATTENDEE: The differentiation between short term and
long term as it's being discussed in this room right here right now
seems to be a bit artificial. It doesn't matter if it's five years, ten
years. The truth of the matter is a good long-term investment is a
series of good short-term investments, and really what makes the
difference between a good long-term investment or a poor long-
term investment is the strategy that's used over the course of the
short term. And I think that this plays to what Steven has been
saying, or trying to say, is that there isn't really any way of
quantifying the strategy that's being employed. So the statistics
do tell us a lot, and I don't think there's anybody in this room
that's attempting to argue that an empirical approach to a
problem is not a good one, but you have to know what it is that
you're measuring.
So when you look-has anyone played chess? Have the
panelists played chess before?
PROFESSOR JONATHAN R. MACEY: Yes.
JUDGE E. NORMAN VEASEY: Sure.
ATTENDEE: Yes. Okay. If you look at a chessboard at three
moves into the game and then you look at the chessboard again
twenty moves into the game and you do an empirical analysis of
the difference between the positioning of the pieces at those two
points in time, it really doesn't tell you anything.
So if you look at the positioning of a stock price at one point
in time and then you look at the positioning of that stock price at
another point in time, that tells you just as little as the chess
board did. So it seems to me that the conversation is kind of
missing the point a little bit, and I'd just like to know, is there
anyone who thinks that, really, strategy is the key piece here that
nobody has really been talking about?
JUDGE E. NORMAN VEASEY: Well, let's start with
Professor Macey is answering that.
PROFESSOR JONATHAN R. MACEY: Well, two things.
One, with respect to your chess premise, the fact is that we
observe in chess, people resign before games are over, and it must
be the case, because they don't resign before the game starts, that
the new positions of the pieces on the board as the game
progresses is providing them with some information about the
quality of their strategy and the quality of their opponent's
strategy, or to put it differently, share prices reflect the market's
assessment, i.e., an unbiased assessment, of the qualities, of the
strategies that management is deploying as they go about running
the company. And the debate is about the market's efficacy and
accuracy with respect to a comparison between the market's
ability to evaluate long-term strategy versus short-term strategy.
Something that Robert just said, it was completely
devastating to the position he's taking, that somehow that
managers are focused maybe too much on the short term, is that
we have an acknowledgment that when we look at, when we value
companies, a very large portion of that value is valuations about
how much wealth a company is going to contribute in the long
term; that is, what are the values of the business five years out.
Those are assessments about strategy because no one is talking
about the breakup value of these companies. Nobody is talking
about taking the assets and just selling them. People are talking
about valuing them as an ongoing concern which means valuing
the strategy that's being used in the deployment of those assets,
and the question is are share prices a legitimate mechanism for
evaluating strategy, and people obviously disagree here. I kind of
think yes, and other people think maybe not so much.
JUDGE E. NORMAN VEASEY: Okay. We have fifteen
minutes to go. We have four more people, at least four more people
who want to ask questions. Please, sir, go ahead.
ATTENDEE: Thank you. I haven't heard anything in this
discussion so far about the impact of corporate taxation and
capital gains taxation, and I raise that because I think it's
generally accepted that not only corporations, but investors are
heavily influenced by the tax laws in terms of, from a corporate

standpoint, how they invest, where they invest, how they fund
that investment, and of course, investors from the standpoint of,
again, what their tax status is. In a way, we've seen that in the
recent debate over inversions with U.S. companies merging into
foreign companies in order to reduce their tax bill.
My question is this. As we talk about corporate short-
termism or the lack thereof, how should that debate feed into the
debate that supposedly will become more intense next year over
corporate tax reform? To the extent that taxes do influence both
corporate management and investors-and we're talking about
public policy-what should be the input of this panel and folks like
you on the corporate tax reform debate that is supposed to
increase next year?
JUDGE E. NORMAN VEASEY: Steve?
STEVE A. ROSENBLUM: Well, I think the whole question
of tax policy is a very important question, and I'm not really sure
how it feeds into the short-term versus long-term debate, but I do
think that certainly at the corporate level the tax structure does
drive behavior that can also be suboptimal in the same way that
slavery to short-term quarterly earnings can drive suboptimal
behavior.
In particular, some of what was driving inversion
transactions is the fact that you have multinational corporations
that have huge amounts of cash trapped overseas, that they don't
really have a good use for overseas, but if they try to bring it back
to the U.S., they'll have huge tax leakage, so they leave it overseas
in suboptimal uses. And I think that's an issue that needs to be
addressed. The corporations were trying to do that with self-help,
with the inversion transactions. The inversion debate has a lot of
other issues involved, but I think if tax policy is going to say we
don't want inversions because we don't want U.S. companies
moving offshore, then we have to address the ability to rationalize
the tax system to allow companies to make use of their offshore
cash rationally.
From the individual perspective, it's actually interesting. I
think our general view or experience is that a lot of institutional
shareholders are actually not tax motivated, even though their
decisions in terms of trading and holding periods and so forth
2016]1 THE SHORT- TERMISM DEBATE 731
have a significant impact on the tax consequences for their

investors. But it's one of the agency problems that I mentioned in
passing about money managers. They are judged in terms of their
pretax return. So they make decisions that are not always mindful
of the tax impact on their underlying investors, which I think is a
disconnect that ought to be addressed, but nobody seems to really
be focused on it.
JUDGE E. NORMAN VEASEY: Okay. Let's get the next
question, please.
ATTENDEE: Okay. Well, if you just turn on CNBC on the
subject of activists, the party line will be, "We like it when they go
after weak managements, but we don't like it when they go after
strong managements. The empirical data you've shown seems to
say mostly the hedge funds in the past, the activists have done
over underperformers. However, I could easily see in the future, as
corporations up their game and we have more and more activist
hedge funds, that they'll start going after a different class of
targets and the data will change. I think the empirical data is fine,
but it doesn't tell me anything about what I should do for public
policy or what that's going to look like in the future.
Now, my question is as follows. For anyone on the panel who
would like to respond, we haven't heard a word about nonvoting
stock, fully entrenched management, blessed by the shareholders,
sometimes generations in the past, and those management, they
still have to live in a short-term world. They have to produce
quarterly earnings, but they have some of the pressures off them.
Has there been a lot of empirical work on that and how they
perform? What's your view of that? That would be the co-op, I
think, in Richard Epstein's world.
JUDGE E. NORMAN VEASEY: Lucian?
PROFESSOR LUCLAN A. BEBCHUK: You had two
questions. So on the first one about companies that are not
underperforming, the data from the past includes some
companies. Most of the companies were underperforming.
But there might be a company that is performing well but
has some population problems, like it's doing well, its current
business, but it's holding too much cash. It would make sense in
such a case for activists to engage with it.
The important point to remember is that activists have a

built-in reason to go only after companies whose value they can
improve because, in the end, if they are not going to improve their
value, they are not going to make a profit.
On your second question, yes, there is some data that shows
that dual class companies perform less well. This is consistent
with the views that Jon was expressing before that not having any
discipline leads to managerial slack, and this raises issues of
public policies, a complicated question, because, obviously, those
companies went public with this structure, and that's something
that should be taken into account. But there is evidence that is
consistent with the possibility that insulation from the market,
also in the context of nonvoting stock, has adverse consequences.
JUDGE E. NORMAN VEASEY: Okay. There's another
question out there. Sir, please.
ATTENDEE: Yes. As a private investor in dozens of publicly
traded companies and a scrupulous reader of their annual reports
and proxy statements, I have found two things. One is the
corporation's management has a huge advantage in public
communication to its shareholders over all opposing views, and
number two, in many cases, compensation of board and
management is not terribly reflective of results of the corporation.
They all use the same consultants who make the same studies,
using the same comparables, which are the same companies that
use my company as a comparable, and they all come to the
conclusion that compensation should go up, even though the stock
price and dividends are down, not always, but very often.
So as a retail investor, my question is, if we eliminate activist
shareholder involvement or severely curtail it, what other
mechanisms are there to move a management that is sitting there
very comfortably and there are very few mechanisms to otherwise
move them to action to make them do things to increase
shareholder value or change things when they're not going in the
correct direction, other than out of their benevolence or the
goodness of their hearts?
JUDGE E. NORMAN VEASEY: Who wants to take that?
STEVEN A. ROSENBLUM: I think benevolence and
goodness of heart is actually a pretty powerful motivator, and I
say that a little facetiously, but honestly, part of the concern I
have with the academic literature is the widespread distrust of

boards and managers. I am not going to say every board and every
manager is good, but I also think it's a vast injustice to say that
every board and every manager is just trying to look out for
themselves and they need to be disciplined.
I don't think we should get rid of shareholders. I don't even
think we should get rid of activists. I think as my senior partner,
Marty Lipton, famously said a few months ago, there are good
activists, and he named a few. And he named a few bad activists,
which created probably more controversy than it should have. But
as I said before, our advice is that boards and managers should
listen to the shareholders and should understand what their views
are.
The question of compensation is a whole different topic that
we could have a whole panel on, but the irony is that part of
what's responsible for the massive rise in executive compensation
is the notion which came from the activists or the institutions that
you want to align the interest of managers with the interest of
shareholders, so you've got more and more stock compensation.
Stock compensation is riskier, so managers ask for more of it
proportionally, and you end up with these outsized compensation
packages, which honestly some of them I can't defend. But it's a
function of the trend to stock compensation, that and the fact that
the SEC keeps requiring more and more disclosure so every single
executive knows exactly what every other single executive is
making down to the penny. It has created this spiral that,
personally, I think does need to be addressed and gotten under
control.
JUDGE E. NORMAN VEASEY: Okay. Jon?
PROFESSOR JONATHAN R. MACEY: I just quickly
wanted to dispel the canard, Steven, that those of us who think
activist investors bring good value to companies somehow think
that all management is malevolent because the fact is-
STEVEN A. ROSENBLUM: I didn't say malevolent, but
self-interested and needing discipline.
PROFESSOR JONATHAN R. MACEY: In needing it. So
the point merely is that if you look at the universe of U.S.
companies, only an extremely small percentage are subject to
activist agitation. So the idea is in order for me to feel comfortable
in my position analytically, it's sufficient for there to be some

small subset of public companies whose managers are not acting
in shareholders' interests sufficiently such that they cause a
significant enough gap in the market price versus the price under
an alternative, more vigorous management structure to attract
the interest of these activists because their shares are so
undervalued.
In other words, most companies, I do think it is true that
activist investors have an effect on management even if companies
that they don't specifically target because people want to keep-
managers want to keep their share prices high in order to avoid
being an attractive target for an activist investor, but I don't see
that as an indictment of all of management at all. That it's just to
say it's a very large world out there, and a lot of managers-and
not all of them-some of them could be doing a better job.
JUDGE E. NORMAN VEASEY: Okay. Wait. Whoa, whoa,
whoa. We have questions out there. We have a limited amount of
time. Lucian, if you have a thirty-second comment on this
question, please do it.
PROFESSOR LUCIAN A. BEBCHUK: Yeah. I also want-
JUDGE E. NORMAN VEASEY: And Robert.
PROFESSOR LUCIAN A. BEBCHUK: -to make a
comment. My view is not that executives and directors are,
quote/unquote, bad people. We stress in our book Pay Without
Performance that examines those issues that we fully accept that
directors are the best and the brightest. The issue is that-and I
think that it shouldn't-people in the Federalist Society
convention should be fully prepared about this-that we generally
believe that most individuals are subject to economic incentives.
When we think that sometimes regulators or people in various
positions are not performing well, it's not because we think that
they are bad people. We think that they might not have the right
set of constraints or disciplines or incentives.
JUDGE E. NORMAN VEASEY: Okay. Robert?
PROFESSOR LUCIAN A. BEBCHUK: And the incentives
are critical.
JUDGE E. NORMAN VEASEY: Your thirty-second
comment?
PROFESSOR ROBERT A. MILLER: Falls very nicely

after that. I don't think there's a serious problem with activist
investors either. One thing that Lucian says very wisely in his
article is that activist investors succeed only if they can convince a
good part of the market or their shareholder base that they are
right. So if there is a problem here, it's that the fund managers
and the pension managers have perverse incentives precisely
because they're agents and are judged on short-term results
rather than longer term results that their investors would really
care about.
Again, I would be with Lucian there. It's not that they're bad
people. It's that they're subject to the wrong set of incentives.
JUDGE E. NORMAN VEASEY: Okay. Last question.
ATTENDEE: Steve, in light of your clients' complaints about
all this, has there been an uptick in go-private deals, and if not,
why not?
JUDGE E. NORMAN VEASEY: Steve?
STEVEN A. ROSENBLUM: I think go-private deals ebb
and flow, and they are subject to a lot of other factors: feasibility,
the ability to get financing at good rates, the ability to pay a
premium that will be attractive to shareholders to get the deal
done. I think there are certainly a lot of people who are interested
in the possibility of going private, but there are a lot of factors
that go into whether a company actually goes private.
JUDGE E. NORMAN VEASEY: Okay. Thanks to this
panel, and thanks to this audience. We appreciate it very much.
[Applause.]

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MILLENNIALS, EQUITY, AND THE RULE

CORPORATIONS: THE SHORT-TERMISM

PROFESSOR LUCIAN A. BEBCHUK, William J. Friedman

PROFESSOR JONATHAN R. MACEY, Sam Harris

PROFESSOR ROBERT T. MILLER, Professor of Law and F.

STEVEN A. ROSENBLUM, Partner, Wachtell, Lipton, Rosen

HON. E. NORMAN VEASEY, Former Chief Justice, Delaware

11:45 a.m. to 1:45 p.m.

JUDGE E. NORMAN VEASEY: I'm Norm Veasey, and I

So when we talk about corporate governance, we talk a lot

He will go first and he will speak for about twenty-five

and economics, corporate finance, business associations, antitrust,

direct empirical test of this very question, based on the full

increase in dividend payouts, so the things that critics have been

least partly, there is causality going from interventions to the

JUDGE E. NORMAN VEASEY: Steve Rosenblum.

are not surrounded by short-term pressures and where they have

JUDGE E. NORMAN VEASEY: Professor Macey.

PROFESSOR JONATHAN R. MACEY: And the grades

drop in thirty-five years, I can respond to that problem so simply

little bit uncomfortable saying this, having the benefit of tenure,

PROFESSOR ROBERT T. MILLER: Let me first say that

This is very important in this debate. Imagine two investors,

funds and so on are looking for short-term results and so have

Whenever there is a contested shareholder election and the

JUDGE E. NORMAN VEASEY: Okay. I sat down there so I

PROFESSOR ROBERT T. MILLER: Could you just say it

JUDGE E. NORMAN VEASEY: Okay. Lucian?

universe of 2,000 to disprove what I'm about to say-but there's no

Now, my point is twofold. Number one, I think the cure would

PROFESSOR JONATHAN R. MACEY: I thought it was

STEVEN A. ROSENBLUM: We were talking before the

One question that maybe we should address frontally is this

cash flow analysis. It turns out that probably, depending on the

heavily influenced by the tax laws in terms of, from a corporate

have a significant impact on the tax consequences for their

The important point to remember is that activists have a

have with the academic literature is the widespread distrust of

in my position analytically, it's sufficient for there to be some

PROFESSOR ROBERT A. MILLER: Falls very nicely

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