Practical analysis for investment professionals
19 May 2016

The Jury’s Still Split on the Value of Activist Investing

Activist investing continues to be a topic of great debate in the financial world. One of the main issues that drives the controversy is whether activist investors help or hinder the market.

Are they a force for good that keeps management and boards honest? Or are they simply quick buck artists intent on creating short-term value at the expense of building long-term sustainable companies?

With these questions in mind, we asked CFA Institute Financial NewsBrief readers the following: “Is activist investing helpful, harmful, or a short-term nuisance?” As you might expect, opinions were split almost right down the middle.

Is activist investing helpful, harmful, or a short-term nuisance?

Is activist investing helpful, harmful, or a short-term nuisance?

Nearly half (48%) of the 538 respondents felt that activist investors are good for the system and improve the quality of the firms they invest in. Just over half of those surveyed, however, offered a less sanguine view of activist investing, split between those who feel activist investors are harmful to the system and are often motivated by short-term profit at the expense of long-term investors (34%), and those who say activist investors are a short-term nuisance and have little long-term effect on a company’s performance (18%).

So what is the answer? Is activist investing a problem or not? As typical humans with short attention spans, we demand an easy answer!

Unfortunately, as with most questions of this sort, the answer is typically yes and no, depending on your perspective. By its very nature, shareowner activism does often seek to return cash to shareowners in some form in a relatively short time frame. But activists rarely pursue corporate prey that has been executing consistently on a proven strategy for years. Activists tend to target companies that have lost their way in one way or another.

There is also a definitional problem with short-termism. The markets work because someone is willing to buy or sell in the short term, often with an unknown time frame. If an investor feels that the full value of their investment is reached in three years, three months, or even three minutes, we do not begrudge them the right to sell.

Activism has increased in recent years because it is believed to be a profitable strategy. It will likely decline as a strategy when and if there is less low hanging fruit — when there are fewer poorly run companies or firms with poor strategies. If management and boards up their games, their companies will not look so attractive to activists.

Corporate boards also have reasonable allies in the battle against those activists motivated by short-term considerations: long-term investors. Long-term investors are typically institutional investors and generally do not have the option of selling the companies they own, so they can be receptive to a strong argument from an activist looking to drive value.

It is therefore incumbent upon management and boards to:

  1. Have a sound long-term strategy.
  2. Tie variable compensation to the execution of that long-term strategy.
  3. Foster a dialogue and ongoing relationships with long-term investors. By engaging with these investors consistently and effectively, companies earn their trust. Then, if an activist comes to their door, they have a more receptive investor ear in the contest of ideas that plays out in the media and corporate boardrooms.

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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.

About the Author(s)
Matt Orsagh, CFA, CIPM

Matt Orsagh, CFA, CIPM, was a director of capital markets policy at CFA Institute, where he focused on corporate governance issues. He was named one of the 2008 “Rising Stars of Corporate Governance” by the Millstein Center for Corporate Governance and Performance at the Yale School of Management.

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