THERE’S a lot of discussion at the moment in international business media about the value of active investors and whether shareholder activism, as personified by some high profile hedge fund owners, is a good or a bad thing. If nothing else, there has certainly been disquiet about some of the tactics employed.
Carl Icahn [pictured], the hedge fund crusader has a particular way of dealing with complacent, inefficient executive teams by openly criticising his victims. John Donahoe, eBay’s CEO, for example, was accused of being ‘completely asleep or even worse, either naïve or wilfully blind’.
Icahn’s approach has had high-profile successes, and earned him a fearsome reputation, but it is not the only game in town. Others, such as Cevian Capital, also have very impressive turnaround records working with companies such as, G4S and ThyssenKrupp, but they choose to conduct their work behind closed doors rather than performing public eviscerations.
Investor activism, not surprisingly, ramped up in the wake of the banking crisis. Concerns over mismanagement and governance sparked the so-called ‘shareholder spring’ of 2012 when big institutional insurers and pension fund managers refused to back pay awards and bonuses of executives at several companies after accusing them of anaemic performances and poor returns. Hedge funds have torn down the corporate veil, and have been able to prove that insiders don’t necessarily know best. In doing so, they have also demonstrated that shareholders can and do hold opinions that they are entitled to voice.
Some, however, may be more adroit at making their point than others and there are concerns that the changes activists drive may not always be in the company’s best interests, especially if the agitation is designed primarily to generate a short-term return. Calls to break up a company or return cash to shareholders are good examples of where activism is seeking to provoke an event that leads to a spike in the share price, after which the agitator/s can bail out of the company, selling their shares for healthy profits.
So do activist investors really know best when they insist that Berkshire Hathaway return the cash on its balance sheet to shareholders? Are other market participants going to do a better job in creating value than Warren Buffet, the world’s most successful investor? And should Apple, the world’s most successful corporation, also return its cash surplus to the market because of a few loud voices at hedge funds?
This kind of agitation can be distracting and disruptive to a company and boards need to have the strength to counter the activists’ arguments if they believe that their own strategy is more in their companies’ long-term interests. Good directors should be in a position to understand their industry better than outside investors and should generally trust their own judgments. Otherwise, why are they on the board in the first place?
That said, activists can play a useful role in corporate governance, particularly behind the scenes, if they constructively highlight alternative strategic options which a poorly performing board is simply refusing to contemplate.
Personally, I think that it’s impossible to state whether activism is intrinsically good or bad – but it is certainly a trend that is gathering momentum, particularly in the US. Activists are no longer seen necessarily as “greenmailers” and indeed many activists’ objectives are now being accepted by mainstream investors. However, in most cases, I believe active ownership and stewardship is more constructive than event-driven short-term activism.
It’s a debate that will only get more intense with British companies now being eyed up as potential new targets by American hedge funds. Boards need to get on the front foot and play a pivotal role in seeking out opportunities for sharing with shareholders why decisions have been made and why they should be the ones entrusted with the long-term future of the company. Before they find themselves staving off unwanted attention.
Roger Barker is director of corporate governance and professional standards at the Institute of Directors
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