October 11, 2015

A Flawed Shareholder Rights Bill

In an Op-Ed piece in the Tuesday, May 12, issue of The Wall Street Journal, entitled “Schumer’s Shareholder Bill Misses the Mark,” attorneys Martin Lipton, Jay Lorsch, and Theodore Mirvis accurately and insightfully point out the fundamental flaws in the shareholder rights legislation proposed by Senator Chuck Schumer.

Senator Schumer ‘s bill is designed to override state corporation laws that vest the primary power for leading any state-chartered corporation to its board of directors. In a number of ways, including banning staggered boards of directors and reducing barriers to shareholders nominating their own candidates for directors, Schumer’s proposed legislation would significantly transfer power from directors to shareholders. The simple, but flawed, rationale is that, since shareholders own the company, they should have more power to manage it.

Having been the CEO of a publicly-held company, I have an informed vantage point from which to critique this position. The fundamental conceptual flaw of the shareholder bill is that shareholders of public companies are not like owners of small private companies. Since they can sell their shares at any time, including within minutes or even seconds after they buy them, short-term shareholders are not aligned with the interests of long-term shareholders, and, in fact, they can force decisions on companies that not only are against its long-term interests, but can ultimately destroy it.

The fiduciary obligation of a company officer or director is to deliver rates of return in excess of the company’s cost of capital and to make sure that the company can survive to deliver that value year after year. Any organization can find ways of maximizing short-term return and destroy the company’s ability to survive in so doing.

At Pitney Bowes, we consistently avoided taking such short-term, destructive actions, but many short-term shareholders consistently pressured us to do so. One common demand of short-term shareholders is that the company become more leveraged with debt, and that it use the proceeds to repurchase shares and pay dividends. While we did that to some degree, we resisted demands to do so to the degree that it would have precluded us from doing acquisitions or making other investments for future growth.

This is particularly relevant today. While it has made sense for companies to cut costs and to hold on to cash in an environment in which there have been threats to liquidity, we will be,or may already be, in a situation in which the best long-term strategy for a company is to begin to invest more for growth. Shareholders who want the company to accumulate cash and pay it out in share repurchases or dividends will benefit in the short term, but the company will lose out.

Framers of corporate law systems for public companies could not have conceived of technology that allowed a significant percentage of shareholders to be traders, rather than investors. Traders play a critical role in enabling even long-term shareholders to have more liquid assets, so we need to protect their rights and deliver value to them. There is no easy solution to balancing the rights of short-term and long-term shareholders, but the Schumer proposal would clearly create an unbalanced emphasis on the rights of short-term shareholders.