Ira M. Millstein is the co-chairman of the
Millstein Center for Global Markets and Corporate Ownership at Columbia
Law School and a senior partner at the law firm Weil, Gotshal & Manges.
With the recent increase in activism, some on Wall
Street are blaming shareholders for the short-term mentality of corporate
But many of these activists represent a small subset
of investors in publicly held companies. As a result, corporate boards
around the country should re-examine their priorities and figure out to whom
they owe their fiduciary duties.
One of the major problems of this newfound activism
is the focus on short-term results. That is not to say that our economy
isn’t gripped by a short-term mentality, whether it’s individuals saving
less and seeking immediate satisfaction or corporations forgoing long-term
sustainable growth and profitability to meet investor demands for quarterly
stock market returns.
But as many
commentators have pointed out, activist investors are manipulating the
system without succeeding in increasing shareholder value or instilling
better corporate governance practices. Some activists are using their
newfound power to sway and bully management to focus on the short term, meet
the quarterly targets and disgorge cash in extra dividends or stock buy
backs in lieu of investing in long-term growth. In recent years, companies
including Dell, Yahoo and others have faced proxy wars or shareholder
proposals to merge, divest, change boards or management or undergo a drastic
This focus on catering to activists has resulted in
overlooking the importance of reasonable shareholder power. And that is
leading to a stasis in corporate governance, rather than innovation and
On the flip side, shareholder power has resulted in
some positive governance changes. One example is recent legislation that put
forth “say on pay” rules, which is making management more aligned with
shareholders when it comes to setting their compensation. Other positive
changes have been better mechanics for voting, proxy contests and precatory
proposals, the elimination of staggered boards and the advent of majority
The great challenge for today’s boards in this new
era of activism is catering to all the diverse “shareholders,” which
includes those with a longer investment horizon like pension funds and
mutual funds, as well as those who are seeking quick profits. The board
should represent all shareholders, not any one region or philosophy.
Many companies are “owned” by both long- and
short-term shareholders. The short-term investors surely have created an
atmosphere of passion for immediate returns, but the board doesn’t have to
succumb. It needs the courage to discover and communicate with long-term
shareholders, shareholders who don’t necessarily agree with the tactics of
their short-term counterparts.
Certainly, no one would go back to the era of the
uncontrolled poison pill and no shareholder power. That world masked
entrenchment, bad judgment and the inability of shareholders, long and
short, to effect change. Happily, that era is long gone.
The problem is that many investors are apathetic,
uninformed, locked into an index fund or don’t care to be informed, thereby
giving the short-term activists a disproportionately strong voice. When
board members are confronted with active and vocal shareholders rather than
the silent majority, it’s as the adage goes: the squeaky wheel gets the
Now, however, there are broader corporate policy
questions that need to be examined. Are short-term investors truly diverting
long-term sustainable growth? Are all or many long-term shareholders
apathetic, locked in or worse in not resisting? What constitutes incentives
or disincentives for both types of investors?
Academics and practitioners should be studying these
questions intensely. This involves canvassing and analyzing the entire
investment chain that boards face, including pension funds, mutual funds and
hedge funds of hundreds of varieties and ordinary investors and advisers,
which one project at Columbia Law School aims to do.
Columbia, along with studies at other institutions,
is trying to learn what motivates short-term investing, why the longer-term
shareholders are so often silent and why the investment chain either through
apathy or the wrong incentives, has created the world of short-term
investing in which we live. This undertaking will also examine the role of
so-called proxy advisory firms and rating agencies in board policies.
In the end, we will all gain a better understanding
of shareholder influence, and what incentives can turn this economy away
from short-term investing and back to long-term sustainable growth.
Corporations will be the ultimate beneficiaries of this knowledge, which
will provide the understanding that will facilitate legitimate long-term
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