Ep. 211: John Coates on How a Few Financial Institutions Control Everything
Apr 12, 2024
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John Coates, Deputy Dean of Harvard Law School, discusses how a few financial institutions control everything, the rise of public companies, balancing societal interests, 1970s corporate disruption, and more in an engaging conversation.
The rise of index funds has concentrated power among a few major players, influencing corporate governance decisions.
Index funds, despite passive investing, actively engage in corporate governance, shaping company strategies and priorities.
Top private equity firms' evolving business model lacks transparency, raising concerns about their impact on finance and the economy.
Deep dives
John Coates' Diverse Background Leading to His Role in Academia and Finance
John Coates, a deputy dean at Harvard Law School, shares his unconventional journey into academia and finance. Initially majoring in history and subsequently entering the legal field focused on financial matters, Coates' career transitioned into teaching finance and exploring broader financial regulation. His diverse background, including work at Wall Street's law firm, Wachtell Lipton, and later, the SEC, offered a unique perspective on the intersection of law and economics.
Evolution of Corporate Governance and the Influence of Index Funds
Corporate governance underwent significant shifts post-World War II, with an emphasis on disclosure regimes, regulatory checks, and balances to address the principal-agent problem. The rise of index funds since the 2000s revolutionized investment practices due to their low-cost, passive approach. Index funds' exponential growth and streamlined investment strategy reshaped corporate ownership, concentrating power among a few major players, impacting shareholder voting and influencing key governance decisions.
Impact of Index Funds on Corporate Governance: Influence and Engagement
Index funds, despite their passive nature, engage actively in corporate governance by employing specialized staff to oversee companies in their portfolio. They play pivotal roles in influencing major decisions, such as mergers, responding to activist events, and participating in shareholder resolutions. Noteworthy examples, like the Exxon proxy fight driven by climate concerns, exemplify index funds' significant sway in shaping company strategies and priorities, despite their ostensibly passive investment approach.
Private Equity Business Model
Private equity firms, particularly the top 10 or 12 players, have rebranded successfully and evolved their business model, leveraging borrowed money to acquire companies, implement cost-cutting measures, and resell them within a few years. A concerning trend is their current business model's lack of disclosure, leading to implications for finance and the economy. Continuation investments now account for over a third of their activities, and as they grow, private equity firms form an alternative capital universe displacing traditional public companies.
Political and Sectoral Reactions to Private Equity
Politically, private equity has faced scrutiny for tax advantages, lack of transparency, and investments in sectors like healthcare where their business model's fit is questioned. Both Democrats and Republicans have shown interest in regulating private equity, particularly around disclosures and investments impacting pensions. As private equity expands, political attention towards their influence in various sectors, like healthcare, intensifies. This scrutiny raises questions about the sustainability and ethics of their operational strategies.
John Coates is the Deputy Dean of Harvard Law School. He has served at the Securities and Exchange Commission, and was a partner at Wachtell, Lipton, Rosen & Katz, specializing in financial institutions. He has testified before Congress and provided consulting services to the Department of Justice, the Department of Treasury, and the New York Stock Exchange. He is author of the ‘The Problem of Twelve: When a Few Financial Institutions Control Everything’. This podcast covers: the rise of the public company, how companies balance the interests of society, the 1970s disruption to corporate order, and much more.
