July 28, 2005
A Lawyer's Many Roles
By LANDON THOMAS Jr.

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When Morgan Stanley directors received a letter from a group of retired executives who argued for the ouster of Philip J. Purcell, their first call for help went to the superlawyer Martin Lipton.

Already on the payroll as an adviser to the board on governance, Mr. Lipton quickly donned a number of other legal hats - advising the board, Mr. Purcell and the company itself on tactics, legalities and, most controversially, severance pay to departing executives.

It was, on the surface, a logical choice. Mr. Lipton, a founding partner of Wachtell, Lipton, Rosen & Katz, has achieved renown for his aggressive defense of companies pursued by hostile suitors.

In recent years, though, as boards and chief executives have become the target of emboldened regulators and shareholders, Mr. Lipton has deployed the same brass-knuckle tactics honed to perfection during the 1980's takeover wars to become a corner man for on-the-ropes directors and chief executives.

Many prominent Wall Street lawyers earn big fees for their advice in the heated atmosphere of merger battles and shareholder revolts. But few are in as much demand as Mr. Lipton.

It is the 74-year-old Mr. Lipton's unchallenged ability to fulfill so many roles for his client - mergers and acquisitions lawyer, counselor to chief executives, governance expert and compensation consultant - that has made him indispensable, especially during takeover fights. But this versatility can lead to a blurring of the lines in more complicated assignments.

At Morgan Stanley, for example, Mr. Lipton advised the board to have only occasional and structured contact with the dissident executives. He sat in on conference calls directors had with top executives at Morgan Stanley as they gauged support for Mr. Purcell. He even engaged in some headhunting of his own during the search for a successor to Mr. Purcell.

Once Mr. Purcell stepped down, a compensation specialist at Wachtell, Adam D. Chinn, in tandem with the board's compensation committee, drafted the controversial severance packages that awarded Mr. Purcell $113 million and his top deputy, Stephen S. Crawford, $32 million. In fact, Mr. Chinn's reputation for cobbling together generous severance awards for departing chief executives is such that the contracts are known as Chinn-ups.

As a result of these payouts, the board has been sued by shareholders and received irate letters from institutional investors who have decried the packages as a violation of the very governance practices Mr. Lipton was hired to improve.

"Clearly, Lipton wore too many hats," said Richard C. Ferlauto, the director of pension and benefit policy at the American Federation of State, County and Municipal Employees, which, through its member plans, owns 4 percent of the company. "He was advising Purcell and Crawford on strategy and then he advised the board on their exit packages. The Marty Lipton one-stop shopping approach does not work for shareholders." Legal ethics specialists say that Mr. Lipton's many roles representing the board, management and finally the company on the payouts were not in conflict as long as he upheld his responsibility to offer each the best advice that he could, which by all accounts seems to be the case.

But the outside perception, which for a lawyer of Mr. Lipton's stature can be as important as the reality, has been murkier. In the battle over Mr. Purcell's leadership, many Morgan Stanley executives were never quite clear about Mr. Lipton's role. Several said they frequently asked each other: Was he advising the board? Mr. Purcell? Or both?

The answer, people close to the board said, is that Mr. Lipton was, first and foremost, an adviser to the board. When it became clear that Mr. Purcell would depart, he hired his own lawyer to negotiate.

While the very best governance practices would argue for the hiring of separate counsel on the compensation packages, time and confidentiality considerations led the board to stick with Wachtell. Still, while the right to give the advice may have been legally beyond reproach, albeit with some lines blurring, the quality of the advice remains open to debate. And that, in the end, is what Mr. Lipton's clients pay for.

When Mr. Lipton was advising the board on governance, for example, succession planning had stalled. Mr. Purcell's abrupt management shakeup then forced the departure of top Morgan Stanley executives and a divisive leadership battle ensued. Mr. Lipton's defenders counter that his advice, in the end, served the best interests of the firm and shareholders.

"If I wanted to prove white was black, I'd hire Marty," said Robert A. G. Monks, a governance expert who crossed swords with Mr. Lipton in 1991 when he mounted a shareholder battle against Sears, then run by a current Morgan Stanley director, Edward A. Brennan. "I simply pay tribute to his ability to attract high-profile clients and in many situations to defy the laws of gravity in terms of multiple representation."

Mr. Lipton declined two separate requests for an interview. Miles L. Marsh, the lead director for the Morgan Stanley board, declined to comment on Mr. Lipton's role.

For Mr. Lipton, his work with Morgan Stanley echoes, perhaps uncomfortably, the tangled strands of advice he gave the New York Stock Exchange and its chairman, Richard A. Grasso, over the $139 million payout that eventually forced him to resign.

As at Morgan Stanley, Mr. Lipton's original mandate was to advise the board on governance, specifically on how the exchange should disclose the compensation of its top executives.

But as the controversy over Mr. Grasso's pay grew, Mr. Lipton took on the role of Mr. Grasso's private adviser, counseling him on many occasions that he was within his rights to take not only the original $139 million but an additional $48 million that he would subsequently forgo.

Mr. Lipton's name resurfaced last week during the deposition of Henry M. Paulson Jr., the chief executive of Goldman Sachs, who was being questioned by Mr. Grasso's lawyers over his role as a stock exchange director regarding Mr. Grasso's pay.

In testimony, Mr. Paulson, who was opposed to Mr. Grasso taking the money, said he told Mr. Grasso in March 2003 to have a lawyer examine his proposal to withdraw his accumulated pay, a person who was present at the deposition said. Mr. Paulson said that Mr. Grasso responded: How about Marty Lipton?

A few days later, Mr. Grasso called Mr. Paulson and told him that Mr. Lipton had been shown the proposed payout and that it had looked proper to him. Mr. Paulson and Mr. Grasso declined to comment.

That Mr. Grasso turned to Mr. Lipton at such an early stage - it was not until August that the board approved his proposal - should not be surprising. In addition to Mr. Lipton's reputation as an adviser, Mr. Grasso knew him as a trustee at New York University, where Mr. Lipton has long been the chairman.

It is this combination of lore and a bulging Rolodex that gives Mr. Lipton a leg up in the booming business of corporate consulting.

"Marty is unique," said H. Rodgin Cohen, the chairman of Sullivan & Cromwell and a frequent competitor. "In addition to being a great lawyer, he has an unparalleled role as a counselor - people go to him for his judgment and experience."

This 30-year history of giving advice lies at the core of his practice. In addition to advising Mr. Brennan, Mr. Lipton counseled Michael A. Miles, a former chief executive of Philip Morris and the chairman of Morgan Stanley's governance committee.

In fact, it was while Mr. Miles and Mr. Marsh, the lead director of the Morgan Stanley board, were top executives at Kraft in 1988 that Mr. Lipton achieved his greatest coup - receiving $20 million for two weeks' work in advising Kraft on its merger with Philip Morris.

Mr. Lipton's imprint on the corporate governance debate spans decades. His invention of the poison pill in the late 1970's, a measure designed to ward off hostile takeovers, was long regarded as the first pro-governance innovation, although years later it came to be seen as a protective tool for entrenched boards and management. One of the first governance reforms put forward last year by the Morgan Stanley board was the abolition of its poison pill.

While shareholder gadflies have criticized Mr. Lipton for being an apologist for corporate management, that assertion misses the point - that Mr. Lipton's fiduciary responsibility is to best represent and advocate in support of his client's interests.

But this laser-like focus on his client's interests can backfire to the detriment of his client, Mr. Lipton's critics say. With both Mr. Grasso and the Morgan Stanley severance packages, Mr. Lipton took the view that the payouts were deserved. That was perhaps a result of the years Mr. Lipton has spent in boardrooms working with highly paid executives.

What his advice may have missed was the extent to which the public has become sensitive to lucrative golden parachutes, especially in a time of corporate scandal and increased focus on linking pay to performance.

According to people familiar with the discussions surrounding the Morgan Stanley packages, the compensation committee, with Mr. Chinn's assistance, came up with numbers they felt Mr. Purcell and Mr. Crawford were owed. They based this on the two men's service to the firm, industry benchmarks and, in the case of Mr. Crawford, what would keep a crucial employee in place in the wake of Mr. Purcell's departure. Mr. Crawford was guaranteed the $32 million even if he decided to leave the firm.

"It should have been plain to the corporate governance adviser that these contracts were not going to be seen as best practice because of the guaranteed payments," said Paul Hodgson, a senior compensation analyst at the Corporate Library. "They are consistent with industry practice but they are not consistent with best practice."