Martin Lipton is a founding partner of Wachtell, Lipton, Rosen & Katz, specializing in mergers and acquisitions and matters affecting corporate policy and strategy, and William Savitt is a partner at Wachtell, Lipton, Rosen & Katz. This post is based on their Wachtell memorandum.
The Business Roundtable’s recent call for a commitment to long-term sustainable economic value creation has prompted a vigorous debate about the optimal corporate governance model for achieving that goal.
Certain familiar arguments have reappeared in reaction to the Business Roundtable’s important statement rejecting shareholder primacy and embracing stakeholder governance. Various law firms and commentators insist that such innovation in corporate governance is constrained by an imperative to maximize shareholder value—the ideology that a corporation can have no purpose other than profit maximization for shareholder gain. Others assert that the path to effective governance reform lies with prescriptive regulation, presumptively by the federal government.
We disagree, and propose an alternative: The New Paradigm. Our approach reimagines corporate governance as a cooperative exercise among a corporation’s shareholders, directors, managers, employees, business partners, and the communities in which the corporation operates. The New Paradigm promotes transparency and engagement to ensure fair treatment of all stakeholders. It also aims to curtail, if not eliminate, short-termism and to combat activist pressure for financial engineering focused on short-term gain. Our approach thus addresses the fundamental criticism of corporations today—that their preoccupation with maximizing short-term shareholder gain has failed to generate economic growth and security for the rest of society—while avoiding the substantial risks of heavy-handed regulatory intervention.
