The leading lawyer representing corporate insiders is Martin Lipton of Wachtell, Lipton, Rosen & Katz. On Harvard Law School’s Corporate Governance blog, he has written an article with his thoughts for corporate directors in 2017. He begins by acknowledging the “evolution” in corporate governance with some respect, though not acknowledging those responsible, either the corporate managers who behaved badly or the institutional investors who objected. And then he creates a straw man of some imagined disconnect between creation of shareholder value and providing competitive and societally worthwhile goods and services.
The evolution of corporate governance over the last three decades has produced meaningful changes in the expectations of shareholders and the business policies adopted to meet those expectations. Decision-making power has shifted away from industrialists, entrepreneurs and builders of businesses, toward greater empowerment of institutional investors, hedge funds and other financial managers. As part of this shift, there has been an overriding emphasis on measures of shareholder value, with the success or failure of businesses judged based on earnings per share, total shareholder return and similar financial metrics. Only secondary importance is given to factors such as customer satisfaction, technological innovations and whether the business has cultivated a skilled and loyal workforce.
He says that long-term institutional investors, with other stakeholders can be a stabilizing force to shield corporate executives from attacks by activists, and he acknowledges that the best protection from activists is a record of performance and credible commitment to long-term shareholder value. The most significant “evolution” here may be his admission that activists can be an essential market response to failing strategies.
To be clear, the new paradigm does not foreclose activism or prevent institutional investors from supporting an activist initiative where warranted. Underperforming companies may be able to benefit from better board oversight, fresh perspectives in the boardroom, new management expertise and/or a change in strategic direction. Responsible and selective activism can be a useful tool to hold such companies accountable and propel changes to enhance firm value, and institutional investors can benefit from the budget and appetite of activists who drive such reforms. However, the new paradigm seeks to restore a balanced playing field, so that activism is focused on improving companies that are truly mismanaged and underperforming, rather than on using financial engineering indiscriminately against all companies in an effort to boost short-term stock prices.
NOTE: Lipton’s New Paradigm is explained in detail in a document prepared for the World Economic Forum