Questioning an Adviser’s Advice

“Come on, you can say it. I’m a professional entrencher of management.”

So joked Martin Lipton, the co-founder of corporate America’s favorite law firm, Wachtell, Lipton, Rosen & Katz. I had called him to ask about his latest memo to his clients — but he knew the subtext before I got there.

And really, his joke wasn’t much of a joke.

Since making his name during the merger wars of the 1980s, Mr. Lipton has been the ultimate consigliere to Wall Street and Fortune 500 companies. If you’re a chief executive under siege, he is the lawyer to call.

At age 76, Mr. Lipton still has a client roster his rivals would die for. Name a corporate showdown, and odds are he was there, lurking in the shadows. He advised Home Depot in its battle against shareholders, defended Disney against Comcast’s hostile takeover bid and counseled Morgan Stanley during a mutiny inside the firm. More recently, he represented the Bancroft family in its sale of Dow Jones to the News Corporation.

Mostly, Mr. Lipton has given chief executives and their boards the advice they want to hear — that even in this age of shareholder rights it’s O.K. to stiff-arm the people who actually own the company. He seems to hold shareholder activists — one-time renegades who are now seen as heroes by much of Wall Street — with something akin to contempt.

Last summer, for instance, after Pfizer invited its largest shareholders to a meeting to comment on the performance of its board, including executive pay, Mr. Lipton sent a memo to his clients calling the move “another example of corporate governance run amok.”

His latest memo, which he sent out right before Christmas, echoed many of his familiar themes — and went even further. So much further, in fact, that some on Wall Street, and even some of Mr. Lipton’s law partners, privately questioned his counsel. “Marty will be Marty,” said one of his partners. “But that note takes the cake.”

In the memo, a manifesto about the responsibilities of board members, Mr. Lipton wrote that “limits on executive compensation, splitting the role of chairman and C.E.O. and efforts to impose shareholder referenda on matters that have been the province of boards should be resisted.”

What is more, he suggested that boards should resist “the trend of having the audit committee or a special committee of independent directors investigate almost all whistle-blowing complaints, recognizing how disruptive such investigations are, and being judicious in deciding what really warrants investigation.”

It is as if Mr. Lipton wants to return to an era when chief executives could do whatever they wanted, when boards were mainly rubber stamps and shareholders had only one way to express their discontent: sell their shares. But he can’t turn back the clock, which is why Mr. Lipton’s advice isn’t just wrongheaded. It’s dangerous.

If Mr. Lipton, who is actually a very affable guy despite his scorched-earth approach to corporate governance, were just a run-of-the-mill lawyer, what he says wouldn’t matter much. But he has the ear of the most powerful corporations in the nation. His first impulse — to push back on shareholders — often becomes their first impulse. He makes it acceptable to run a rear guard action against investors. Indeed, some companies consider his blessing on such actions as the equivalent of a Good Housekeeping Seal of Approval.

For Mr. Lipton, executive pay — a hot-button issue in the current political and proxy season — is not out of control. In his memo, he suggests that compensation for boards “should be adjusted to reflect the increased time commitments and responsibilities borne by directors.” He is an unapologetic apologist for the days of the Imperial C.E.O.

The problem for Mr. Lipton is that nowadays shareholders often have more power than he does. Last winter, his advice to Home Depot about how to deal with angry investors backfired.

After Relational Investors, an activist fund, hinted that it might wage a proxy contest to oust Robert L. Nardelli, the chief executive, the board unanimously backed the C.E.O. Two weeks later, the board reversed course and fired Mr. Nardelli, a personal client of Mr. Lipton’s. Of course, Mr. Nardelli and Home Depot said his resignation was by mutual agreement.

The list of advice gone wrong goes on and on: Michael D. Eisner got booted from Disney, Phil Purcell got kicked out of Morgan Stanley and Richard A. Grasso lost his job at the New York Stock Exchange. In each instance, Mr. Lipton represented the board and pushed for the status quo — until he couldn’t anymore, and someone got the ax.

The joke on Wall Street is that companies that hire Mr. Lipton eventually outperform their peers in the stock market because their entrenched C.E.O.’s end up getting fired. Call it the Marty Index.

(By the way, Mr. Lipton has counted The New York Times Company as a client. Last year he endorsed the company’s two-tier stock and corporate governance program, which had come under attack from some shareholders.)

Mr. Lipton’s instincts are not all wrong. In this Sarbanes-Oxley world, corporate governance headaches can paralyze boards. Growing numbers of special committees can Balkanize directors and prevent them from making tough decisions.

It’s no surprise that Mr. Lipton’s biggest detractors are his rivals at banks and other law firms, the beneficiaries of the increase in special committees and internal investigations that Mr. Lipton rails against. And many competitors envy his fat fees. Rather than charge by the hour, Mr. Lipton sets his pay for projects upfront. No negotiation. (Good work if you can get it.)

Of course, virtually nobody in the business, rivals included, is willing to say a bad word about Mr. Lipton publicly, even on the intellectual merits of his views. His power is too large and the Wall Street cabal too tight.

When I called Joseph H. Flom, the Flom in Skadden, Arps, Slate, Meagher & Flom, who has worked on the opposing side to Mr. Lipton for nearly a generation, and has a more measured view of shareholder activism, the first thing he told me was, “I just got back from lunch with Marty.”

Mr. Flom, 84, says Mr. Lipton is somewhat misunderstood. “The problem is that you’re judged in this business based on stuff that is public and by the way it appears at the end. I never second-guess my competitors.”

And, he said, “the whole attitude of corporate governance functions like a pendulum.”

It may be a long time before it swings back in Marty’s favor.