Shareholder Activism and the “Eclipse of the Public Corporation”: Response to Marty Lipton

This post is by John F. Olson and Amy L. Goodman, partners at Gibson, Dunn & Crutcher LLP in Washington, DC.

In a post to this blog on June 25th, Marty Lipton 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 Public Corporation?,” in which he expressed concern about the eroding centrality of the board and its vulnerability to pressure to seize short-term value at the expense of long-term value creation. Marty is one of our most experienced and thoughtful observers of corporate governance trends, based in large part from his front row seat as an advisor to many corporate boards and managements. However, while his points of caution are well worth bearing in mind, we think that directors and those who advise them must do more than decry what to many are troublesome trends that erode the ability of the board to take decisive action on behalf of the corporate enterprise.

The new world of inexpensive and constant communication is not limited to the corporation and its constituents; it is part of everyday life in every realm. Shareholder and other interest groups are going to make themselves heard; proxy contests are going to be cheaper and more accessible to those who may have short term goals; regulation will continue to be hard pressed to adapt quickly to these changes. In response to this environment, which we argue is inescapable, we submit that it’s time to move beyond the us (corporate board/managers) versus them (shareholder) mindset and recognize the commonality of interest that exists between boards and most shareholders in creating long-term value. We are preparing a paper that will develop these ideas in more detail but wanted to encourage more dialogue surrounding these important issues now.

Given the increasingly complex and global world facing corporations today, we need to get away from focusing on the corporate governance issue du jour or per annum to assisting the Board in addressing its complex role. In recent years, there has been an annual “hot” corporate governance issue–from declassifying boards, to shareholder approval of poison pills, to majority voting for directors, to an advisory vote on pay. While companies have embraced many of these proposals, boards of directors are becoming increasingly concerned about the amount of time and attention they, management and the company’s advisors must spend on responding to the corporate governance issue du jour. It may be time to step back and consider whether other issues should take priority, especially given the state of the economy and the many challenges facing corporate America.

In our upcoming paper, we will address some of the issues that deserve focus from shareholders, directors, business executives and other interested stakeholders.

• First, and not necessarily in order of importance, we need to develop effective methods of board/shareholder communication that build on new electronic capabilities but are not burdensome and do not increase liability risks.

• Second, boards and business executives need to effectively and regularly communicate corporate strategy and the board’s oversight role to investors, the business press and analysts, once again without fear of increased liability.

• Third, companies need to make good investor relations, and “good listening” a day to day corporate priority, and shareholders need to take advantage of these opportunities to present their views to business executives and directors.

• Fourth, shareholders need to think for themselves and reduce their reliance on proxy advisory services and be more transparent in their proxy voting decision-making processes.

• Fifth, companies, boards and their advisors need to figure out a way for directors to spend more time addressing strategy and risk and less time on compliance.

• Finally, while efforts to better educate directors about corporate governance and their fiduciary responsibilities has been salutary, we now need to shift our efforts to better educating directors in understanding the businesses, including the risks, of their companies.

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One Comment

  1. Max Kennerly
    Posted Friday, July 11, 2008 at 2:28 pm | Permalink

    That’s similar to what I wrote in response to Lipton’s post. My conclusion was:

    “So what’s next? I think the information revolution will continue its course. Just as it is now possible to quickly do a wholesale accounting and review of a massive international corporation, it is also possible — or at least soon will be possible — for investors to keep close tabs on private corporations, even without the benefits of the openness and the economies of scale that come with public trading.

    I thus foresee over the next few years growth in mid-size and large private corporations where the investors have extensive access to the records in real-time; perhaps not the same level as in a small private company, but far more than investors and public companies now have. We’ve already started to see that trend with the recent explosion of private equity groups like Blackstone.”

    See the link to my website for more.

    I still think, though, that it will be hard to stop the exodus to private equity, where investors generally have more control and information, and more accessible channels for getting both.