Icahn and Blockbuster

     The success of Carl Icahn in electing himself and two others to the board of directors of Blockbuster Inc. is front page news.  Mr. Icahn has posted a rare victory over management incumbents in a contested proxy contest. (See Article)

     Astute observers have noted that Mr. Icahn’s success is due to a loose coalition of hedge funds, which took positions in Blockbuster stock and voted for his dissident slate.

     There is an irony here, an application of the old maxim: “Be careful what you wish for you may get it.” 

      In the 1990s academics sought to empower the shareholder voice in publicly traded firms to offset the power of incumbent managers.  Since individual, dispersed shareholders did not have the financial incentive to organize, academics turned to “institutional investors” – mutual funds and pension plans, among others – hoping that they would have large enough positions in the firm to justify an active monitoring and disciplining of managers.  The institutional investors were, however, largely passive.  They found that friendly relations with managers opening up channels of communications that facilitated success stock trading, often ahead of the general market.  SEC Regulation FD, forcing companies to talk to all investors at once, significantly altered but did not eliminate the benefits of these cozy relationships.

     Now hedge funds have appeared on the scene.  They are not into cozy relationships; they are into fast money.  If they can make fast money by changing corporate practice or structure, the funds will run over incumbent managers to do it.  Are these the “empowered shareholders” for whom we wished?  Do we want fast money restructuring corporate operations?  We would be more comfortable with the “empowered,” “long-term” shareholder, but it has not happened.