A Corporate Governance Gadfly

Fortune magazine has an article about Lucian Bebchuk in its current issue. The article, by Geoffrey Colvin, Fortune’s senior editor at large, discusses both Bebchuk’s bylaws initiative and his academic work. Below is the profile:

A Corporate Governance Gadfly Irks CEOs: Lucian Bebchuk’s Shareholder Initiatives are Shaking Corporations.
by Geoff Colvin

He insists he isn’t an activist. Plenty of America’s CEOs must hope he means it. “I’m mainly a kind of ivory tower academic,” says professor Lucian Bebchuk of Harvard Law School, and that he surely is – the only person I know of with four graduate degrees from Harvard (master’s and doctoral degrees in law and economics).

But as director of the school’s Program on Corporate Governance he has also become America’s most influential critic of CEO pay–to the deep annoyance of many CEOs, who say privately they wish he’d just be quiet. So now that he’s behaving like a shareholder activist as well for the second proxy season in a row, the mere suspicion that it could be a new career cannot be comforting.

Bebchuk is best known for careful research that skewers the way CEOs get paid. From the bosses’ perspective he has been distressingly energetic, not only writing a book (Pay Without Performance) but also delivering lectures, contributing op-ed pieces, conducting seminars and testifying before Congress.

Then, starting last year, he got into the game directly and changed it. Based on a particularly astute reading of corporation law that’s too complicated to describe here, he filed a proposal with CA (formerly Computer Associates), to be voted on by shareholders at the annual meeting, that would change CA’s bylaws regarding the so-called poison-pill takeover defense. Bebchuk and many others see that mechanism as a management entrenchment device that hurts shareholders. His proposed bylaw change would let CA adopt a pill, but only by unanimous vote of the board, which would have to reaffirm the vote unanimously every year.

Are CEOs losing their power?

CA said it wouldn’t let shareholders vote on the proposal, arguing that it would violate the law of Delaware, where CA and most big companies are incorporated. The dispute went to court. Bebchuk won. CA held the vote, and his proposal got 41 percent–a huge number for a management-opposed proposal and enough to shake CA’s board, which quickly replaced its pill with a new one that can be redeemed by shareholders.

Companies usually regard professors as mere nuisances, but this was clearly different. Bebchuk was meddling with real power at a major corporation. As soon as he filed his CA proposal, corporate über-lawyer and poison-pill inventor Martin Lipton (who has represented CA) accused him of promoting a “pernicious” proposal with an “invidious purpose,” namely tearing down anti-takeover measures. That didn’t stop Bebchuk from filing proposals and forcing change at a number of other companies last year, all on bedrock issues of corporate power–poison pills and how directors get elected.

And now he’s back, this spring going after ten giants: AIG, Bausch & Lomb, Bristol Myers Squibb, Chevron, El Paso Natural Gas, Exxon Mobil (Charts), Halliburton, Home Depot, Time Warner (Charts) (parent of Fortune’s publisher) and Walt Disney. The boards of Bristol Myers (Charts) and Home Depot (Charts) have already agreed to require that CEO pay be approved by a supermajority of independent directors.

Disney (Charts) put his poison-pill proposal, similar to CA’s, on the ballot, and it got 57 percent of votes despite management’s opposition. That wasn’t enough to change the bylaw, but Disney chairman John Pepper promised that the board would now give the proposal “serious consideration.” The other seven companies will apparently go ahead with shareholder votes, fighting Bebchuk’s proposals all the way. We’ll see results in the coming weeks.

What’s next? “I don’t expect to continue doing as much of this in the future,” says Bebchuk, repeating that he’s essentially a scholar. But he does think we’ll see others doing more of what he did.

Shareholder rights will get strengthened not by government action but through shareholder initiatives. “When changes come in this form, they have a kind of legitimacy that is hard to oppose,” he says. “It’s the market imposing certain arrangements.”

Bebchuk may back off his activism, but it’s unlikely he’ll cease to be a powerful irritant to CEOs. His latest push, for which he recently testified to a House committee, is for a law that would give shareholders a nonbinding advisory vote on executive pay.

Even a shareholder advocate like me isn’t sure about that one. But I’m certain the balance of power between shareholders and managers is still tilted too much toward managers. If an ivory tower academic trying to nudge it the other way really worries companies, maybe they really do have something to worry about.

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  • Programs Faculty & Senior Fellows

    Lucian Bebchuk
    Alon Brav
    Robert Charles Clark
    John Coates
    Alma Cohen
    Stephen M. Davis
    Allen Ferrell
    Jesse Fried
    Oliver Hart
    Ben W. Heineman, Jr.
    Scott Hirst
    Howell Jackson
    Robert J. Jackson, Jr.
    Wei Jiang
    Reinier Kraakman
    Robert Pozen
    Mark Ramseyer
    Mark Roe
    Robert Sitkoff
    Holger Spamann
    Guhan Subramanian

  • Program on Corporate Governance Advisory Board

    William Ackman
    Peter Atkins
    Joseph Bachelder
    John Bader
    Allison Bennington
    Richard Breeden
    Daniel Burch
    Richard Climan
    Jesse Cohn
    Isaac Corré
    Scott Davis
    John Finley
    Daniel Fischel
    Stephen Fraidin
    Byron Georgiou
    Larry Hamdan
    Carl Icahn
    David Millstone
    Theodore Mirvis
    James Morphy
    Toby Myerson
    Barry Rosenstein
    Paul Rowe
    Rodman Ward