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Call for orderly forum to address long term investor interests in activist proposals

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Source: The New York Times, April 8, 2014 editorial

The Opinion Pages | Op-Ed Contributors

Powerful, Disruptive Shareholders


THE season is starting for annual meetings, when shareholders have the chance to attend gatherings of companies in which they own stock to tell chief executives what’s on their mind.

While years ago there were few investors publicly voicing their criticisms, a new kind of shareholder has emerged — the activist investor. Often these investors take to the media and go online to excoriate companies. Their disruptive actions are rattling corporate boardrooms and businesses, disproportionate to their size and number.

These activists typically hold small percentage ownership positions in companies and publicly propose significant changes: They can suggest that the chief executive be replaced (Yahoo), that a subsidiary be divested (PayPal from eBay) or that an entire strategy is flawed (Herbalife). The idea is that they buy the stock cheap, propose changes and sell when the value is higher.

In a number of cases, shareholder activism has had a very positive effect on the market and on the management of individual companies that are underperforming. For example, Daniel S. Loeb bought a position in Yahoo in 2011, forced a C.E.O. change, and the stock has since risen by 149 percent. Carl C. Icahn forced a split-up of Motorola in 2011, and shareholders fared exceedingly well.

But many don’t end this successfully. William Ackman meddled into the affairs of J. C. Penney in 2013 and almost destroyed the company. He then sold his position and left the company to pick up the pieces. Mr. Icahn, in another investment, asked Apple to return more cash to shareholders. What can Mr. Icahn possibly know about the list of confidential projects on which Apple can spend cash? Certainly less than Apple management.

The truth is that the fringe minority dominates the debate. These vocal factions often wage activist campaigns that strike fear into the hearts and minds of executives across the country, while purporting to act in the interest of creating long-term value. Furthermore, activists typically not only tolerate a fight — they relish it. While that may provide amusement to them, it can leave a company distracted, vulnerable to a takeover and subject to losing its people to more stable employers. These activists take a position, roll the dice, and if it doesn’t pan out, they move on to the next target. Chief executives often have no choice but to react to short-termism, even at the expense of long-term value creation — which is their job.

The dialogue between shareholders and companies needs to change. It’s not something that can be accomplished by regulation or legislation. We would never suggest that shareholders lose their right to complain; they are owners and have every right to voice disapproval of their company. But the big shareholders, the institutional shareholders who invest for pension funds and the like, need to stop being silent and speak out. Sometimes they are working behind the scenes, encouraging the activists to shake up management. They need to be open about what they think, so ideas that are floated can be debated by the full range of shareholders, not just dominated by the vocal minority. If the large institutions are quietly feeding ideas to the activists, why hide their intentions? We are starting to see some changes; BlackRock, the world’s largest asset manager, recently sent a letter to the biggest companies in the United States criticizing investors who think about short-term instead of long-term goals. That’s a start, and we urge others to follow.

The activist-investor debate should not be a one-sided mudslinging assault waged by a few vocal dissenters who drown out companies and the majority of other investors. We need a constructive public forum. Perhaps equity research analysts could provide that forum. They host meetings for management and investors all the time, so why not use this forum to host the debate? The media would certainly cover the discussion. While companies cannot be forced to participate in such a debate, there would be enormous pressure for them to take up valuable ideas for changing companies and to reject the destructive ones. Shareholders own companies, management teams serve shareholders, and boards of directors serve as fiduciaries for those shareholders.

We get that. What we don’t get is why a small group of bullies should be able to command such undivided attention and instill such fear in corporate boardrooms. The fear is currently so intense that some executives at a recent conference admitted that they are afraid to speak out about the problem because they don’t want to be targeted themselves.

It’s reminiscent of Joe McCarthy in the 1950s — in the same way he hid behind patriotism to inflame the communist scare, activists purport to seek long-term value when all they really want is to make a quick buck. It’s time for a more civil, open debate conducted with decency. It will help all shareholders.

Joseph Perella and Peter Weinberg are founding partners of Perella Weinberg Partners, a global financial-services firm.

A version of this op-ed appears in print on April 9, 2014, on page A23 of the New York edition with the headline: Powerful, Disruptive Shareholders.

© 2014 The New York Times Company


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