The Misguided View of Shareholder Engagement

Michael Goldhaber has an interesting piece on American Lawyer, Marty Lipton's War on Hedge Fund Activists. The article mostly uses as a template for the discussion the views of Marty Lipton and Lucian Bebchuk (with a bit of CJ Strine thrown in). Mr. Lipton was described as asserting that "activism is awful for companies and the economy over the long run."  

At the same time, however, he was represented as having recognized that, to stop activism, boards need to encourage institutional investors to vote against activists.  "Lipton will never win his war until institutional shareholders vote against activists more. He is the first to say so, and others agree."

Yet if this were the case, the appropriate strategy would be to peal off long term and other institutional investors.  This would mean a concerted effort by management to work with, and support, long term shareholders.  There is, however, little evidence that this is the common strategy at Mr. Lipton's firm.  

Take shareholder access.  This is a proposal designed to allow mostly large (those with 3% or more alone or in a group) shareholders who have held the shares for a long term(three years) to simply have the right to submit nominees (no more than 25% of the board) for inclusion the the company's proxy firm.  One would suspect that if long term investors had this authority, they might be more hesitant to support hedge funds and other investors who engage in proxy contests.  

In fact, however, the latest missive from the Firm on shareholder access (The Unintended Consequences of Proxy Access Elections) is highly critical.  As the memo describes:  

• Proponents of proxy access frequently speak in terms of "shareholder representation" and "democracy." These buzzwords are intended to appeal to the American understanding of political fairness. However, this metaphor fundamentally misunderstands the nature of a corporate board. In the United States, a public company board is not designed to be a representative democracy in which different directors speak for particular interest groups. Widespread utilization of proxy access could produce a system in which various factions nominate their candidates and the result could be an unpredictable array of representatives all owing allegiance to their individual sponsors. Such a situation could easily produce a dysfunctional board riven by divisive deadlocks and incapable of making decisions or providing effective oversight.

In other words, institutional shareholders should support management but management should not support institutional investors.  Perhaps that explains why institutional investors are less supportive of management than Mr. Lipton would like.