Thursday, May 15, 2014
Ron Gilson and Jeff Gordon weigh in on activist pills and Sotheby's at the Blue Sky Blog:
Delaware corporate governance rests on two conflicting premises: on the one hand, the board of directors and the management the board selects run the corporation’s business, but on the other the shareholders vote on who the directors are. The board needs discretion to run the business, but the shareholders decide when the board’s performance is so lacking that it (and management) should be replaced. All of the most interesting issues in corporate governance arise when these two premises collide – when the board’s assessment of how the company is doing is different than the shareholders’, and each claims that their assessment controls. These collisions work out within a predictable range when, unexpectedly, new governance initiatives shift the underlying plate tectonics and disequilibrate the settled patterns. Whether the particular earthquake is caused, as was the case in the 80s, by the emergence of a hostile tender offer or, as now, by activist investors seeking to change management, policy or both through a threatened proxy fight, the underlying question is the same: when does the board’s discretion end and the shareholders’ power begin? The boundary is the corporate governance ring of fire.
Gilson and Gordon suggest that the new distribution of share ownership, heavily weighted in favor of institutional ownership, may require a new approach to governance. This new approach would recognize that institutional shareholders may well need less protecting from threats than would individual shareholders with less information.