Views on improving the integrity of global capital markets
12 March 2013

Activist Investors: Blessing or Curse?

Posted In: Short-termism

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.


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

Matt Orsagh, CFA, CIPM, is a senior director of capital markets policy at CFA Institute, where he focuses on corporate governance, ESG, and climate change analysis. He writes and speaks frequently on these topics on behalf of CFA Institute. His paper, Climate Change Analysis in the Investment Process was named “Best ESG Paper” by Savvy Investor in 2021.

2 thoughts on “Activist Investors: Blessing or Curse?”

  1. Tom says:

    The problem with this article or any article trying to characterise activist investors as either ‘good’ or ‘bad’, is that you cannot make a blanket statement about either the Boards’ or investors’ general intentions or behaviour. It is specific to the relevant situation.

    My experience is that institutional investors are usually very loathe to be seen not supporting management. Indeed often investors, who in private are vociferously against a particular action of management, are unwilling to take this stand in public. I would go further and advocate that the direction of votes cast by institutional investors should be made public – particularly with pension and other retail funds – so that the investment manager has to answer to its investors how it has used a critical element of its shareholding, its right to vote.

    Further this line of argument this misses a fundamental argument, companies should be answerable to their shareholders. If shareholders vote in favour of a given action, then that is their perogative, irrespective of whether it is ‘short term’ in the view of management or not. Why should democracy be a good thing with the exception of companies?

  2. Thank you for your comment. I agree that activists investors can be either beneficial or detrimental to the fortunes of other shareholders, and that their involvement should be judged on a case-by-case basis.

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