Martin Lipton on Shareholder Activism

Posted by Theodore Mirvis and Paul Rowe, Wachtell, Lipton, Rosen & Katz, on Tuesday February 13, 2007 at 8:47 pm
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Editor’s Note: This post is by Theodore Mirvis and Paul Rowe of Wachtell, Lipton, Rosen & Katz.

Here is an important address by Marty LiptonShareholder Activism and the ‘Eclipse of the Public Corporation, which rightly belongs here in the belly of the beast.  Part of the title derives from Professor Michael Jensen‘s famous 1989 piece in the Harvard Business Review, proving at least that there is much back to the future in the field.

  1. This address makes a few good points, but for the most part, it is propaganda for the corporate good-ole-boys club.

    Clearly, directors are under tremendous pressure from activist shareholders, and this can and likely does affect the board’s traditional relationship with management. Putting aside the question of whether the traditional relationship might be a little too cozy, asserting that due diligence and ensuring compliance are inappropriate roles for the board is ludicrous. Boards have a fiduciary duty to shareholders. This is the context in which directors should be providing strategic guidance. The company does not exist so that directors and managers can feel comfortable in each other’s company – it exists to create wealth for its shareholders, or at the very least, prevent them from losing it. Due diligence and compliance are part of the job. When directors pay more attention to those roles, they do not do so at the expense of offering strategic guidance, if they devote the time and care necessary to properly execute their duties. Complaining that directors don’t have enough time to serve on multiple boards and run their own public corporations misses the point of fiduciary duty entirely.

    I think it is widely accepted that “good corporate governance” is a fast moving target. Many shareholder initiatives to improve governance are, in my opinion, often symbolic, even when they pass. Whether or not implementing majority voting, separating the CEO/chair roles, etc. actually decrease investor risk is debatable at best. But this does not mean that every idea that comes out of the shareholder activism movement is meaningless.

    What is sure is that there is a noticeable dissatisfaction among investors about the way public companies are run, and while activist pension funds and organizations that publish governance ratings may perpetuate that sentiment for less than pure reasons, it does not decrease its validity. People have lost their life savings, their retirement, everything, because of scandals that could have been thwarted had the boards of those companies been more effectively engaged in their role as shareholder representatives.

    Further, Mr. Lipton’s assertion that governance ratings and report cards are intended to embarrass directors is just more propaganda. To my knowledge, the credible governance rating organizations give covered companies access to their own information for free, so the assertion that companies must subscribe to all the services available in order to stay on top of their ratings is simply ill-informed.

    This is what governance reforms must address – making it easier for shareholders to have a meaningful say in how companies are run, because people who agree with Mr. Lipton clearly can not be trusted to exercise their fiduciary duty. This means appointing board members who interface regularly and meaningfully with major shareholders to stay in touch with the issues that matter to them, and who then vociferously represent their interests in the board room. This also means that activist shareholders must break free from their political biases and tap into the expertise of those academics and organizations who understand the influence of governance practices on investor risk, so that their initiatives address meaningful issues.

    Comment by C — February 14, 2007 @ 1:35 pm

 

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