From the early days of the derivatives revolution to the explosive growth of ETFs and bitcoins, Professor Henry Hu has been at the forefront of assessing the risks and promise of the modern financial and corporate worlds.
The Allan Shivers Chair in the Law of Banking and Finance, Hu has taught corporate law, modern finance and governance, and securities regulation at both Texas and Harvard.
His writings and public service focus on capital markets and corporate governance, with an emphasis on financial innovation. A Wall Street Journal profile of Hu, titled “At SEC, a Scholar Who Saw It Coming,” described his specialty as “figuring out how finance can go awry in unexpected ways.”
Hu’s thinking has attracted wide academic and real-world attention. He has appeared in over 200 stories in the Financial Times, New York Times, and Wall Street Journal. In the last year or so, he appeared five times on NPR to discuss crypto matters. In lead- and sole-authored articles, he introduced the governing analytical framework for “decoupling,” coining terms such as “empty voter” and “empty creditor” that have come into use worldwide. Long before the 1998 collapse of Long Term Capital Management (LTCM) and the 2008 global financial crisis, Hu warned that derivatives and other complex financial products would cause systemic risk. The epigraph (“Past may be prologue, but which past?”) to Roger Lowenstein’s best seller on LTCM, When Genius Failed, is from Hu’s Yale Law Journal article, “Misunderstood Derivatives”.
A major index of gold mining stocks even uses “HUI” as its ticker symbol, in recognition of one of Hu’s articles on hedging and corporate governance. In 2018, he co-authored the first academic work to show the need for, or to offer a regulatory framework for ETFs. Warren Buffett, Charles Munger, and other luminaries have come to Hu’s classes to share their insights.
After reading an op-ed by Hu in the Wall Street Journal, Mary Schapiro, the SEC Chairman at that time, tapped him out of the blue to serve as the founding Director of the Division of Economic and Risk Analysis, the SEC’s first new Division in 37 years. He has chaired the Business Associations Section of the Association of American Law Schools and was a member of the Legal Advisory Board of the National Association of Securities Dealers (now the Financial Industry Regulatory Authority) and the NASDAQ Market Regulation Committee. Hu has previously been named one of the 100 most influential people in corporate governance by the National Association of Corporate Directors (the “Directorship 100”). He has testified before Congress as an academic multiple times and on behalf of the SEC as to what became the Dodd-Frank Act.
We recently caught up with Hu.
Where did you go to school and what did you do before coming to Texas Law?
I went to Yale for a B.S. in Molecular Biophysics and Biochemistry, M.A. in Economics, and J.D. I was always interested in the intersection of science, economics, and law, While New Haven certainly wasn’t what it is today, I got to learn from cutting edge scholars in all three areas.
I loved law school. Smart people thinking about vital issues in profound, analytical, and realistic ways. This was different from my grad school economics experience. Back then, economics relied on abstract models that typically treated decision-making as a black box and relied on truly heroic assumptions. The behavioral analysis that so enriches econ today was in its infancy.
After law school. I did a federal judicial clerkship—Judge Patrick Higginbotham was a great mentor—and then ultimately ended up doing corporate work at O’Melveny & Myers’ head office, in Los Angeles. While LBOs, troubled corporate credit, and certain securities offerings were fun, I most enjoyed dealing with derivatives and other complex financial innovations. When a really weird financial product came to O’Melveny, I often got to work on it. Financial rocket science dovetailed nicely with my background in science, law, and economics.
How do you explain your research interests?
One explanation is that venturing into virgin territory and helping shape the legal and regulatory landscape is often challenging—and thus fun. My research has centered on financial innovation, for example, products and corporate and investor strategies involving derivatives and asset-backed securities. Financial innovations often have profound consequences for the efficiency and stability of capital markets as well as the corporate and debt governance of corporations. Those consequences often weren’t recognized, much less addressed by existing law and regulation. There’s lots of low-lying fruit.
Serving as the founding Director of the SEC’s Division of Economic and Risk Analysis provided more impetus. The SEC had always been dominated by lawyers and its world was that of traditional stocks and bonds. But the global financial crisis shouted out how much the world has changed. I like to believe that with this Division and our people, interdisciplinary types—the geeks and nerds—got a seat at the table. Chairman Schapiro noted that, prior to its creation, interdisciplinary analysis at the SEC “was a novelty,” and that the SEC had been set on a “new path.”
Since you’re known for looking ahead, what do you have upcoming?
The main paper is “Reconceptualizing Shareholder ‘Disinterestedness,’” a co-authored work that will be published in the spring 2025 Business Lawyer. An initial version was presented at the NYU Law School Institute for Corporate Governance and Finance Spring Roundtable in May 2024. I will present the published version at the National University of Singapore this year. Previously, we co-presented the key ideas from the related fall 2023 Business Lawyer article, “Decoupling and Motivation,” at the University of Pennsylvania Law School Institute for Law and Economics Fall Roundtable in December 2023.
For unfamiliar readers, how do you summarize the forthcoming paper?
The shareholder vote is the linchpin for corporate governance. But individual investors such as you and I have little motivation to vote, and we may not know enough to vote wisely. It’s the vote of institutional investors—folks like Vanguard and State Street—that has any possibility of keeping management in check. The hope is that with big holdings, they’ll have the motivation and expertise to vote in ways that would increase the share price—thereby generally helping all shareholders.
However, the reality is more complex. Our pair of Business Lawyer articles showed that recent transformational changes in mainstream institutional investors may too often motivate them to vote in ways that deviate from the interests of ordinary shareholders.
The longstanding response to motivational misalignments in voting in Delaware—Delaware is the Elvis of corporate law—has been the “disinterested shareholder” doctrine. Under this doctrine, courts will ignore the votes of shareholders with certain motivational misalignments in specific important contexts.
Our forthcoming article uncovers many problems with this doctrine. One is that the doctrine can lead to the disqualification of institutional votes when it makes zero sense to do so. Another problem is that application of the doctrine would result in a completely inadvertent—and highly undesirable—shift of power to individual investors like you and me.
Our forthcoming article is also the first to offer a workable solution to these and other problems. Our proposed reconceptualization of the doctrine should enhance the voices of institutions that vote in ways helpful to ordinary shareholders—and curb those voices that don’t.
That’s an important challenge to address. As this paper also aims to do, your work has had a major impact on the corporate and financial world. How does that research connect to your teaching?
I take teaching and mentoring seriously and incorporate pertinent academic research and real-world knowledge in all my interactions with students. This helps students in their careers. One concrete example involves Alex Rigby ’23. Apart from being my research assistant, Alex took my Business Associations (Enriched), Securities Regulation, and Modern Corporate Governance and Finance offerings. He’s exceptionally talented and, on graduation, went to clerk for Kathaleen McCormick, the Chancellor of the Delaware Chancery Court. The RA-ship, courses, and clerkship soon intersected. Chancellor McCormick was a fellow panelist at that Penn Roundtable. Knowing that Alex worked on the 2023 Business Lawyer article, she brought Alex, giving me a chance to thank him for his contributions at an important gathering.
One point I’ve started to make to students relates to artificial intelligence. AI won’t displace plumbers. For lawyers, it’s a different story. If all you know is the law, you might be outmoded by AI in material respects in, say, four or five years. The CEO of Goldman Sachs recently claimed that 95 percent of the S-1, the core document filed with the SEC in IPOs, could be completed by AI in just a few minutes. By teaching them some novel aspects of finance, trying to inculcate judgment, and showing how executives, judges, and SEC and other regulators actually reach decisions—matters perhaps less vulnerable to AI advances—I’m hoping to give students some more breathing room.
You’re often contacted by the media for your thoughts on crypto matters. How do you feel about bitcoin?
I’m concerned about how heavily some individual investors are exposed to bitcoins. Nobody’s been able to come up with a fully convincing way of determining their intrinsic value. Assessing what others will be willing to pay tomorrow, much less ten years from now, for something of uncertain intrinsic value is pretty difficult. In my December 2024 interview on NPR’s Morning Edition, I challenged Federal Reserve Chairman Jerome Powell’s analogy of bitcoin to gold on many grounds, including the threat of quantum computing to bitcoins. However, I also said the crypto markets will likely benefit from the combination of Paul Atkins becoming SEC Chair and the efforts of current SEC Commissioner Hester Peirce.
There’s a story, perhaps apocryphal, that’s been attributed to the hyperinflation that gripped post-World War II China. People would trade tins of sardines. One day, a buyer opens a tin, finds the sardines have spoiled, and complains to the seller. The seller replies, “So what — it’s only for trading!” I wonder if at least some Bitcoin traders have a “so what” attitude.
What’s it like to repeatedly identify risks and opportunities in financial markets and in corporate law long before they are widely recognized?
I like to think that one of my roles is to try to bring about more resilient futures. Sometimes a highly interdisciplinary approach that is informed by insights on inevitable human and market frailties can help. Cassandra was always right—but her warnings were unheeded, and she met a tragic end. In contrast, I’d rather be right some of the time but have my warnings and proposed solutions be heeded.
Original source can be found here.