Activist Investors: Blessing or Curse?
A recent increase in high-profile activism by noted hedge fund investors — think David Einhorn and Apple and Carl Icahn and Dell — has raised the eternal question of whether such shareowner activists are: a) just quick-buck artists who compromise the integrity of our capital markets because they lack the patience to see a long-term business strategy through or b) investor advocates who have the resources and temerity to shake up companies that may have grown complacent in their execution.
As with all questions of this nature, 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 timeframe, but such activists rarely go after corporate prey that has been executing consistently on a proven strategy for years. Activist targets tend to be 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 timeframe. If an investor feels that the full value of its investment is reached in three years, three months, or even three minutes, we do not begrudge them the right to sell. The problem we have with short-termism is when executives say that they will not invest in long-term “seed-planting” type projects — projects that are net present value positive — because they risk missing their quarterly earnings “number” by doing so. That is the problem.
In his recent article in the New York Times DealBook, Ira Millstein, co-chairman of the Millstein Center for Global Markets and Corporate Ownership at Columbia Law School, argues that corporate boards have the power to make the arguments of activists moot by simply dedicating themselves to those to whom they owe their fiduciary duties — all shareowners, not one group favored over another.
According to Millstein, corporate boards have a reasonable ally in the battle against short-termism in the long-term shareowner, which are predominantly institutional investors. By fostering a dialogue and ongoing relationship with these investors, companies can more easily build their case and have a friendlier investor ear in the contest of ideas playing out in the media and corporate boardrooms when an activist comes to their door.
This dialogue has indeed increased in recent years with the advent of investor-friendly tools such as majority voting and yearly “say-on-pay” votes.
Millstein argues that by catering to activists, some companies and their boards are overlooking the importance of reasonable shareholder power, which is leading to a stasis in corporate governance rather than innovation and positive change.
The Millstein Center for Global Markets and Corporate Ownership will examine the corporate policy questions around the issues of short-termism in the coming years. This includes analyzing the entire investment chain that boards face, including pension funds, mutual funds, and hedge funds of hundreds of varieties of investors. The goal is to learn what motivates short-term investing, why the longer-term shareholders are so often silent, and why the investment chain is so short term — either through apathy or the wrong incentives.
Will research such as this ever change the short-term nature of the markets? Maybe, if it pushes corporations and investors into discussions that get them both to the realization that stepping off the quarterly guidance treadmill is in their mutual best interest.