Corporate Governance

Marty Lipton, the prominent Wachtell Lipton lawyer whom I have sparred with on numerous occasions, is no stranger to hyperbole about the "sanctity" of the corporate boardroom, but his latest comment about Anheuser-Busch is way over-the-top.

In a July 24 memo to clients (Corporate Governance Ratings Debunked), Lipton pointed out that the giant beermaker recently changed its bylaws to allow for yearly elections of directors, rather than every three years. As a result of this, the company was subjected to a hostile takeover by Belgian beermaker InBev, which was poised to run a proxy battle to get new directors elected to the board, asserts Lipton.

"Anheuser Busch is the latest US company to fall prey to a hostile takeover shortly after repealing its classified board in the name of adherence to best practices in corporate governance," Lipton said in the memo.

Unfortunately, Lipton has it all wrong in this classic anti-shareholder view. His opinion suggests that it is a good thing that the maker of Budweiser should be protected from takeovers to maintain the cozy "status quo" of its boardroom.

Fortunately, the directors of Anheuser Busch didn?t listen to Wachtell Lipton, but responded to shareholders who saw the InBev takeover as a positive thing ? at the right price.

The deal, at $70 per share or $52 billion was a great thing for shareholders, sending the stock up to record highs. (We don?t hold Anheuser-Busch).

Lipton?s views are emblematic of the anti-shareholder views exemplified by pro-management groups like the Business Roundtable.

Over the years, Lipton has built a very lucrative law practice advising big corporate clients on some very clever ways to keep shareholders like hedge funds from having a strong say in companies they hold. He is credited with inventing the poison pill, one of the most anti-shareholder provisions ever devised.

The memo seems designed to scare more corporate clients not to change their bylaws for fear that they may be subjected to hostile takeover offers and lose their lucrative and cushy management jobs.

Lipton elaborated in a June 25 speech to the University of Minnesota Law School, where he decried a wave of new laws and court rulings that have favored shareholders in the wake of corruption scandals like Enron, Adelphia, Worldcom and a spate of others that lost billions of dollars for pension funds.

"Boards merit the vote of confidence of shareholders and the public markets," asserts Lipton. "History has proven this vote of confidence to be well deserved."

"I believe it is the only way to assure that public corporations will be able to compete with the state corporatism that is transforming the economies of China, Russia and other rapidly industrialized countries," he adds.

Actually, it is just the opposite. Shareholder activists are making their voices heard more often precisely because American corporations are failing and losing their economic hegemony globally to the detriment of our national economy.

This is happening because many boards didn?t challenge managements to address global threats that have been brewing for years. Board members must select managements that have the vision and the foresight to get ahead of the competitive curve.

The University of Michigan speech also contains some astounding contradictions and mental gymnastics in defense of the indefensible.

On the one hand, Lipton decries the fact that union-backed activist CtW Investment Group threatened a "vote no" campaign against 22 directors of six major banks unless they could provide satisfactory answers to what efforts they took to manage risk exposures at their banks.

This of course is a perfectly legitimate ? and imperative ? inquiry to bank directors whose institutions have taken billions of dollars in losses and threatened the viability of the entire financial system.

But Lipton?s response is basically, 'don?t bother the directors ? they have too much on their plate.'

"We cannot afford continuing attacks on the boards of directors at a time when their full commitment and their most talented members are so acutely needed," says Lipton.

If billions of dollars in losses is what their full commitment and most talented members bring, they should seek employment elsewhere. We can?t afford directors like this anymore.