Lipton vs. Bebchuk

Do stockholders own the company? To most board members, and probably most Americans, the idea is so axiomatic that the question hardly seems worth asking. Yet a long-simmering debate on the age-old argument over the board’s responsibilities to shareholders versus the arguably inherent rights of all company stakeholders recently burst out in the open, shedding new light on that central question.

The battle pits two leading corporate governance experts against each other: Lucian Bebchuk, a Harvard Law School professor and ardent shareholder-rights proponent, and Martin Lipton, a Wachtell, Lipton, Rosen & Katz founding partner who has been a stalwart defender of the viewpoint that it is management’s prerogative to do what is in the best interest of the corporation since he dreamed up the poison pill to help companies fend off corporate raiders more than two decades ago.

How their increasingly acrimonious duel plays out is likely to influence many of the corporate governance debates now going on in boardrooms, the Securities and Exchange Commission (SEC), and Congress. The central issue is whether directors of a public company owe their primary fiduciary duty to its shareholders, as Bebchuk insists, or have to consider the prerogatives of all the stakeholders, as Lipton maintains.

In 2005 lectures at Cardozo and Yale Law Schools called “The Myth of the Shareholder Franchise,” Bebchuk argued that the governance structure of most U.S. companies disenfranchises their true owners, the shareholders. His sharp critiques have put powerful intellectual firepower behind rising shareholder demands for more control over corporate boards, from the proxy access proposal on director elections currently under consideration at the SEC, to Say on Pay, which would give shareholders input into executive compensation. (Editors’ note: Say on Pay, sponsored by Rep. Barney Frank (D-Mass.) passed in the House by a 2 to 1 margin in April. Barack Obama sponsored similar legislation in the Senate, but the Senate Committee on Banking, Housing, and Urban Affairs has yet to take action on the proposal.)

"The fear of replacement is supposed to make directors accountable and provide them with incentives to serve shareholder interests." --Lucian Bebchuk, Harvard Law 

Lipton did not sit idly by. He rebutted Bebchuk’s world view with a pointed essay in the May issue of the Virginia Law Review called “The Many Myths of Lucian Bebchuk.” The article, co-authored by Wachtell colleague William Savitt, strikes at the heart of the widely accepted argument that a company’s primary goal is to maximize shareholder value. In addition to calling out Bebchuk in the title, Lipton challenges the very notion that corporations are the private property of stockholders, and does so in language so forceful that it might sound like heresy coming from almost anyone else in Corporate America. “Shareholders do not ‘own’ corporations,” he says. “They own securities—shares of stock—which entitle them to very limited electoral rights and the right to share in the financial returns produced by the corporation’s business operations.”

Directors, Lipton and Savitt argue, are not merely representatives of stockholders who have a legal responsibility to put investor interests first. Instead, they assert, the role of a director is simply and dutifully to seek what’s best for the company itself, which means balancing the interests of shareholders as well as other stakeholders such as management and employees, creditors, regulators, suppliers, and consumers. They conclude that Bebchuk’s postulate that the shareholder enjoys the position as the board’s primary client is a myth of corporate law, and should be understood as such.

Careful What You Wish For

Lipton vs. Bebchuk is one of those topsy-turvy clashes that has caused corporate governance experts to line up on either side of the debate, and has led to the presence of some strange bedfellows. Lipton first began articulating his director-centric position in a 1979 article published in The Business Lawyer called “Takeover Bids in the Target’s Boardroom,” years before the stakeholder view gained prominence in the late 1990s. But he has since gained backing from several of the most articulate stakeholder theorists, including University of California at Los Angeles corporate law professor Lynn Stout. Two years ago, she penned a piece called “Takeovers in the Ivory Tower: How Academics are Learning Martin Lipton May be Right.”