CLS Blue Sky Blog

Wachtell Lipton discusses Staggered Boards, Long-Term Investments and Long-Term Firm Value

Recent econometric studies (“empirical evidence”) definitively rebut the position taken by the Harvard Law School Shareholder Rights Project (SRP) that classified boards are associated with lower firm value and inferior outcomes for shareholders. After correcting serious statistical and econometrical flaws in the studies put forth to support declassification, these new studies conclude that staggered boards result in long-term value creation:

Concomitantly with the rise of the SRP, activist hedge funds have significantly grown in size and have piggybacked on the campaign against staggered boards and other governance “issues” as a lever to force firms into removing their takeover defenses, thus making them more vulnerable to short-termist pressures to deliver immediate shareholder returns. These attempts have been largely successful; over the last 10 years, the percentage of S&P 500 companies with classified boards has sharply declined from 47% to 10%, while at the same time S&P 500 companies have increased dividends and buybacks by 85% to nearly $1 trillion. This has been fueled by underinvesting in long-term growth and is in diametric opposition to the interests of institutional investors in long-term value creation, as evidenced by recent statements by Vanguard’s William McNabb, BlackRock’s Laurence Fink and State Street’s Ronald O’Hanley.

Hopefully these new studies will serve as a further wake-up call and make it clear that the recent trend of forcing companies to adopt one-size-fits-all governance “best practices” – at the expense of long-term investments and firm value – is misguided and must end.

The preceding post comes to us from Wachtell, Lipton, Rosen & Katz.  It is based on a memorandum circulated by the firm on December 3, 2015.

Exit mobile version