Tuesday, April 28, 2015
Last week, the Deal Professor, Steven Davidoff Solomon, wrote an article titled, The Boardroom Strikes Back. In it, he recalls that shareholder activists won a number of surprising victories last year, and more were predicted for this year. That prediction made sense, as activists were able to elect directors 73% of the time in 2014. This year, though, despite some activist victories, boards are standing their grounds with more success.
I have no problem with shareholders seeking to impose their will on the board of the companies in which they hold stock. I don't see activist shareholder as an inherently bad thing. I do, however, think it's bad when boards succumb to the whims of activist shareholders just to make the problem go away. Boards are well served to review serious requests of all shareholders, but the board should be deciding how best to direct the company. It's why we call them directors.
As the Deal Professor notes, some heavy hitters are questioning the uptick in shareholder activism:
Some of the big institutional investors are starting to question the shareholder activism boom. Laurence D. Fink, chief executive of BlackRock, the world’s biggest asset manager, with $4 trillion, recently issued a well-publicized letter that criticized some of the strategies pushed by hedge funds, like share buybacks and dividends, as a “short-termist phenomenon.” T. Rowe Price, which has $750 billion under management, has also criticized shareholder activists’ strategies. They carry a big voice.
I am on record being critical of boards letting short-term planning be their primary filter, because I think it can hurt long-term value in many instances. I don't, however, think buybacks or dividends are inherently incorrect, either. Whether the idea comes from an activist shareholder or the board doesn't really matter to me. The board just needs to assess the idea and decide how to proceed.
[Please click below to read more.]
Bernie Sharfman makes this point in his forthcoming article in the Columbia Business Law Review titled, Activist Hedge Funds in a World of Board Independence: Creators or Destroyers of Long-Term Value? In it, he argues that hedge-fund activism can be a good thing for long-term value, but not necessarily by acting as the activists wish. In the article he argues:
an activist hedge fund creates long-term value by both signaling to the Board that its executive management team may be making inefficient decisions and providing recommendations on how the company should proceed. These recommendations require the Board to review and question the direction executive management is taking the company and then choosing which path the company should take, the one recommended by executive management, the one recommended by the activist hedge fund or a combination of both. Critical to this argument is ability of the Board to act as an independent arbitrator deciding whose recommendations should be followed.
This last point is critical -- the board is the decision maker, and the board should use the tools before it to make decisions in the best interests of the entity. This is consistent with my views on director primacy, which I have noted here and here, among other places (Prof. Bainbridge shares his thoughts, and links to good resources, on the subject here).
Director primacy need not be undercut by shareholder activism. If boards are doing their jobs, and perhaps the early returns from proxy season suggest that many boards are, then shareholder activists can force important and valuable conversations that can add to long-term entity value.
I am not yet convinced that "an activist hedge fund creates long-term value," in all cases, but I am willing to concede that activist hedge fund can create long-term value in some cases. Even if on average activist hedge funds increase long-term value, there still exists the risk that some boards will acquiesce to public pressure, even where a better course of action is before them, which may have happened in 2014. Nonetheless, if boards do their jobs, and review shareholder proposals with focus and independence as Sharfman suggests, shareholder activists could help improve long-term value, even when following the activists' proposals would not.