Board Control Seen Shifting to Shareholders

Martin Lipton of Wachtell, Lipton, Rosen & Katz, asks if the recent bout of shareholder activism has shifted the balance from director-centric governance to shareholder-centric governance in a new paper posted on the The Harvard Law School Blog.

Titled, “Shareholder Activism and the ‘Eclipse of the Public Corporation’: Is the Current Wave of Activism Causing Another Tectonic Shift in the American Corporate World,” Lipton addresses how today's uneasiness between shareholders and directors ultimately affects the global economy. He stresses that shareholders are interested in short-term gains, thus hurting long-term interests of the company.

Lipton, best-known as the father of the poison pill and an adviser to corporations on mergers, acquisitions, and matters affecting corporate policy and strategy, separated activists into two categories: hedge funds that target more profitable and financially healthy firms, and other entrepreneurial activists, who do not redirect investment strategies of their targeted firms.

Lipton advises directors to be, “vigilant, thorough, and proactive in seeking to balance short-term pressures against long-term goals.” He also explains how the tumultuous relationship between boards and shareholders affects the global economy.

The board-centric model of corporate governance is based on shareholders being confident with their board’s leadership abilities. The current distrust shareholders have toward their boards can ultimately cause competition with global competitors to suffer. American corporations cannot compete with emerging industries in foreign countries if shareholders and directors remain at odds.

Short-term or “short-sighted” stock gains by activist hedge funds make long-term investments in their businesses less attractive. Lipton writes that shareholders are short-sighted and are only interested in the short-term bottom line. It is the responsibility of directors to ensure that the company’s long-term investments reflect the company’s best interests.