Over the past two weeks, one of the enduring questions of corporate governance — whether boards of directors are re-elected entirely every year of if their terms are “staggered” so that only a fraction of the directors (often 1/3 or 1/4) are up for vote every year — jumped back into public discussion. Steven Davidoff wrote about it on March 20th, with a thorough post, The Case Against Staggered Boards, that synthesized the issues well and linked to many of the core academic papers on the subject. As Davidoff asked:
According to the data provider FactSet SharkRepellent, 302 S.&P. 500 companies had staggered boards in 2002. Ten years later, the figure has fallen to 126.
Outside this universe of large companies, the staggered board has also fallen out of favor, though not as rapidly. Of 900 other companies outside the S.&P. 500, staggered board adoption rates have declined by about 25 percent since 2002.
It is here where our puzzle arises.
Compare this with the market for initial public offerings. According to FactSet SharkRepellent, 86.4 percent of the companies going public this year have had a staggered board. This figure is up from a still high 64.5 percent in 2011. Staggered board provisions have been adopted by prominent companies like Tesla, LinkedIn and Dunkin’ Brands.
What explains this divergence?
If this were a class, I’d raise my hand. Why do IPOs overwhelming have staggered boards while public companies overwhelmingly have annual-election boards? Because company founders and managers like to preserve as much power as they can when their companies go public.
Ever the professor, Davidson admits that’s one possibility, but also says it may be well-intentioned management trying to maximize shareholder value, or just the fault of lawyers giving every client the strictest option they can:
Companies going public may believe that the staggered board is important because it creates value by insulating directors from shareholder pressure so that they can make long-term decisions. More cynically, they adopt these provisions because it prevents shareholders from having undue influence that may affect their ability to keep their management positions or pay themselves compensation. …
But there may be another explanation here: the lawyers. The corporate legal bar is not particularly enamored of the staggered board, most likely from its experience representing companies without such a device. Many of these lawyers believe the staggered board provides negotiating room to bargain for a higher premium.
I’m always happy to blame lawyers for problems — they often are the problem — but I don’t think that’s the issue when it comes to IPOs. Davidson singles out LinkedIn and its IPO for its astonishingly aggressive staggered board provision, which says the board can only be de-staggered by an 80 percent vote of shareholders.
That’s not to maximize shareholder value and it’s not the fault of the lawyers. It’s about control. I have no doubt that, when Reid Hoffman, founder of LinkedIn and now Executive Chairman, went to the IPO lawyers, he didn’t ask, how can I maximize shareholder value? He was a major shareholder, and he would have known long in advance that his shares would be worth, literally, billions. Do you think he cared if his share would be $2.1 billion versus $2.5 billion or some other trivial difference?
Of course not. He went to his IPO lawyers and asked: how do I maintain control of my company? And they told him to set up a staggered board that could only be voted out with such a massive shareholder majority that it necessarily included the founders.
That’s good for the founders of the company, or whoever else is entrenched in the board of directors at that time, but it’s not so good for shareholders. Lucian Bebchuk, professor at Harvard Law, thinks so, too, and so he set up the Harvard Law School Shareholder Rights Project, which last week posted a celebratory press release on the The Harvard Law School Forum on Corporate Governance, discussing how they helped some state and municipal pension funds convince a couple dozen S&P 500 companies to de-stagger their boards.
A day later, Marty Lipton (inventor of the poison pill, the pre-eminent legal device for protecting boards from takeovers) swooped in to rain on the parade:
This is wrong. According to the Harvard Law School online catalog, the SRP is “a newly established clinical program” that “will provide students with the opportunity to obtain hands-on experience with shareholder rights work by assisting public pension funds in improving governance arrangements at publicly traded firms.” Students receive law school credits for involvement in the SRP. The SRP’s instructors are two members of the Law School faculty, one of whom (Professor Lucian Bebchuk) has been outspoken in pressing one point of view in the larger corporate governance debate. The SRP’s “Template Board Declassification Proposal” cites two of Professor Bebchuk’s writings, among others, in making the claim that staggered boards “could be associated with lower firm valuation and/or worse corporate decision-making.” …
It is surprising that a major legal institution would countenance the formation of a clinical program to advance a narrow agenda that would exacerbate the short-term pressures under which American companies are forced to operate. This is, obviously, a far cry from clinical programs designed to provide educational opportunities while benefiting impoverished or underprivileged segments of society for which legal services are not readily available. Furthermore, the portrayal of such activity as furthering “good governance” is unworthy of the robust debate one would expect from a major legal institution and its affiliated programs.
In Lipton’s view, law school clinical programs exist only to support the causes he likes and, in any event, should never, ever oppose the boards of directors he represents.
Lipton is wrong. The point of having law schools, as I’ve written before (and again), is to “lay the foundation for graduates who are capable of learning and developing technical skills and of exercising sophisticated and mature judgment in the face of uncertainty.” Sometimes legal clinics serve charitable and public interest purposes, but that’s not their primary purpose: the purpose is to give law students the experiences that will make them good lawyers.
Law is about disagreement. Law is superfluous where everyone agrees; the whole point is to establish rules for what happens when everybody doesn’t agree. Lipton should know as well as anyone that practicing the law requires you take a side and stick by it.
Which is why practice-oriented schools like Temple’s Beasley School of Law offer clinical programs all over the spectrum, from prosecuting criminals to defending the accused, to defending SEPTA from tort claims to the standard, Lipton-approved basic family law and public benefits programs for the indigent and the disabled. It’s quite possible Temple is using Jim Beasley’s donation to fund scholarships for students who go into the SEPTA clinic and help make our claims against SEPTA so frustratingly hard to win.
That’s good. That’s what we want. If we limit law school clinical programs to the issues where everybody agrees, we’ll end up with law schools banned from even introducing lawyers to the actual practice of law outside of a handful of limited areas. As much as corporate lawyers like Lipton believe they’re the masters of the universe, there’s nothing unique about corporate law, it’s just as susceptible to critical analysis, debate and, yes, advocacy, as any other field of law.
Once we recognize that law school clinical programs must take a side to have any relevance whatsoever to the actual work of practicing lawyers, it’s quite easy to see why there’s nothing “wrong” with the Shareholder Rights Project. Law schools exist to train lawyers. To do that, they hire professors, and give them discretion. If a professor thinks it would serve a pedagogical purpose to have students advocate one form of a board of directors versus another, that’s wonderful and students interested in corporate law should take it. The exact position a professor chooses for the clinic to advocate is wholly irrelevant to the question of whether the clinic should exist, and Bebchuk should no more be criticized by the Shareholder Rights Project than if Stephen Bainbridge set up a Defense of Board of Directors Primacy clinical.