Published On: March 23, 2017Categories: Securities and Investor

Is the World Economic Forum’s “New Paradigm” Good for Corporate Governance and Investor Protection?

In a document prepared by Marty Lipton, The International Business Council of the World Economic Forum issued a paper entitled “The New Paradigm: A Roadmap for an Implicit Corporate Governance Partnership Between Corporations and Investors to Achieve Sustainable Long-Term Investment and Growth.” The paper ostensibly lays out a compact that the WEF wants businesses, CEOs, and investors alike to sign on to, and which if implemented by each firm will result in the best long-term value for shareholders.

Mr. Lipton is a management-side advocate, having invented the famous “poison pill” takeover defense strategy which is starkly pro-management (although, there are many who debate me on it). The paper purports to be good for investors by asking companies and activist investors to work together to focus on long term strategies instead of “Short Termism.”  In one respect, I am in agreement that an over-emphasis on short-termisim can be bad if Management adopts a short term view to the detriment of long-term growth and investment.

But why does management adopt a short term view? To protect their jobs from corporate raiders? Or is because they get stock options and bonuses if they hit their quarterly numbers? Much of investor activism of late has been a reaction to the misalignment in incentives for management–and their power under the law–to drive business decisions to their short-run benefit and to the detriment of investors. This and other things make me think the paper is particularly one-sided in its attributions of the sources and causes of short-termism — and if widely adopted, will become the new gospel on which investor-hostile laws will be offered and passed.

See the paper here.