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E-MailThis post is from Martin Lipton of Wachtell, Lipton, Rosen & Katz.
On June 25, I presented a paper entitled “Shareholder Activism and the “Eclipse of the Public Corporation”: Is the Current Wave of Activism Causing Another Tectonic Shift in the American Corporate World?” at the 2008 Directors Forum of The University of Minnesota Law School. The paper discusses the pressures that have been pervasively eroding the centrality of the board of directors and transforming its role in the governance structure of public companies, with the end game being a new conception of the corporate organization. Against the backdrop of the subprime and leveraged loan financial crisis and other recent events, the paper addresses what I regard as the crux of the issue affecting public companies today: whether the institution of the corporate board can cope with these pressures and survive as the vital governing organ of public companies. Or, will a forced migration from director-centric governance to shareholder-centric governance, along with a concomitant transformation of the role of the board from guiding and advising management to ensuring compliance and performing due diligence, simply overwhelm American business corporations?
The paper is available here.
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There is a deep-seated paradox at the heart of the argument put forward here because the analysis refuses to disaggregate different forms of shareholder activism and assumes that corporate governance advocacy is a short-term proposition. Particularly misplaced is the blanket assimilation of CII or ICGN members, institutional investors, and other corporate governance advocates with hedge-fund activists and traders hoping to profit from short-term share price movement. As it happens, many leading corporate governance advocates are also long-term universal investors or responsible social investors demanding much more sustainable corporate performance over the long haul. As fiduciaries and owners, not traders, they are much more likely to use activism precisely to raise long-term issues; consequently, they’re also eager to dialogue directly with Boards about material issues of concern in order to avoid public proxy battles. Only when management and Boards prove unresponsive do we get proxy fights.
Under the managerial form of governance that has been in dominant for most of Lipton’s brilliant career, the board is composed of experts and operates primarily to provide internal technical advice. Under public governance, the board is composed of outside directors, shareowner interest groups and even more broadly defined stakeholders to link the corporation to mass markets and society… functions increasingly important for companies operating in a global context.
Lipton’s clients would be better served if he helped them adapt to the process of democratic deliberation, rather than fighting a rear guard action. How can they evolve to a system of selecting board members nominated by and directly accountable to shareowners? How can they supplement the annual meeting with an assembly of elected shareowners who provide advice to management throughout the year? By inviting public discussion in areas heretofore regarded as the exclusive domain of management, companies deliberate matters of public concern in advance and are less vulnerable to the vagaries of market bubbles and crashes. Lipton can best help his clients avoid the imposition of overly burdensome regulations by advising them on how to build democratic mechanisms into the very structures and processes of corporations themselves.
See much more extensive comments at http://www.corpgov.net/news/news.html under the heading “Lipton and Democracy.”
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Shareholder Activism and the “Eclipse of the Public Corporation”…
Martin Lipton, who knows a thing or two about corporations, presents: On June 25, I presented a paper entitled “Shareholder Activism and the “Eclipse of the Public Corporation”: Is the Current Wave of Activism Causing Another Tectonic…
[…] In Shareholder Activism and the “Eclipse of the Public Corporation”: Is the Current Wave of Activis…, Martin Lipton discusses the pressures that have been “pervasively eroding the centrality of the board of directors and transforming its role in the governance structure of public companies, with the end game being a new conception of the corporate organization.” […]