Microsoft ( MSFT) and Carl Icahn this week effectively upturned the conventional notion that you must negotiate a transaction with another company's board.
The software company and the activist investor are essentially bypassing Yahoo!'s ( YHOO) board and saying, We're fed up and won't deal with you any longer. Instead, they're negotiating directly with Yahoo!'s shareholders by trying to take control of the board at next month's annual meeting. The implications for boards, activist investors and future takeover battles are significant. Dumb and lazy boards can no longer stand in the way of the will of shareholders. Challenging the Conventional Thinking Martin Lipton, famous lawyer and father of the poison pill, is a popular defender of omniscient and omnipotent corporate boards that, he believes, deserve to be unfettered from answering to shareholders. He has repeatedly spoken out on the perceived dangers of the diminishing power of the board in the face of rising shareholder demands over the last five years. He and others of his view have argued that because corporate boards are elected each year by the will of the shareholders, these boards should be left to guide the company in its long-term interests. (He omits the fact that 95% of the time they succeed in uncontested elections and the Securities and Exchange Commission has done little to allow for contested elections in the last 20 years.) Lipton argues that, if each short-term strategic decision must be brought back to the shareholders, almost like a referendum, before a company can act, two major problems emerge. First, the corporation slows down considerably. Second, Lipton says, shareholders will consistently opt for the short-term benefits at the expense of long-term interests.