Martin Lipton is a Founding Partner at Wachtell, Lipton, Rosen & Katz. This post is based on a Wachtell Lipton memorandum by Mr. Lipton and Kevin S. Schwartz.
For decades, advocates of “shareholder primacy” as the North Star of corporate governance have steered our leading corporations and our Nation’s economic engine perilously off-course. Since the 1970s, when the work of Milton Friedman, Michael Jensen, and Frank Easterbrook took hold in business schools, activists and raiders in high-profile proxy fights and hostile takeovers on Wall Street have wrapped their arms around the shareholder-primacy narrative to advance their own short-termist objectives. Far from shared scholarly interest, their objective was plain: To justify cutting off directors’ reasoned judgment, in favor of maximizing short-term shareholder value, notwithstanding the attendant harm to the health of our corporate and economic landscape and even our national security. To be sure, some in academia and in the corporate world fought back, in favor of responsible corporate stewardship in pursuit of long-term sustainable value, by advocating consideration of other stakeholders who make essential contributions to the creation of sustainable value. And the 2008 financial crisis alerted others to the dangers of the shareholder-primacy paradigm. But until recently, shareholder primacy remained stubbornly ascendant, largely crowding out other voices. Even the Business Roundtable, which officially adopted shareholder primacy in 1997, did not recognize its existential threat to society and abandon it for stakeholder corporate governance until 2019.
