One does not normally see the words “Harvard” and “soap-opera-grade rock fight” used in the same sentence. Yet over at Harvard Law’s Governance blog, a sticks-and-stones-at-dawn gage may be thrown down at any moment in a hedge fund activism feud that just entered its fifth season.
Behind a tree on one side of the Yard stands Lucian Bebchuk, Harvard professor. Bebchuk claims that his opponent has “run away from the evidence,” is “still running away from the evidence,” “keeps running away from the evidence,” and commits a deadly academic sin—“asserting that the professed beliefs of [his] partners or clients should serve as the factual premises of policymaking.”
Behind a tree on the other side of the Yard stands Martin Lipton, corporate attorney. He claims that Bebchuk is “wrong” and “still wrong.” He claims that Bebchuk’s work is “meaningless” and “speculative,” and amounts to “lies, damn lies and statistics.” He calls on a Holy Roman Emperor for back-up. Most recently, he declares, "I win."
What’s this row about?
Lipton argues that directors should serve on a company board in staggered terms. This set-up, he argues, neutralizes activist shareholders who want to pressure the board into a particular strategic agenda by tying that agenda to director elections, and thus enables the board to remain focused on the planning and investment that are essential to the company’s long-term performance. Activists, Lipton maintains, seek a short-term stock price increase at the expense of long-term creation of value.
Bebchuk presents data on hedge fund activism from 1991-2012 to argue that such activism improves company operating performance and does not hurt long-term stock price. Strategic agendas and director slates pushed by activist shareholders, Bebchuk maintains, do not impair a company’s long-term performance.
Who’s right? In fact that might not be the question that this standoff asks of us.
1. Given the potential repercussions of the economic uncertainty, political turmoil, income inequality and climate risk that we confront today, can statistics from up to 25 years ago really tell shareholders and directors anything reliable about a company’s performance in the years to come? The argument that they can resembles the argument that the 2016 Warriors would beat the 1996 Bulls or the 1985 Lakers—interesting topic, but not one to be taken too seriously, because the rules have changed so dramatically.
2. Given our urgent need to make intelligent economic, political, income and climate choices, is advocating that directors be given latitude to create long-term value anywhere near a specific and substantial enough policy to fight for?
Does your company capitalize on opportunities that help solve these problems, and help educate customers, employees, investors and other market players on how to help solve these problems? Regardless of whether shareholders or directors pose this question, addressing it would seem to steer a company toward bolstering the economy as the company capitalizes on it, thereby earning the loyalty of customers, investors and employees, and thus succeeding at the task of creating long-term value.
Ignoring this question, by contrast, would seem to increase the risk of alienating customers, investors and employees and thus ultimately failing to create long-term value. The point, for those thinking strict fiduciary duty construction, is that the question demands attention today not as a matter of social responsibility, but rather as a matter of business survival.
3. Who are your investors and what do they value? This question applies in particular to private companies. If those investors share your perspective about opportunities and strategies amid all the economic, political, income and climate risk, they may be a good fit. If they don’t, you might want to decline their money, no matter how much they are set to invest.
Copyright 2016 by William Devine. All rights reserved worldwide.
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