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EXCLUSIVE: Martin Lipton Says Latest Steps by Big Institutions Align Well with “The New Paradigm”

John Jannarone

Martin Lipton, Founding Partner of Wachtell, Lipton, Rosen & Katz

By John Jannarone

The largest institutional asset managers including Vanguard, State Street, and BlackRock have taken recent steps that align well with the tenets of The New Paradigm, according Martin Lipton, Founding Partner of Wachtell, Lipton, Rosen & Katz.

“All three have beefed up their proxy departments and personnel so they make an appropriate decision when there’s a contested proxy vote,” Mr. Lipton said in an interview with CorpGov. “I think all three of them are paying attention to sustainable long-term investment strategy and ESG issues.”

Mr. Lipton’s comments follow the publication of a lengthy paper he wrote entitled “It’s Time To Adopt The New Paradigm, which focuses on how corporations can run themselves better for the sake of all their stakeholders. The New Paradigm, as Mr. Lipton outlined in this recent interview with CorpGov, envisages cooperation and active communication between senior management, boards, and all stakeholders – not just shareholders – to achieve long-term value. Ideally, the various parties would work together in a supportive rather than combative manner.

Vanguard recently announced it would grant proxy voting responsibilities to outside managers who oversee nearly $500 billion in assets. Previously, Vanguard’s Investment Stewardship team made proxy voting decisions on behalf of all Vanguard funds, but the new move is intended to put such responsibility in the hands of the managers who make investment decisions.

Mr. Lipton applauded Vanguard’s move as a way to put an onus on external fund managers to vote with the right principles in mind. “Vanguard isn’t forgetting about how they vote,” Mr. Lipton said. “They will make sure the external managers follow the same sort of policy and strategy as the committee.”

He added that Vanguard has a strong track record when it comes to governance. Late Vanguard Founder Jack Bogle was “the father of index funds and was concerned that shareholders have access and influence on governance,” he said.

Even more dedicated to governance efforts was former Vanguard CEO Bill McNabb, Mr. Lipton said. “He was very active on governance, including a speech he gave at a Lazard event.”

Mr. McNabb “Defined the dimensions of stewardship and was a real leader,” Mr. Lipton said. “Bill was instrumental in the stewardship group and took a front seat.”

Mr. Lipton pointed out that Vanguard, BlackRock, and State Street often own a combined 15% of the shares of listed companies. The large stakes held by the institutions, along with their long-term investment horizons, make them a centerpiece of good governance under The New Paradigm.

State Street, which has a major focus on ESG investing, has also taken recent steps that Mr. Lipton believes are a move in the right direction. The firm recently constructed its so-called R-Factor, which supports sustainability-focused investing by assigning a standardized ESG score for listed companies.

One element of the R-Factor is a focus on the materiality of ESG considerations. “Asset owners and their investment managers seek solutions to the challenges posed by a lack of consistent, comparable, and material information,” State Street wrote in a note. “Investors increasingly view material ESG factors as being critical drivers of a company’s ability to generate sustainable long-term performance. In turn, ESG data has increasing importance for investors’ ability to allocate capital most effectively.”

Blackrock has also done its part to further corporate governance, frequently issuing letters, thought leadership, and setting out a clear policy for its investment stewardship team. “Blackrock has expanded its governance department substantially,” Mr. Lipton said.

 

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