The 31st Annual Francis G. Pileggi Distinguished Lecture in Law: “Shareholder Activism: the Triumph of Delaware’s Board-Centered Model and the New Role for the Board of Directors”

GordonOn October16, 2015, the Delaware Journal of Corporate Law presented the 31st Annual Francis G. Pileggi Distinguished Lecture in Law.  This year’s lecture featured Professor Jeffrey N. Gordon, the Richard Paul Richman Professor of Law at Columbia Law School.

Professor Gordon’s lecture focused on the transition in Delaware law from the hostile takeovers in the 1980s to the current role of the activist shareholder.  Specifically, Professor Gordon argued that Delaware jurisprudence should celebrate shareholder activism because it focuses governance attention on the board of directors, the leading objective of Delaware’s corporate and takeover law.  In turn, courts should reject the poison pill as a managerial defense against an activist voting campaign. Instead, Professor Gordon contends that the focus should be on broadening the role of directors to become credible managers and defenders of the firm’s business strategy.  According to Professor Gordon, this is the next step in the evolution of directors’ role in the public firm.

Professor Gordon articulated three claims that formed the foundation of his lecture.  First, the current variety of shareholder activism reflects triumph of the Delaware board-centric model and reinforces the importance of director elections.  Second, a reorganization of the board is in order to include more full-time directors, rather than directors whose part-time role requires them to be guided by stock price performance.  The current model, which is made up of mostly part-time directors who merely monitor, but not manage, the firm, is simply an experiment of organizational design that should be reconsidered.  Third, the purported short-termism associated with activist shareholders is a symptom, not a cause, of most directors’ inability to closely monitor their firm’s activities.  As such, restructuring may be necessary to ensure that directors take a “deeper dive” into the firm’s operations, which would help Delaware’s board-centric model continue to thrive.

In questions following the talk, some expressed concern with Professor Gordon’s suggestion to overhaul the current board model.  One question posed the problem of how to avoid having more engaged, full-time directors become essentially members of management and therefore less able to perform a monitoring function.  As Justice Randy J. Holland of the Supreme Court of Delaware has explained, “For the last twenty-five years, the Delaware courts have emphasized the importance of independent directors in safeguarding the interests of shareholders by preserving the integrity of the corporate governance process.”  Another questioner noted the irony that in its judicial opinions in the 1980s and 1990s, the Delaware courts emphasized both the importance of independent/outside directors, who are constrained to rely on stock market prices as a measure of corporate success, while at the same time (in cases like Smith v. VanGorkom) calling into question undue reliance on market prices as a measure of firm value. After a brief discussion, Professor Gordon concluded, “We should not regard governance forms as frozen, but in constant need in reorganization” as time demands.  According to Professor Gordon, Delaware courts should embrace the current trend of shareholder activism because it reinforces the Delaware board-centric model of corporate governance.

Professor Gordon’s Pileggi Lecture will be discussed in great detail in his forthcoming article that will be published in Volume 41 of the Delaware Journal of Corporate Law.

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