Corporate Governance

Wachtell, Lipton and the Opening Salvo Against the Shareholder Bill of Rights (The Criticisms)

By J. Robert Brown

We are discussing the anticipated Shareholder Bill of Rights that willl be introduced soon by Senator Schumer and the arguments made by Wachtell Lipton for opposing the efforts.  The main argument is that the current crisis is the fault of shareholders and the legislation will make things worse by giving shareholders more authority.

The memorandum also raises a traditional cluster of arguments:  This should be left to the states (something frankly that has been the case for the last century and Delaware has made a hash out of it) and that it would implement an inefficient "one size fits all" approach.  The latter was the approach taken by Congress in SOX (see Criticizing the Critics: Sarbanes Oxley and Quack Corporate Governance) and, in any event, there is no empirical evidence to suggest greater flexibility actually results in anything more efficient.  Indeed, there is an argument to be made that it simply results in a "one size fits all" approach that benefits management (see Opting Only in: Contractarians, Waiver of Liability Provisions, and the Race to the Bottom). 

More interestingly, though, are the arguments that there is no need since states and companies are already responding with improved governance.  The examples?  Delaware amended its statute to permit access bylaws.  But, as we have noted, this is merely a pro-management reform couched in pro-shareholder clothing.  The provision is likely designed to allow companies to control the access process and thwart the SEC from giving the rights to sharehodlers (it will permit companies to set higher ownership thresholds and longer ownership duration requirements than what will be in Rule 14a-8).  Indeed, as we have written on this Blog, the SEC, when it amends Rule 14a-8 to permit access, will need to preempt this provision. 

The other example is that companies are already implementing the various reforms.  The memorandum notes that the number of companies electing directors annually (and not using staggered boards) is something like 64% of S&P 500 and 50% of S&P 1,500 companies.  With respect to majority voting, the memorandum suggests that 75% of boards have put the approach into effect.  It also states that "nearly" 40% of the S&P 500 have split the Chair/CEO roles.  The memorandum notes that 90% of corporate boards are comprised of a supermajority of independent directors.  And, finally, it notes that  TARP has already imposed say on pay "at the hundreds of stockholder meetings held this year by companies accepting TARP funds."

It is a raft of statistics that contains many nuggets.  Foremost, it suggests that these reforms are well underway with little harm.  As a result, at most, the Schumer Bill will do little more than accelerate what is already taking place.  After all of the controversy over say on pay, it has, as the memorandum notes, been implemented in hundreds of companies, with little publicity, controversy or apparent harm. 

Moreover, some of the items, majority voting, for example, have been implemented rapidly not because of any significant shift in attitude about corporate governance, but because management wants to retain control over the bylaw drafting process in order to ensure that the majority vote provision leaves substantial discretion with the board.  Legislation would likely take away the board discretion and require a majority to win.  This would in fact be a radical departure from the approach in place now.

The one provision in the Shareholder Bill of Rights with a modest amount of teeth is the separation of chairman and CEO.  The memorandum notes that this has been done by "nearly" 40% of the S&P 500.  One wonders exactly what "nearly" means here but suffice it to say that the number of companies that have this as a written policy are few and far between.  In other words, some of the 40% is only accidental.  The CEO will in fact eventually be elevated.  In many cases where a division has occurred, the Chairman is not an independent director.

It is the provision that will be opposed the most fiercely.  As Jon Macey at Yale has noted, CEOs capture their boards.  They are able to do this in part by holding onto the position of Chairman, which in large part controls the agenda and information flow to the board.  Is it really the case, on the merits, that the body charged with overseeing the CEO ought to be headed by the same person? 

The Shareholder Bill of Rights ultimately won't change a great deal.  Access, real majority vote requirements, and an elimination of staggered boards, will increase slightly the ability of shareholder's influence the board.  Separating the chairman and CEO will slightly increase the independence of the board.  All of these changes, however, will not shift the current paradigm in any meaningful way.  Management will still manage, largely without oversight.

Full post as published by The Race to the Bottom on May 15, 2009 (boomark / email).