天美传媒

What is the function of a company today, and what is the subsequent role of the board of directors?

Martin Lipton, a renowned expert in corporate governance, sat down with 天美传媒 Professor Jordi Canals at the school鈥檚 New York campus recently to explore these interlinked questions.

Lipton is a founding partner of law firm Wachtell, Lipton, Rosen & Katz, and has written seminal articles, books and legal frameworks on topics spanning corporate takeovers to shareholder rights.

In 2016, the World Economic Forum sponsored his publication The New Paradigm: A Roadmap for an Implicit Corporate Governance Partnership Between Corporations and Investors to Achieve Sustainable Long-Term Investment and Growth. He describes it as 鈥渁 sort of compendium on the duties of putting shareholders and asset managers in stewardship of a company.鈥�

2008 marks a turning point

Lipton approaches the question of the duty of the board by asking what the purpose of a company is. He says that the focus for years was disproportionally on shareholders as opposed to all stakeholders.

He makes a major distinction between how, in the late 20th century, companies were under pressure 鈥渢o maximize stakeholder wealth鈥� and promote shareholder governance. When the 2008 crisis hit, 鈥渢he obsession with short-term profits had backfired.鈥�

Lipton suggests that 2008 was a turning point, with companies redefining their purpose beyond making a product and satisfying shareholders. Companies became obliged to consider long-term aspects such as 鈥渢he proper compensation of employees, employees鈥� retirement plans, the quality of their product, and the support they lend to a whole network of institutions so that their company is well situated in society.鈥�

Companies today still grapple with the problem of short-termism, Lipton stresses. Canals points out that to this challenge, myriad others can be added: understanding the complexity of consumers, management challenges provoked largely by digital disruption, new geopolitical risks and engaging today鈥檚 generation of millennial employees.

Bigger, sophisticated boards needed

Lipton believes that today鈥檚 boards need to be diverse in terms of ethnicity and gender and, in the case of major companies, comprise 12鈥�15 members. This, he acknowledges, contradicts the typical business-school model of eight.

鈥淭oday we are no longer an industrial society, we are a knowledge society,鈥� Lipton says. 鈥淚t鈥檚 the Googles and the Apples and the Microsofts and the Ubers who are the big players and companies like these need sophisticated boards.鈥�

Facebook, he said, learned this lesson the hard way: 鈥淣o one asked the right questions for years as to the societal impact of the expansion of the advertising and communication activities that Facebook adopted. It was enormously profitable but there was nobody on the board saying 鈥榃hat are we doing?鈥� and 鈥榃hat is the impact of this going to be?鈥欌��

One reason boards benefit from being bigger is dealing with issues such as R&D and marketing which, according to Lipton, should be no afterthought. If they are, it may come back to haunt the company.

鈥淲hen a company trends down it鈥檚 often because it has failed to keep up this investment,鈥� Lipton remarks.

Concluding on this topic Lipton said, 鈥淓ven if you have a smart, dedicated board 鈥� people who are acting like PE people 鈥� if they don鈥檛 have the compass, if they aren鈥檛 on the right road, then you鈥檙e going to get a failure.鈥�

Choosing battles with activists

A recurring theme during the conversation was the importance of independent advice, given today鈥檚 focus on governance issues raised by shareholder聽activists.

Lipton said that one of the activists鈥� common attacks was 鈥渁 stale board,鈥� in other words no turnover, or no new director for over Lipton鈥檚 acceptable maximum of 5-6 years. Often, Lipton says, the best approach is to reach agreement with activists by 鈥減utting one or two mutually agreeable new directors鈥� on the board.

He added: 鈥淧eople think that if there is an activist you have to fight tooth and nail to defeat it, and sometimes you do, but at least half the time it makes sense to work something out.鈥�