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E-MailMartin Lipton is a founding partner of Wachtell, Lipton, Rosen & Katz, specializing in mergers and acquisitions and matters affecting corporate policy and strategy. Theodore Mirvis is a partner in the Litigation Department at Wachtell Lipton. This post is based on a Wachtell Lipton memorandum by Mr. Lipton, Mr. Mirvis, Daniel A. Neff, and David A. Katz. This post discusses the 2011/2012 activities of the Harvard Law School Shareholder Rights Project, which are described in an earlier post here.
The Harvard Law School Shareholders Rights Project (SRP) recently issued joint press releases with five institutional investors, principally state and municipal pension funds, trumpeting SRP’s representation of and advice to these investors during the 2012 proxy season in submitting proposals to more than 80 S&P 500 companies with staggered boards, urging that their boards be declassified. The SRP’s “News Alert” issued concurrently reported that 42 of the companies targeted had agreed to include management proposals in their proxy statements to declassify their boards – which reportedly represented one-third of all S&P 500 companies with staggered boards. The SRP statement “commended” those companies for what it called “their responsiveness to shareholder concerns.”
This is wrong. According to the Harvard Law School online catalog, the SRP is “a newly established clinical program” that “will provide students with the opportunity to obtain hands-on experience with shareholder rights work by assisting public pension funds in improving governance arrangements at publicly traded firms.” Students receive law school credits for involvement in the SRP. The SRP’s instructors are two members of the Law School faculty, one of whom (Professor Lucian Bebchuk) has been outspoken in pressing one point of view in the larger corporate governance debate. The SRP’s “Template Board Declassification Proposal” cites two of Professor Bebchuk’s writings, among others, in making the claim that staggered boards “could be associated with lower firm valuation and/or worse corporate decision-making.”
There is no persuasive evidence that declassifying boards enhance stockholder value over the long-term, and it is our experience that the absence of a staggered board makes it significantly harder for a public company to fend off an inadequate, opportunistic takeover bid, and is harmful to companies that focus on long-term value creation. It is surprising that a major legal institution would countenance the formation of a clinical program to advance a narrow agenda that would exacerbate the short-term pressures under which American companies are forced to operate. This is, obviously, a far cry from clinical programs designed to provide educational opportunities while benefiting impoverished or underprivileged segments of society for which legal services are not readily available. Furthermore, the portrayal of such activity as furthering “good governance” is unworthy of the robust debate one would expect from a major legal institution and its affiliated programs. The SRP’s success in promoting board declassification is a testament to the enormous pressures from short-term oriented activists and governance advisors that march under the misguided banner that anything that encourages takeover activity is good and anything that facilitates long-term corporate planning and investment is bad.
Staggered boards have been part of the corporate landscape since the beginning of the modern corporation. They remain an important feature to allow American corporations to invest in the future and remain competitive in the global economy. The Harvard Law School SRP efforts to dismantle staggered boards is unwise and unwarranted, and – given its source – inappropriate. As Delaware Chancellor Leo Strine noted in a 2010 article: “stockholders who propose long-lasting corporate governance changes should have a substantial, long-term interest that gives them a motive to want the corporation to prosper.”
4 Comments
Maybe the Shareholder Rights Project should switch emphasis. Next season submit dozens of proxy access proposals. There is nothing more fundamental than nominating board members.
The issue raised by the Wachtell Liption memo does not relate primarily to staggered boards. It is clear that staggered boards are an effective impediment to takeover efforts. Indeed, they are a more significant antitakeover protection than a lot of us realized.
The serious issue raised by the Wachtell Lipton memo is whether antitakeover protections reduce or increase stockholder value. I believe there have been studies that indicate they increase stockholder value by giving the Board negotiating leverage. The history of recent transactions seem to support that (at least up to the point where the Board uses the antitakeover protections to block transactions even after the led to significant increases in proposed purchase prices).
Sirs, you assert that there is no evidence to support the notion that de-classified boards are “better” and so moves to adopt modern governance standards are unworthy of discussion by SRP.
Where is **your** evidence that classified boards are superior? Stating that they “have been part of the corporate landscape since the beginning” is simply a restatement of facts.
Around the time of the first founding of joint stock companies we used to treat serious illness by blood-letting with leeches. Thankfully modern science and a patient-centred approach to medicine has led to more precise and less gruesome cures for our ills.
Europe dispensed with classified boards over a lifetime ago and European capital markets are highly competitive in the global economy. We also have binding director elections which allow shareholders to remove under-peforming directors by simple majority.
Capitalism depends on successful corporations which are accountable. Accountable to the laws of the land and to their owners – the providers of capital, the shareholders.
Pension funds, public or private, are the most long-term investors on the planet with time horizons stretching out 30 or 40 years. They will still be around long after the average joint chair/CEO has retired with his (usually) handsome annuity.
Professor Bebchuk and the SRP are not “wrong” to promote a modern and progressive approach to corporate governance. Indeed the very notion of scholarship is to explore new approaches and test the boundaries, nay break them and take society forward, not to stay wedded to the past.
Global markets long ago embraced a progressive and democratic approach to Corporate Responsibility and Investor Stewardship. We would earnestly encourage the US markets to do likewise.
This excellent post by Mr. Lipton should make everyone wonder what exactly is this one-size-fits-all approach to corporate governance all about. To help answer this question, I am going to take the liberty of quoting from my keynote address at the Journal of Corporation Law spring banquet:
[W]hat are we to make of the shareholder empowerment movement? This movement, supported by both shareholder activists and the federal government, is a one-size-fits-all approach to the corporate governance of public companies that shifts decision making in only one direction, toward shareholders.
I believe if shareholder activists, and their primary enabler, the federal government, took a disciplined, firm-by-firm approach to analyzing the corporate governance arrangements they are advocating, they may see that in the vast majority of situations the shifting of decision making from the board to shareholders does not enhance decision making, but instead will lead to increased error and a shifting of agency costs from management to shareholders that overcomes whatever benefit is received from a reduction in management agency costs. Therefore, the more successful shareholder activists are, the more damage they will cause to our economy.
Moreover, even though I hope I am wrong, I currently have a somewhat pessimistic outlook on the ability of those who strongly support the value of centralized authority, such as me, to minimize the harm caused by shareholder activists. I base this on several reasons, the least of which is that shareholder activists may simply be undervaluing the benefits of centralized authority and need to be reeducated.
More importantly, to the extent their activities are motivated by rent-seeking, the potential motivation of labor union pension funds; or their own political ambitions, the potential motivation of those elected officials who get the opportunity to manage public pension funds; or simply to maximize their income, the potential motivation of corporate governance professionals who take on the role of zealous advocates of shareholders rights; their objective for the company will not match the commonly accepted corporate objective of shareholder wealth maximization, or alternatively, the board objective of mediating the interests of those who have made firm specific investments. In addition, unlike the board and even controlling shareholders, the activities of shareholder activists are not constrained by fiduciary duties, meaning they do not have to consider the interests of the corporation and their fellow shareholders. Without fiduciary duties how can their interests ever be aligned with that of the corporation?
Finally, I do not see an end to shareholder activism even if activists succeed in getting binding proxy access, majority voting, declassification of boards, binding say-on-pay, etc. implemented at all the largest public companies. After all, an end to their activism means an end to the benefits they can derive from such activities. Therefore, for shareholder activists, there is no ultimate goal to achieve. If so, then what we are dealing with can be referred to as “creeping shareholder activism,” a constant movement toward shareholder empowerment without regard for what is lost in the process in terms of efficient decision making.
Vol. 37, No. 4, Journal of Corporation Law (forthcoming).
Bernard S. Sharfman
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