(Bloomberg Opinion) -- In an ordinary April, Corporate America would now be gearing up for proxy season, preparing for annual meetings and arguing with activist investors over strategy. Instead, companies find themselves on the front lines of the coronavirus crisis, facing difficult choices about how best to protect workers, investors, and their businesses from the virus and its fallout.
Among the issues normally debated at spring shareholder meetings is the use of anti-takeover measures that critics say make it harder for activist investors to hold management accountable, or to push management to shift strategic direction. Supporters of these measures say that they are necessary because they allow firms to make long-term investments. Those debates have been hard-fought for years, and there are ordinarily strong arguments for and against limiting these defensive measures. But whatever one’s view of them, everyone should recognize that this is no ordinary moment. Management needs flexibility now to take the extraordinary actions required by this crisis.
Anti-takeover measures, including the “poison pill” shareholder-rights plan, protect management from outside pressure by limiting the stakes that any given investor can acquire. This insulates the company, to some degree, from the “market for corporate control” and from election contests brought by activists. America’s largest investors have typically been skeptical of the use of defenses because of a concern that they will shield management from accountability to investors. Indeed, the two dominant firms advising shareholders how to vote in corporate elections have long recommended voting against all members of a board that adopts takeover defenses without the approval of shareholders before or shortly after the fact.
Investor skepticism about takeover defenses is understandable. Although the empirical evidence is far from conclusive, the unilateral adoption of such measures poses the risk of entrenching underperforming insiders, even as it carries the potential of encouraging firms to make long-term investments. The debate won’t be resolved anytime soon — but it needs to be left for another time. Management’s immediate focus must be battling the virus, not engaging in proxy fights.
Corporate managers will soon have to make enormously consequential decisions for millions of Americans in the face of unprecedented uncertainty. Should companies conserve cash by laying off workers, especially in industries where a return to full productivity seems especially far off? Or should they follow the examples of Starbucks Corp. and Paypal Holdings Inc., which have assured employees of future paychecks despite the devastating effects of the crisis on their business? Some manufacturers may even need to pivot to producing personal protective equipment at great short-term cost to the companies and their investors. Crucial decisions like these must be made quickly — and managers should be free to make them without worrying that they will soon find an activist on their doorstep demanding answers.
Even some activist investors seem to agree. Many have voluntarily walked away from planned attacks, or pursued constructive and friendly settlements with target-company boards. But not all activists have said they will take this approach. That’s why some boards have recently announced the adoption of takeover defenses in the midst of the crisis even though, under institutional investors’ current policies, that could put directors’ jobs at risk. Just Monday, for instance — after calling off a planned merger on account of the pandemic — aerospace suppliers Hexcel Corp. and Woodward Inc. each adopted shareholder-rights plans.
Giving companies the space they need to manage this crisis will require leadership from institutional investors. In particular, proxy-advisory firms such as Institutional Shareholder Services Inc. and Glass Lewis that have spearheaded investor skepticism over takeover defenses should suspend their anti-poison pill policies for the duration of the crisis and make clear that they will give companies the case-by-case consideration that this moment requires. Those firms have come under considerable fire from business advocates claiming that they fail to give situation-specific advice, even drawing some surprising threats of federal regulation. Adjusting their policies in light of the current crisis would provide a compelling counterargument to those who say those firms are ideologically driven and want to impose one-size-fits-all solutions on corporate America.
In reviewing the use of shareholder rights plans adopted in the crisis, investors and proxy advisory firms must be attentive to the extraordinary pressures that firms are facing. At the same time, boards shouldn’t take advantage of this crisis to erect entrenched defensive measures like staggered boards that shareholders have clearly rejected. This is a time to put the ordinary debate aside, and to provide boards with space to respond to the multiple challenges of protecting firms, employees, consumers, and the country.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
Edward B. Rock is a professor at New York University's School of Law and co-director of NYU’s Institute for Corporate Governance and Finance.
Haley Sylvester is a resident fellow at New York University's Institute on Corporate Governance and Finance.
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