Standish Fleming makes the case.
Standish Fleming makes the case.
There was a very interesting post at Dealbook a couple of days ago, in which the estimable Steven Davidoff Solomon argues that:
Shareholder activism is in full roar as hedge funds prowl and companies retreat, but Nelson Peltz’s campaign to replace four directors at DuPont may just be where corporate America finally draws the line and tries to stem the activist tide. ...
DuPont is a well-performing company that should be receiving credit for its actions, not pressure from activists. ...
The easy route these days is for companies to settle when faced with an activist attack of this type. Yet DuPont has refused to compromise any further. Sotheby’s and Darden Restaurants had clear performance problems when they were confronted by the demands of activist investors, but DuPont does not. Another way to put it: Why should DuPont adhere to the wishes of its fifth-largest shareholder, including having that shareholder place a director on the board? ...
The underlying struggle is over who knows what is best for America: competent boards that perform well or hedge funds that are looking for the quick payoff.
That is indeed the basic question. It is one I recently addressed in my essay Preserving Director Primacy by Managing Shareholder Interventions (August 27, 2013), which is aailable at SSRN: http://ssrn.com/abstract=2298415:
Even though the primacy of the board of director is deeply embedded in state corporate law, shareholder activism nevertheless has become an increasingly important feature of corporate governance in the United States. The financial crisis of 2008 and the ascendancy of the Democratic Party in Washington created an environment in which activists were able to considerably advance their agenda via the political process. At the same time, changes in managerial compensation, shareholder concentration, and board composition, outlook, and ideology, have also empowered activist shareholders.
There are strong normative arguments for disempowering shareholders and, accordingly, for rolling back the gains shareholder activists have made. Whether that will prove possible in the long run or not, however, in the near term attention must be paid to the problem of managing shareholder interventions.
This problem arises because not all shareholder interventions are created equally. Some are legitimately designed to improve corporate efficiency and performance, especially by holding poorly performing boards of directors and top management teams to account. But others are motivated by an activist’s belief that he or she has better ideas about how to run the company than the incumbents, which may be true sometimes but often seems dubious. Worse yet, some interventions are intended to advance an activist’s agenda that is not shared by other investors.
This [essay] proposes managing shareholder interventions through changes to the federal proxy rules designed to make it more difficult for activists to effect operational changes, while encouraging shareholder efforts to hold directors and managers accountable.
Yvan Allaire and Francois Dauphin are back with another critique of Bebchuk et al.'s claims about the merits of hedge fund activism:
Bebchuk et al. have produced a new version of their paper The Long-Term Effects of Hedge Fund Activism (December 2014) to be published in the June 2015 issue of the Columbia Law Review. In this revised text, the authors struggle valiantly to cope with the challenging questions a number of critics have raised about their original paper. We, among many, have taken issues with their original paper. While the revised draft by Bebchuk et al has the merit of clarifying some aspects of their study, many issues remain unresolved and new ones creep in. In this paper, we provide examples of the latter while reiterating the fundamental questions that remain unanswered.
The challenge for both sides now is to win over shareholders. Typically, the biggest investors reserve judgment until late in the campaign, often after third-party proxy advisers weigh in. Those advisers have recently supported many activists seeking minority board representation, on the theory that shareholder voices in the boardroom are unlikely to hurt.
Robert Gentry, principal at San Francisco-based investment adviser Stewart & Patten Co., said his firm has held DuPont shares for decades and generally backs management. However, he said, “dissenting viewpoints on the board could actually be a healthy thing.”
Maybe, but it's not that simple. Short slate proxy contests such as the one Peltz has launched, if successful, result in a board comprised of a majority of prior incumbents and a minority representing the dissident shareholder. The effect thus resembles a board elected via cumulative voting. And that is not necessarily a good thing:
On the one hand, cumulative voting may bring a desirable diversity of viewpoints into the boardroom. On the other hand, board cohesiveness likely suffers. Whether cumulative voting is desirable for a given firm will therefore vary. Firms whose top management team requires advice from diverse sources might benefit from cumulative voting, although the high probability of adversarial relations between that team and minority shareholder interests suggests that board representation of the latter likely would prove unavailing in this regard. Firms requiring skeptical outsider viewpoints to prevent groupthink likewise might benefit from cumulative voting. Again, however, the likelihood that cumulative voting results in affectional conflict rather than cognitive conflict leaves one doubtful as to whether those benefits will be realized.
From today's WSJ comes a must read column by Dennis Berman in which he argues that:
The vast majority [of shareholder activist funds] are making similar demands of their targets, delivered with what now feels like a dull percussion: Raise the dividend, buy back shares, cut these costs, spin off that division, sell the company.
What’s the average length of an activist shareholding? Some 84% don’t last more than two years, according to FactSet. ...
Here’s a drastic question for a field beset by conformity. Why can’t activists find targets where the misallocation is going the other way? In other words, identify companies that are playing it too safe, perhaps pushing too much into dividends or buybacks. Or missing a great opportunity in a new market. ...
Think about how jarring it would be if Carl Icahn wrote a blistering letter to a management, demanding that it halt a buyback program and plow money into a promising new product. Or if another activist took out full-page ads insisting a company hire 200 more salespeople.
It just doesn’t happen. Consider the database kept by FactSet, which has tracked 3,774 activist campaigns since 2005, and has placed each in one of five categories. There is no such category for “advocating more long-term investment,” says FactSet vice president John Laide. “It’s an extremely rare demand, so we don’t code for it.”
And that's the problem.
So I'm perusing Do Corporations Have Religious Beliefs? (90 Ind. L.J. 47) by Jason Iuliano and on the first two pages, I read the following:
Do corporations have religious beliefs? In a word, yes. They also have fears, hopes, desires, and worries. Some even love; others get angry. Truth be told, corporations are a pretty emotional bunch. Open any newspaper, and you will see corporate intentionality on full display, such as in the following excerpts:
- “Facebook wants to go head-to-head with Google in the fight for small- business advertising.”
- Verizon worries that, without instruction from lawmakers, the [FCC] will continue to be pressured to expand its authority in this area . . . .”
“Microsoft fears that Google could become a kind of operating system of the Internet . . . .”
- “The Big Ten is angry at Comcast. And Comcast is angry at the Big Ten. The conference needs the cable operator, the nation’s largest, to carry its fledgling network.”
In this Article, I seek to defend the claim that corporations actually possess these emotions. They genuinely do have worries, fears, and other mental states. These ascriptions are not mere metaphors. They are identifications of legitimate intentional states.
If you're me, you're expecting at least a but see cite to Bill Klein's work on reification of the corporation. See, e.g., William A. Klein, Business Organization and Finance 117-22 (11th ed. 2010) (criticizing reification of the corporation); see also G. Mitu Gulati, William Klein, & Eric Zolt, Connected Contracts, 47 UCLA L. Rev. 887, 891 (2000) (“[I]t is dangerous to ignore the reality that firms transact only through individuals ....”).
Of course, that really would't be not enough. Anyone making that claim would have to rebut Klein. And good luck with that.
After all, "Bill was, and is, almost larger than life, one of the abiding figures of our discipline."David A. Skeel, Jr., Corporate Shaming Revisited: An Essay for Bill Klein, 2 Berkeley Bus. L.J. 105, 107 (2005).
But Iuliano never cites Klein. He never even mentions reification. Odd.
I've created a public list of business law professors at US law schools that I follow: https://t.co/9Lu23dl1iO— Stephen Bainbridge (@ProfBainbridge) January 27, 2015
I've also created a public list of non-business US law school professors who I follow: https://t.co/X9au9ZTZ7S— Stephen Bainbridge (@ProfBainbridge) January 27, 2015
SEC Rule 14a-8(i)(7) provides that a shareholder proposal need not be included in the company's proxy materials if the proposal relates to a matter of "ordinary business." The idea is to keep shareholders from using proposals to micromanage companies. But Jim Hamilton notes that:
The National Association of Manufacturers (NAM) has filed an amicus brief in support of Wal-Mart Stores, Inc.'s appeal regarding a shareholder proposal on gun sales. Wal-Mart has appealed a district court decision holding that a shareholder proposal concerning the sale of certain guns should have been included in Wal-Mart's proxy materials for its 2014 annual shareholders meeting and should not be excluded in 2015. NAM posits that a proposal attempting to influence the types of products a retailer may sell clearly relates to an "ordinary business" matter (Trinity Wall Street v. Wal-Mart Stores, Inc., January 21, 2015).
You would think so, but the SEC and the courts have essentially gutted the exception. If the Wal-Mart case is not reversed, however, the rule will essentially have been repealed. As Hamilton notes:
Citing Trinity's claims that the products at issue could have the potential to impair Wal-Mart's reputation or be offensive to community values, NAM contends that this subject matter is "inherently subjective and open-ended." Where retailers sell a wide variety of products to an array of consumers, many products could offend someone, somewhere. The shareholder proposal rules are not meant to be a referendum on how a retailer selects its inventory, NAM says, and "[i]f the mix of products a retailer chooses to stock and sell is not subject to the ordinary business exception, that exception is rendered a nullity."
The problem is that the SEC takes the position that "proposals relating to such matters but focusing on sufficiently significant social policy issues (e.g., significant discrimination matters) generally would not be considered to be excludable, because the proposals would transcend the day-to-day business matters and raise policy issues so significant that it would be appropriate for a shareholder vote." It doesn't take a very imaginative proponent to twist virtually any corporate activity so as to raise "significant social policy issues." Want Nabisco to stop making Oreos? Bleat at length about childhood obesity. Want Wal-Mart to stop selling some article of clothing? Bloviate about sweatshops. And so on.
In sum, the SEC and the courts have completely undermined Rule 14a-8(i)(7) and thereby are allowing shareholders increasing ability to micromanage corporations. It's time to put the genie back in that bottle. And stopper it.
The children apparently have fallen in love with the whole divestment thing. BDS is an especially prominent and insidious case. But there are a ton of other divestment movements floating around in the higher education circus. Fossil fuels. To which you can now add Turkey:
According to the Daily Bruin, "the undergraduate student government voted 12-0-0 Tuesday to pass a resolution that calls for the University of California to divest from investments made in the Republic of Turkey." See http://dailybruin.com/2015/01/21/usac-passes-resolution-for-uc-to-divest-from-the-republic-of-turkey/. 12-0-0!
...Gun control activists in the national Campaign to Unload group and student governments — horrified by the May rampage that left seven dead at Isla Vista near UC Santa Barbara — are now seeking a more formal ban on weapons industry investment and better public disclosure...
The Regents actually did divest from guns after the Sandy Hook (Connecticut) shooting so apparently this campaign wants something more. It's not clear what that is.
All this despite the fact that divestment doesn't work and has very high costs:
A London Business School Institute of Finance and Accounting working paper called "The Effect Of Socially Activist Investment Policies On The Financial Markets: Evidence From The South African Boycott concluded:
"We find that the announcement of legislative/shareholder pressure of voluntary divestment from South Africa had little discernible effect either on the valuation of banks and corporations with South African operations or on the South African financial markets. There is weak evidence that institutional shareholdings increased when corporations divested. In sum, despite the public significance of the boycott and the multitude of divesting companies, financial markets seem to have perceived the boycott to be merely a 'sideshow.'"
Another paper, "The Stock Market Impact of Social Pressure: The South African Divestment Case," from the Quarterly Review of Economics and Finance in fact found:
"Using the South African divestment case, this study tests the hypothesis that social pressure affects stock returns. Both short-run (3-, 11-, and 77-day periods) and long-run (13-month periods) tests of stock returns surrounding U.S. corporate announcements of decisions to stay or leave South Africa were performed. Tests of the impact of institutional portfolio managers to divest stocks of U.S. firms staying in South Africa were also performed. Results indicate there was a negative wealth impact of social pressure: stock prices of firms announcing plans to stay in South Africa fared better relative to stock prices of firms announcing plans to leave."
In sum, divestment may make activists feel all warm and fuzzy, but the evidence is that (1) it has no significant effect on the target of the divestment campaign but (2) likely does harm the activists' portfolios.
As the Manhattan Institute's James Copeland explained in reference to an anti-semitic effort by the Presbyterian Chiurch (USA) to embrace the BDS movement, these results are entirely consistent with financial theory:
"Unlike a boycott in a traditional goods market, the sale of a stock or bond in a financial market in sufficient volume to affect its price makes it more attractive to a buyer who doesn't care about the divester's social cause. These buyers will bid the price back up to its equilibrium level, the risk-adjusted net present value of expected free cash flows from the instrument. So whereas a goods boycott can be effective under certain conditions, a stock divestiture never can unless there is insufficient liquidity on the other side, a highly dubious condition in our financial market. The Presbyterian Church may have $7 billion in financial assets, but that's hardly a sufficient sum to control financial market pricing."
As the UCLA Faculty Association blog observed of this ongoing stupidity:
So apparently there was not a doubt that it is a Good Thing to use the pension fund for political statements at a time when a) the pension is underfunded, b) there is a UC Regents dispute with the state over the state's responsibility to fund the pension, c) employer and employee contributions are being raised at UC to cover the pension liability, and d) students are wondering if in some way their tuition will go up to help pay for that liability. Interesting!
Dealbook reports that:
Federal prosecutors are seeking to reverse, or at least narrow, a crucial insider trading ruling that overturned the convictions of two hedge fund managers last month, DealBook’s Matthew Goldstein and Ben Protess report. Preet Bharara, the United States attorney in Manhattan, is asking the same three-judge panel that issued the ruling to revisit its decision, according to a filing on Friday. As an alternative, Mr. Bharara’s filing proposes the legal equivalent of a do-over in a process known as en banc.
I hope that the court will deny these requests. As I have explained before, Newman was demonstrably correct. See this post for details.