Tuesday, June 16, 2009
The proposed shareholder access rules and the debate surrounding the role of shareholder activists got me thinking. Some opposed to increased shareholder power paint pictures of the end of capitalism that will come when shareholders force boards to adopt unwise business positions motivated by political and other interests. Of course, this is not the first time we’ve had this debate. Long before cheap credit fueled the private equity bubble of the past few years and before Mike Milken and the junk bonds made the buyout craze of the 1980’s possible, there were a set a characters who started the modern takeover movement and were the original shareholder activists.
The first corporate raiders of the post-World War II era were Thomas Mellon Evans, Robert Young and Louis Wolfson among others. They were called pirates and financial hooligans for their attacks on the comfortable life of corporate boards that typified the 1950s. The takeover tactics that these raiders developed would later become commonplace. They used cumulative voting to get minority board representation, they successfully challenged staggered boards, they used leverage to increase their influence, and they sought to make the market more efficient by buying up underperformers and turning them around.
I just finished reading Diana Henriques’ White Sharks of Wall Street. White Sharks is a portrait of these raiders and Thomas Evans in particular. Evans, Wolfson, and Young all looked to acquire underperforming “businesses run by boards devoid of any meaningful ownership” and underperforming family-owned businesses where the genetic lottery resulted in an uninterested group of founders’ children trying to manage the business. They bought these businesses and shook them up – sometimes by turning them around and other times by breaking them up and selling them off.
Evans and the other “activists” of the 1950s were the face of the nascent takeover market. They were also a threat to the social and political fabric of the day. By forcing boards to face facts, they undid all the stability of the business in the 1950s. Notwithstanding this threat from activist shareholders, boards and the system stood up reasonably well, adapted and thrived for many years. One wonders what parallels we can learn from that experience that might inform how we think about shareholder access rules.