By, Martin Lipton, ESQ., Founding Partner of Wachtell, Lipton, Rosen & Katz
The “New Paradigm” is an emerging corporate governance framework that derives from the recognition by corporations, their CEOs, boards of directors, and leading investors that short-termism and attacks by short-term financial activists significantly impede long-term economic prosperity.
In essence, the New Paradigm recalibrates the relationship between public corporations and their major institutional investors and conceives of corporate governance as a collaboration among corporations, shareholders, and other stakeholders.
In the New Paradigm, a board and the corporation’s senior leadership should jointly guide, debate, and oversee a thoughtful long-term strategy for the corporation and the communication of that strategy to investors using clear, non-boilerplate language.
Shareholder perspectives should be understood and a long-term relationship with investors should be fostered using appropriate methods of engagement.
The appropriate “tone at the top” should actively cultivate a corporate culture that gives high priority to ethical standards, principles of fair dealing, and integrity.
The board and senior leadership should set high standards for the corporation with respect to the integration of relevant environmental sustainability and corporate social responsibility matters into strategic and operational planning.
In the New Paradigm, the corporate board should periodically review bylaws, corporate governance guidelines, committee charters and other governance policies.
The board should challenge itself to recruit and retain highly qualified directors who are willing to shoulder an escalating workload. Such directors should be compensated in a manner that fairly reflects the significantly increased time and energy that must now be spent as a board and board committee member.
Extraordinary transactions should be carefully considered by the board on an informed basis. The board should not be deterred by shareholder litigation as its become party of modern corporate life; instead, the board should exercise its business judgment in the face of such litigation.
The investor’s role in the New Paradigm involves providing steadfast support for the corporation in pursuing reasonable strategies for long-term growth and to speak out publicly against short-term demands.
Investors should actively listen to corporations and review their communications about strategy, long-term objectives, and governance.
If an investor is concerned about a corporation’s strategy or performance, it should give prompt notice to the corporation of its concern and invite the corporation to privately engage with the investor before taking such concerns public.
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