“Harvard’s Shareholder Rights Project is Wrong”

According to the Harvard Law School online catalog, the SRP is “a newly established clinical program” that “will provide students with the opportunity to obtain hands-on experience with shareholder rights work by assisting public pension funds in improving governance arrangements at publicly traded firms.”

Marty Lipton and others at Wachtell, Lipton don’t like the idea and criticize it here. More at NYT DealBook (via Bainbridge).

Reader J.B. emails to say:

Whatever one thinks of Wachtell’s substantive critique of the attack on classified/staggered boards, it’s kind of interesting for a law school to be promoting a “clinical program” in which the kids get to work for institutional investors with bajillions of dollars in assets (and, you know, the wherewithal to retain sophisticated counsel at market rates) rather than the sort of boring old indigent individuals that are the traditional law school clinic client base.

A different view: Max Kennerly.


  • The post by Mr. Lipton was really on point. His post should make everyone wonder what exactly is this one-size-fits-all approach to corporate governance all about. To help answer this question, I am going to take the liberty of quoting from my keynote address at the Journal of Corporation Law spring banquet:

    [W]hat are we to make of the shareholder empowerment movement? This movement, supported by both shareholder activists and the federal government, is a one-size-fits-all approach to the corporate governance of public companies that shifts decision making in only one direction, toward shareholders.

    I believe if shareholder activists, and their primary enabler, the federal government, took a disciplined, firm-by-firm approach to analyzing the corporate governance arrangements they are advocating, they may see that in the vast majority of situations the shifting of decision making from the board to shareholders does not enhance decision making, but instead will lead to increased error and a shifting of agency costs from management to shareholders that overcomes whatever benefit is received from a reduction in management agency costs. Therefore, the more successful shareholder activists are, the more damage they will cause to our economy.

    Moreover, even though I hope I am wrong, I currently have a somewhat pessimistic outlook on the ability of those who strongly support the value of centralized authority, such as me, to minimize the harm caused by shareholder activists. I base this on several reasons, the least of which is that shareholder activists may simply be undervaluing the benefits of centralized authority and need to be reeducated.

    More importantly, to the extent their activities are motivated by rent-seeking, the potential motivation of labor union pension funds; or their own political ambitions, the potential motivation of those elected officials who get the opportunity to manage public pension funds; or simply to maximize their income, the potential motivation of corporate governance professionals who take on the role of zealous advocates of shareholders rights; their objective for the company will not match the commonly accepted corporate objective of shareholder wealth maximization, or alternatively, the board objective of mediating the interests of those who have made firm specific investments. In addition, unlike the board and even controlling shareholders, the activities of shareholder activists are not constrained by fiduciary duties, meaning they do not have to consider the interests of the corporation and their fellow shareholders. Without fiduciary duties how can their interests ever be aligned with that of the corporation?

    Finally, I do not see an end to shareholder activism even if activists succeed in getting binding proxy access, majority voting, declassification of boards, binding say-on-pay, etc. implemented at all the largest public companies. After all, an end to their activism means an end to the benefits they can derive from such activities. Therefore, for shareholder activists, there is no ultimate goal to achieve. If so, then what we are dealing with can be referred to as “creeping shareholder activism,” a constant movement toward shareholder empowerment without regard for what is lost in the process in terms of efficient decision making.

    Vol. 37, No. 4, Journal of Corporation Law (forthcoming).

    Bernard S. Sharfman

  • As some one who makes a living by buying and holding publicly owned corporations, my viewpoint is a bit distant from the modern concept of investing — which strikes me as more akin to speculation. Without going into details which are liberally covered in the media, it is my firm opinion that the balance between the owners of a publicly owned corporation — the shareholders — and their employees — management — are overwhelmingly stacked in favor of management. Much of this is due to the attitude of most of the shareholders, who seem to view a share of stock as a gambling slip. Much of it is due to the fact that my ownership is of a business in which I have little or no expertise and so must depend on the effectiveness and good will of the management.

    Much of it, however, is due to the fact that corporate governance is handled in the Delaware Chancery Court and is based on a model of a publicly owned corporation in which the Board of Directors is composed of the major shareholders. While in days gone by it was a good idea to insulate the Board, with its sizable holdings in the company from the distraction of cranks with a single share, that situation no longer applies. While there are good actors in management — officers of the company who have purchased their shares with their own money — much of the “alignment of management with shareholders’ interests” in the past thirty years has been little more than a cover for a massive transfer of cash from shareholders to management. This transfer in not in terms of ownership. Instead it usually takes the form of spending the shareholders’ equity to buy shares of the company, which supports their price as management exercises stock options and sells the shares.

    Speaking as a business owner, it is my expectation that the free cash flow belongs to the owners and should be distributed to them, with reasonable reserves for expansion and maintenance. This is the way every non-public business I have been party to has been managed, and is the major reason one goes into business. The result in many publicly owned corporations is entirely different. Confronted with huge piles of cash, giving it to shareholders is a last resort of most boards of directors. Instead, they use it to buy back shares of the company, supporting the price in the interest of share SELLERS or go on buying binges far from the purview of the company and the interests of the shareholders — and why not? It’s not like it’s their money.

    There are, as I have noted, good actors in this field and the lack of interest on the part of most shareholders to act like business owners does not support rational action. Nonetheless, a distressingly large proportion of publicly owned corporation management treats their employers with well-deserved contempt.

    If the people in charge of publicly owned corporations truly wish to “align their interests with those of shareholders”, there is an easy and quick fix: make them shareholders. Set their bonuses not in stock options, but in stock — which their may not sell for a good, long time. When they are shareholders, when their personal welfare is directly tied to the long term health of the companies they manage, watch how that health becomes their concern — and how fast the share buybacks fall, to be replaced by dividends. How strange it is that management, the “compensation experts” it hires and the Boards of Directors beholden to the CEO have never happened upon this simple scheme.

    In view of these issues, a move of the standard away from protecting the management from shareholders to protecting the shareholders from the management is warranted. Courts are properly conservative and the Delaware Court of Chancery more so than average. Changes in administration requires more direct action. Changes in the laws are required.


  • The market value of a firm should reflect its “real” value. In a stock buyback, money is expended lowering the “real” value of the company and pushing the market value down offsetting the pushing up effect of reduced shares. Buying stock releases cash to stockholders through capital gains which are tax advantaged.

    Our tax code advantages growth with tax deferment of payments to stockholders. What happens is that the tax advantage is used to finance investments with lower yields than demanded by the market as a whole. When growth eventually is limited, the lower returns change a marvelous company into a dog.

    It is my understanding that the over use of stock options resulted from corporate reform to not pay managers of failing companies. Andy Grove, the former CEO of INTEL and a really smart man, said that stock options were vital for high tech firms.