On The Case

Citing 'crisis' for corporations, Marty Lipton launches feud with investors’ council

(Reuters) - The legendary corporate advisor Martin Lipton of Wachtell, Lipton, Rosen & Katz believes Corporate America is facing an existential crisis. Wealth inequality, climate change and the pressure to maximize corporations’ short-term profits, he said in an interview on Wednesday, have led to the very real prospect of legislation that will strip businesses of autonomy. If corporations and their shareholders fail to acknowledge that businesses must be accountable not just to shareholders but to their employees, customers and communities, Lipton said, they’re exposing themselves to government imposition of that accountability.

Corporations have awakened to what Lipton calls “a critical moment for American business.” But in a memo issued Tuesday night and in his interview with me on Wednesday, Lipton said that institutional investors have not. He said that “failure” is “inconceivable.”

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“This will ultimately result in government regulation of institutional investors,” Lipton said.

The context for his comments was a response from the Council of Institutional Investors to the Business Roundtable’s announcement Monday of a new corporate paradigm. In a way, the Business Roundtable statement was the vindication of Lipton’s life work. He has been preaching for 40 years about the peril of running corporations to maximize shareholder returns, warring with activist investors such as Carl Icahn and academics, most notably Harvard’s Lucian Bebchuck, who promoted the doctrine of shareholder primacy. The Business Roundtable’s revised vision of corporate principles – calling on business leaders to consider the interests of their employees, customers, suppliers and communities as well as their shareholders – aligned with Lipton’s unabating mantra of governing corporations for the long term.

Lipton issued a memo on Monday, saluting the Business Roundtable for its new commitment to all stakeholders, not just shareholders. “As a long-time proponent of stakeholder corporate governance and a firm believer in capitalism and the market economy,” Lipton wrote, “I hope (the new model) will be emulated by all participants in our markets.”

Institutional investors were not so bowled over. Ken Bertsch, executive director of the Council of Institutional Investors, told me his group at first considered the Business Roundtable statement to be a more of a public relations event than a substantive development. The Business Roundtable, he told me, had been talking on and off to CII about a shift away from shareholder primacy. But CII didn’t realize the business group was moving ahead with a formal position paper, Bertsch said, until he received a heads-up about the statement on Friday. When CII received calls requesting comment on the Business Roundtable statement, Bertsch said, the group realized it needed to issue a formal response.

CII’s press release said the shift to “stakeholder primacy” threatened to undercut corporate accountability and prove cover for bad corporate management. “Accountability to everyone means accountability to no one,” the CII statement said. “To achieve long-term shareholder value, it is critical to respect stakeholders, but also to have clear accountability to company owners.”

CII’s statement said corporations serve their employees and communities by delivering long-term value to investors in pension and retirement funds. Businesses, it said, should leave it to the government to address “societal objectives with limited or no connection to long-term shareholder value.”

Keep in mind that CII, as it emphasized in its statement, shares the view that corporations should be managed for the long term, not for short-term profitability. In that regard, the group is on the same side as Lipton and the corporate traditionalists at the Business Roundtable, although Bertsch told me CII has split with Lipton on activist investors’ role in corporate governance.

There was no cordiality, however, in Lipton’s response to CII. His Tuesday night memo said CII’s “failure” to join the Business Roundtable in abandoning shareholder primacy was “misguided.” And CII’s deference to the government to deal with issues such as wealth inequality and climate change, his memo suggested, “is an even more serious mistake.” CII’s approach, Lipton warned, “would lead to state corporatism or socialism.”

Lipton was no more conciliatory in our interview. “Anybody who gets it understands that this is a critical moment,” he said. Institutional investors, he said, don’t seem to realize that they have power at the moment to influence corporate decision-making but could lose that power if lawmakers feel emboldened to restrict corporate autonomy.

“What’s truly at issue here is the welfare of employees, the welfare of the environment,” he said. “It’s inconceivable that institutional investors, that CII, would not embrace that.”

CII’s Bertsch declined to respond to Lipton’s criticism, but it’s worth pointing out that Lipton places an awful lot of faith in corporate CEOs to act as the custodians of social welfare – and in the Business Roundtable’s statement of principle to guide the actions of business leaders. I’m not so sure that lawmakers who are skeptical about the motives of big corporations will be mollified by a statement that CEOs are now supposed to consider the interests of their employees and communities as well as shareholder returns.

But CII has pushed Lipton into a pronouncement that American corporate law is on a knife’s edge. When Lipton speaks, we should listen.