Long Term Profit Maximization and Shareholder Access

Marty Lipton just sent around a study that emphasizes the need for corporate governance to help orient companies towards a long term, rather than short term, perspective on profit maximization.  The study (from the Center for American Progress) is here.  As the study states: "To provide greater macroeconomic and financial stability and to raise productivity, it is essential that markets work in the public interest and for the long term rather than focusing only on short-term returns." 

Among other possible reforms, the study provided: 

• There are a number of potential ideas that could be implemented, including making directors more independent of company staff, moving away from quarterly reporting, taking measures to reduce the ease with which hostile takeovers can take place, and promoting greater information disclosure from brokers and other market participants.  

Marty Lipton concludes by stating that "Implementation of recommendations made in the report is critical to the American economy and a fairer distribution of prosperity."

There is much to be said for the position that favors a long term perspective.  But the focus of the reforms in this report suggest that management should have a monopoly on determining the perspective.  Yet in fact the perspective would benefit from the inclusion of the views of long term shareholders. 

For the most part, long term shareholders prefer steady rather than short term growth and prefer sustainable growth.  Moreover, in what can only be described as an unsubstantiated opinion, long term shareholders generally understand that a corporation's contributions to the common good (community, environment, employees) also provides reputational benefits and contributes to the sustainability of long term growth.

Yet the interests of long term shareholders are often ignored.  Thus, for example, most companies (and Wachtell) opposed the shareholder access rule (Rule 14a-11) when it was proposed in 2009.  This was true even though it provided access only to long term shareholders.  The comment letters are here. 

Admittedly, the proposal defined long term as those holding shares for one year.  The final rule, however, ratcheted that number up to three years, allowing only long term shareholders with 3% of the shares to submit nominees.  Yet the provision was still challenged by the Business Roundtable and ultimately invalidated by the DC Circuit in a poorly reasoned opinion.  (For a discussion of this case, see Shareholder Access and Uneconomic Economic Analysis: Business Roundtable v. SEC).   

By opposing shareholder access, these participants suggested that in fact they did not want a shareholder presence in the board room.   Long term interests should not be a monopoly of management but should involve the participation of managers and long-term owners.  Shareholder access provides the promise of such participation.