Europe courts Marty Lipton

Do you advise by phone or travel to the scene of the battle?
Oh, we travel. An activist battle is basically fought on the home country’s turf. You might give some advice long distance, but you basically have to be on the ground when you’re in the midst of an activist fight. In dealing with an activist situation, there are a lot of people that need to be involved and it’s always best to meet in person. It doesn’t mean you stay there for a month or two. It’s back and forth.

Does a strong market provide some coverage to companies that might otherwise become activist targets?
Yes. If the price of a stock has gone up, it improves the total shareholder return. One of the key metrics that activists use is comparison of the target’s TSR to the peer group TSR. And to the extent that the target’s TSR is lower than the peer group, it’s an argument that activists like to use.

Some proponents of long-term investing, for instance McKinsey’s Dominic Barton, have suggested that short-termism may play a role in rising populism. What do you think?
I view activism as being a major factor in inequality. And inequality always breeds populism. There are a number of economic studies that show that. There are organizations like the Coalition for Inclusive Capitalism that are trying to moderate short-termism and activism in order to make the economy more inclusive.

Going back to 1970, when Milton Friedman published an article in The New York Times basically saying that the sole social purpose of a corporation should be maximizing value for the shareholders – usually virtually those words –there’s been academic support for short-termism and activism.

There are those who have accepted that and basically believe that shareholders should have absolute control over the corporation and that management should operate solely to maximize the return to shareholders.

I think it’s axiomatic that if that thinking dominates an economy, the average worker is going to get less and the shareholders are going to get more. And sooner or later, you have created a degree of inequality – and really, despair – that’s going to spur a sharp populous turn.

That’s been true throughout history. Step back to Roman times. If there’s an elite that begins to take an outsized share of the economy, it causes disruption and ultimately some kind of revolution. It can be a revolution that moves toward a more socialistic approach, or it can be a sharp turn to a totalitarian approach. But one way or another, the few who control the source of income in an economy, whether it be land in feudal times or business corporations in modern times, you’re going to get a reaction unless there’s a fair mediation of the proceeds of economic activity.

A series of economic studies, two of which have come from Europe, showed that activism – short-termism, shareholder-centric governance – is responsible for a very material drag on GDP growth in the US, UK, Netherlands, France and Germany. If companies don’t invest, you’re not going to get an increase in productivity, you’re not going to create employment – you’re not adding to the economy. It doesn’t take statistics to show that. It’s plain, ordinary common sense. And people are beginning to have common sense.

That’s why I feel so strongly that activism is not beneficial to an economy and it should not be encouraged. Now, there are always companies that are not well-managed, pursuing a bad strategy. Those companies need to be turned around, but it is not necessary to have activists do it. The institutional investors should undertake to engage with those companies and convince them to turn around. If you promote activism, what you’re doing is sending a message to every company that it should start thinking the way of the activist or otherwise it’s going to be attacked, which means in a sense that you kill long-term strategies.

So what can be done?
We need to rethink corporate governance. The board of directors should determine the strategy of the company. We’ve taken that away and put the power into the hands of shareholders. The best way of dealing with that is for institutional investors to stop outsourcing the monitoring of their investments, and instead take it in-house.

What really annoys me, what I get really angry about, is that the public and union pension funds don’t try to do something about this. Activism is the cause of these great layoffs. It is bad for working people, it’s bad for shareholders and it’s bad for the economy.

How should boards deal with the potential for activism?
What activists are trying to do is drive a wedge between the board and management. Boards need to be prepared to back the management. Boards need to be on top of shareholder relations, to be ready to meet with institutional investors. Then they will get the support of institutions to win proxy fights.

That means, with regard to the potential for activism, the single most important thing for a CEO is to maintain a relationship with the board of directors so the board doesn’t feel pressured to seek a solution that’s not in the best interests of the long-term shareholder.

How optimistic are you for future generations?
Well, at the moment one cannot be very optimistic because the world is somewhat chaotic, both from an economic standpoint and a political standpoint. And the failure of investment, both in business corporations and by government, has basically penalized future generations.

If you don’t invest in infrastructure – and by infrastructure I mean not only bridges and roads but also soft infrastructure like education, employee training, healthcare and housing – if you don’t invest in that, you’re basically penalizing future generations. We’ve now had more than 16 years of robbing from future generations.

A founder in 1965 of Wachtell, Lipton, Rosen & Katz, Marty Lipton is a dean of mergers and acquisition law, his practice focused in particular on corporate defense. He invented the so-called poison-pill defense.

Kevin Helliker, a Pulitzer Prize-winning journalist, is Editor-in-Chief of the Brunswick Review.