Martin Lipton's objections aside, the Economist seems to think little of the new "Imperialist Shareholder," and in fact argues quite strongly in an article this week (Economist subscription required) that shareholders are quite a bit less powerful than they might seem. Lipton's primary argument was one of focus. Permit shareholders to go wild, he argues, and management will be so focused on short term gains that long term planning will fall by the wayside. Similar arguments are made to support the notion that firms shouldn't give quarterly earnings guidance, or seek to maximize quarterly earnings.
Funny that it would be Time Warner now, and Carl Icahn's siege of that firm, that prompted Mr. Lipton's outrage. Back in 1989 a Delaware court backed Time against a hostile bid by Paramount. (The famous "Just Say No" case resulting in the "Nancy Reagan Defense"). The case resulted in the adoption of "Poison Pills" by management all over the country and a series of takeover defense mechanisms with names like "Bankmail," "Flip-out," "Flip-in," the "Pension Parachute," the "Pac Man Defense," "White Squire," "Jonestown Defense" and the dreaded "Goodbye Kiss," all shifting the balance of power to management and from shareholders. Poison pills had been around since 1982 (in fact there is a strong argument that Lipton actually invented them) but their sudden widespread adoption was a dramatic shift.
Of course, hedge funds are getting in on the gig and, as I've mentioned before, they look quite like the new greenmailers.
But then what does this mean for the smaller shareholder? According to the Economist, not very much.
As Bob Monks, a shareholder activist, puts it, “the American shareholder cannot nominate directors, he cannot remove them, he cannot—except at the arbitrary pleasure of the SEC—communicate advice to them. Democracy is a cruelly misleading word to describe the situation of the American shareholder in 2006.”
Personally, the increasing heat on the management of public companies convinces me that private equity, even with the bubble like signs it has begun to show, has a long and valued place in the microcosm of Corporate America.