| Espen Eckbo:
Thank you very much. I'm the odd man out here since
I’m a financial economist and not a legal scholar
like the rest of my panel. I’d like to talk about
how Corporate Governance is a multi-front push. It has come
up in the panel discussion as well that it is difficult
to talk about voting reform unless you also talk about defensive
tactics and the kinds of resistance firms can make to hostile
takeovers.
Perhaps the most important voting right I, as a shareholder,
have is to sell my shares to the highest bidder. If I'm
not allowed to do that, then my voting rights are being
cut quite considerably. I’m talking about the poison
pill, so lets go back a little bit in history.
In the 1970’ and early 1980’s, excess capacity
developed in much of corporate America primarily due to
technological innovations. Also, as the oil price went up
in the mid 1970s, oil companies experienced an enormous
increase in free cash flow—with no commensurate increase
in valuable investment projects. The result was value-destroying
overinvestment on a massive scale. That started a wave of
hostile takeovers because managers and boards resisted paying
out dividends and down-sizing their firms. The hostile takeovers
generated resistance activity, and one of the big inventions
of course, was the poison pill. A pill effectively forces
a potential buyer to negotiate with the board or management
before a takeover can go through. Negotiations are required
even if a majority of shareholders want to sell. So, the
pill undermines shareholder voting rights. If the purpose
of the takeover is to get rid of the board, then it is,
of course, very hard to get an agreement. The poison pill
has proven to be a every effective takeover deterrent.
During the 1980’s, more and more firms adopted the
pill. The courts basically confirmed that the pill was consistent
with good business judgement and the degree of hostile takeovers
dwindled to almost zero. In the 1990’s, institutional
shareholders, who had lost the ability to sell their shares
to a hostile bidder, gradually became too big to sell their
shares in the market without creating serious price pressure.
Because of this, they started saying “let’s
go into the annual meetings and change the board that way”.
That’s when they discovered that the system for electing
directors is flawed.
That’s why we’re talking today about the board
election system. I applaud efforts to make the system more
efficient. But, if we don’t get a culture for taking
these pills out of the equation, I don’t think we’re
going to get very far. Now I'm very glad to see that someone
like Marty Lipton is predicting that this will happen at
an increasing rate. Annual general meetings where institutional
owners are having enough clout to embarrass boards are starting
to question poison pills and classified boards. The goal
is to elect independent boards that think like shareholders.
Creating boards that in a real sense represent shareholders
requires a rapid-fire way to change the board. This requires
election reform. We had a debate on this two years ago with
the SEC which led us nowhere. Defenders of status quo argued
that is was somehow “dangerous” to allow shareholders
to have a say in the operations of the firm through the
board. The issue of allowing shareholders to get closer
to the firm is a very sensitive one with a lot of key people.
In Europe by the way, this issue is even more sensitive
than in the United States. Europe has a hard-wired conflict
of interest problem in their boards. In Germany, 50% of
the supervisory board seats must be allocated to employees.
In Scandinavia, I’m from Norway myself, where we also
have a two-tiered board system, one third of the supervisory
board seats are allocated by law to employees. And when
you have that structure, it’s very hard to close plants
in response to excess capacity. So there are built in conflicts
of interest. You don’t really want directors that
sit with these conflicts of interest to be responsible for
downsizing or hiring and firing managers.
So, let’s do the voting reform, but also, let’s
not forget that maybe the biggest issue is the ability of
boards to resist takeovers in their own self interest. How
can we tell that resistance is driven by self-interest?
When the court gets a case of hostile takeover, how does
it determine that the target board is not acting in shareholder
interest? It’s nearly impossible. It’s like
trying to catch somebody speeding without knowing how fast
they were going. The courts have an enormous problem distinguishing
‘good’ from ‘bad’ management in
hostile takeover cases.
To avoid the courts having the last word, in a sense, let’s
tear down structural defences such as pills and staggered
boards. Only then may shareholders exercise their presumptive
right to sell the shares to the highest bidder. |
