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Sideshows of the main event: what the fight, at heart, has been about.

IN THE FILM "Lawrence of Arabia," Sir Donald Wolfit, playing the acerbic General Murray, remarks that, in light of the panorama of the World War, fighting the Turks in the Arabian Desert is no more than "a sideshow of a sideshow."

In a one-page March 25, 2004, memorandum, takeover lawyer extraordinaire and corporate governance thinker Martin Lipton of law firm Wachtell Lipton listed nine "Key Issues for Directors." Among the points that Lipton considered critical were that: boards should not concentrate "on process to the exclusion of [their] fundamental function ... to advise on strategy and to monitor performance and risk management"; and "Unless directors resist [campaigns regarding poison pills, staggered boards, Chairman/CEO split, etc.], and the threats of these actions, we will have governance by referendum, or threat of referendum, rather than [by] the board."

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Wolfit's line from "Lawrence of Arabia" can be taken together with Lipton's memo to illustrate what, in my view, has been the underlying theme in corporate governance for at least the last 20 years--though to some extent it has been obscured by a long progression of sideshows and sideshows of sideshows.

At its core, the struggle in corporate governance has not been about proxy access or executive compensation or "say on pay" or checklist-ism or "best practices" or poison pills or staggered boards.

All are sideshows.

No, the fight has, at heart, been over whether to maintain, or to try to dismantle, the fundamental backbone and structure of American corporate law: That it is the directors, not the shareholders, who (subject to statutorily required shareholder votes) are responsible for overseeing the management of the corporation's business.

That theme is not a sideshow but, instead, the main event in the center ring. And it is an issue that has been repeatedly emphasized in this column.

American corporation law is not, and never has been, Athenian or town hall democracy. It is republican.

My column "Access Denied!" [Summer 2003] emphasized that. I wrote there that, "in deciding most matters on behalf of the shareholders, incumbent directors are supposed to act less like Representatives (reflecting the current desires of their local constituencies) and more like Senators (considering broader interests)." To similar effect was the analysis four years later in my column "The Thin Edge of the Wedge" [3Q 2007]: (a) "Shareholders do not govern directly; they elect directors to perform that role" and (b) in a world of shareholder rule by plebiscite, "governance chaos would prevail."

That there are weaknesses in our present system is undeniable. We should endeavor to fix them from within the existing structure, not to rip that structure apart. That some, instead, appear to relish that latter prospect should give us serious pause.

In a recently published 134-page book, The Shareholder Value Myth, Cornell Law professor Lynn Stout put forward these views:

a. Maximizing shareholder value is "an incoherent and counter-productive business objective."

b. The notion of "shareholder value" is "an ideology, not a legal requirement. ... The notion that corporate law requires directors, executives, and employees to maximize shareholder wealth simply isn't true."

c. Shareholders are not in a "principal-agent" relationship with directors.

d. Extolling the primacy of shareholder value has not "translated into better corporate or economic performance." The purported "three simple ingredients" of giving directors less power, giving shareholders more power, and "aligning" executives and directors by relating their pay to share price have failed to produce results.

Stout's book has received more than a little journalistic mention. The New York Times has run two columns about it. On June 27, 2012, Jesse Eisinger, in "Challenging the Long-Held Belief in 'Shareholder Value,'" summarized her key arguments; in opposition, he cited the opinion of the redoubtable governance personage Nell Minow that shareholders today have too little--not too much--power.

About six weeks later, Times columnist Joe Nocera, in "Down with Shareholder Value," discussed not only Stout's views but the related ones of Rotman School of Management dean Roger Martin, Harvard Business School professor Jay Lorsch, and others--all to the effect that the notion of shareholder democracy is seriously misguided.

The net of the matter is that the mantras of "shareholder democracy" and "shareholder value primacy" are not grounded in law, economics, empirical performance, or the republican form of corporate governance. They rest on analytical quicksand.

The author can be contacted at hkaback@nyc.rr.com.

Hoffer Kaback is president of Gloucester Capital Corp. and has served on several boards.
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Title Annotation:QUIDDITIES
Author:Kaback, Hoffer
Publication:Directors & Boards
Date:Sep 22, 2012
Words:738
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