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The Opinion Pages
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Op-Ed Contributors
Powerful, Disruptive Shareholders
By
JOSEPH PERELLA and PETER WEINBERG APRIL 8, 2014
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.
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