Bylaw Protection against Dissident Director Conflict/Enrichment Schemes

By Martin Lipton, May 10 2013, The Harvard Law School Forum on Corporate Governance and Financial Regulation

This year, the practice of activist hedge funds engaged in proxy contests offering special compensation schemes to their dissident director nominees has increased and become even more egregious. While the terms of these schemes vary, the general thrust is that, if elected, the dissident directors would receive large payments, in some cases in the millions of dollars, if the activist’s desired goals are met within the specified near-term deadlines.

These special compensation arrangements pose a number of threats, including:

 

• undermining Board prerogatives to set director pay and select the timeframe over which corporate goals are to be achieved;
• creating a multi-tiered, dysfunctional Board in which a subset of directors are compensated and motivated significantly differently from other directors;
• creating economic incentives to take the corporation in the specified direction, and within the timeframe, that would trigger outsized compensation, whether or not doing so would be in the best interests of all shareholders, would engender inappropriate and excessive risk, or would sacrifice long-term value for short-term gain; Continue reading…

 

The Most Influential People in Corporate Governance

by Scott Hirst, for The Harvard Law School Forum at Harvard Law School, March 25, 2010.

A review of the most recent Directorship 100 list – a list of the most influential people in corporate governance put together each year by Directorship magazine – indicates that individuals affiliated with Harvard Law School and its Program on Corporate Governance play a central role in the corporate governance landscape.

The Directorship 100 list includes such well-known figures as President Barack Obama, Chairman Barney Frank, SEC Chair Mary Schapiro, activist investor Carl Ichan and Goldman Sachs CEO Lloyd Blankfein. The Forum was pleased to learn that the list includes thirty-four individuals who are (i) HLS faculty and fellows, (ii) Members of the Advisory Board of the Program on Corporate Governance, (iii) Guest Contributors to the HLS Forum, and/or (iv) Harvard Law School grads.  The “Harvard Thirty-Four” are as follows (for HLS alums, the year in parenthesis refers to graduation year):

• Harvard faculty and fellows: Professors Lucian Bebchuk (‘80) and Elizabeth Warren, as well as Vice-Chancellor Leo Strine, Jr., a Senior Fellow of the Program on Corporate Governance…(continue reading)

Board of Directors Meeting Agendas

by Martin Lipton, for The Harvard Law School Forum at Harvard Law School, January 8, 2010.

The numerous legislative and regulatory initiatives adopted or proposed in response to the economic crisis, and the increased corporate governance activism by shareholders and their advisory organizations, raise the question of what are the key matters that a board should be considering on a regular basis. As a supplement to our recent post on the Forum, entitled Some Thoughts for Boards of Directors in 2010, we developed the following list of matters. Some matters could be visited once a year; and some should be visited at each meeting. Some companies will need to add matters to this list in view of relevant business, corporate governance or other issues specific to their companies. Boards should also consider the extent to which some of these matters should be addressed more fully by board committees. Each company should tailor the scope of, and the allocation of time to, the matters, and the frequency of their consideration, to its particular circumstances…(continue reading)

Risk Management and the Board of Directors

by Martin Lipton, for The Harvard Law School Forum at Harvard Law School, December 17, 2009.

Balancing risk and reward has never been more challenging than it is today. Companies face risks that are more complex, interconnected and potentially devastating than ever before. Over the past two years, a perfect storm of economic conditions has triggered an extraordinary downward spiral from which we are only recently beginning to emerge: the subprime meltdown, liquidity crises, extreme market volatility, controversial government bailouts, consolidations of major banking institutions and widespread economic turmoil both in the U.S. and around the world. Against the background of the global financial crisis and the still uncertain global economy, companies are re-assessing their strategies for responding to the challenges and pressures of the new environment. Risk—and in particular the risk oversight function of the board of directors—has taken center stage in this re-assessment, and expectations for board engagement with risk are at all-time highs. Risk from the financial services sector has contributed to large-scale bankruptcies, bank failures, government intervention and rapid consolidation. And the repercussions have spread to the broader economy, as companies in nearly every industry have suffered from the effects of a global constriction of the credit markets, sharply reduced consumer demand and volatile commodity prices, currencies and stock prices…(continue reading)

Bruce Wasserstein

by Martin Lipton, for The Harvard Law School Forum at Harvard Law School, December 9, 2009.

Editor’s Note: Martin Lipton is a founding partner of Wachtell, Lipton, Rosen & Katz, specializing in mergers and acquisition and matters affecting corporate policy and strategy. This post is based on remarks delivered by Mr. Lipton at the memorial service for Bruce Wasserstein earlier this week.

Sometime after leaving the Cravath law firm to join First Boston in 1977 and before co-founding Wasserstein Perella in 1988, Bruce Wasserstein moved from being a phenomenal investment banker to an investment banking legend. If I had to place the time of the transformation, I would choose 1981. It was when Bruce advised DuPont on the takeover of Conoco, which at that time was the largest takeover in corporate history. Conoco was a classic case of the complexity and tactical maneuvering that were features of the takeover battles that caught the attention of the Nation for most of the decade of the 80’s. First having been attacked by Dome Petroleum, then having negotiated a merger with Cities Service, Conoco was again attacked, this time by Seagrams, just as it was about to sign a merger agreement with Cities Service. In desperation, Conoco turned to DuPont to rescue it. Bruce structured a deal that outmaneuvered Seagrams, was successful despite a higher offer from Mobil, and resulted in DuPont acquiring all of Conoco. The investment banking world recognized that DuPont’s success was the result of the brilliant strategy and tactics of Bruce Wasserstein. The legend was born…(continue reading)

Corporate Governance Provisions Added to Financial Reform Bill

by Martin Lipton, for The Harvard Law School Forum at Harvard Law School, November 10, 2009.

(Editor’s Note: This post is based on a Wachtell, Lipton, Rosen & Katz memorandum by Martin Lipton, Theodore N. Mirvis, Steven A. Rosenblum, David M. Adlerstein and Karessa L. Cain.)

Senator Dodd unveiled his 1,136-page financial reform bill discussion draft today, which proposes a variety of new financial industry regulations and regulatory agencies. While the bill focuses on these wide-ranging and controversial financial reform proposals, a number of corporate governance reforms are also buried in the bill on pages 755 to 762, and are largely taken, albeit in somewhat weakened form, from Senator Schumer’s proposed Shareholder Bill of Rights Act. As we have previously commented, these governance reforms, while presented as a means of enhancing corporate governance and restoring stability to American companies, are likely to have just the opposite effect. See the Wachtell, Lipton, Rosen & Katz memoranda “A Crisis Is a Terrible Thing to Waste: The Proposed ‘Shareholder Bill of Rights Act of 2009’ Is a Serious Mistake,” posted on the Forum here, and “Corporate Governance in Crisis Times,” posted on the Forum here…(continue reading)

Excessive Executive Pay: What’s the Solution?

by Roger Thompson, for Working Knowledge at Harvard Business School, September 21, 2009.

In the search for culprits in the global financial meltdown, bloated executive pay and the excessive risk-taking behavior it fueled stand out as prime suspects. Of the two, pay dominates the headlines and provokes the most public and political outrage.

Pitchfork populism over the issue reached a crescendo last March when insurance conglomerate AIG, kept on life support with up to $183 billion in taxpayers’ cash, dished out bonuses totaling $165 million to 400 employees in the London office whose derivatives trading nearly destroyed the company. Lavish pay for poor performance wasn’t just an AIG phenomenon. On Wall Street, it was endemic. Bankers gave themselves nearly $20 billion in 2008 bonuses, even as the economy was spiraling downward and the government was spending billions on bailouts.

Politicians pounced. President Obama called Wall Street’s outsize pay packages “shameful,” especially for companies in need of federal bailouts. Such pay, he said, is “exactly the kind of disregard for the costs and consequences of their actions that brought about this crisis—a culture of narrow self-interest and short-term gain at the expense of everything else.”

That culture, critics maintain, spawned executive compensation plans with incentives that encouraged the excessive risk-taking that led to the financial crisis. And while the intricate details of pay plans don’t evoke the outrage of multimillion-dollar paydays, curbing the risk-taking incentives embedded in those plans is key to resolving the current crisis and preventing another. That task falls, by law, to corporate boards, clubby groups that are widely criticized as the handpicked “captives” of self-serving management…(continue reading)