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The Limits of Private Equity Shareholder Activism

From Deal Journal:

The best advice for investors in companies that are targeted by activist shareholders like Carl Icahn and Nelson Peltz may be this: wait for the stock to pop and then head for the hills.

Harvard has a new study out that examines the performance of shares in companies targeted by activists. (Read about it in this Wall Street Journal article today.) The upshot: the modern day corporate raiders are only going to make other shareholders money if their goal is to get the target company sold — and they succeed.

Why? It seems that the skill of activists like Icahn, Peltz and William Ackman is in judging the value of companies in a sale, and not in figuring out how to improve companies’ operations and profits. Says Robin Greenwood, the Harvard assistant professor who conducted the study: “They’re investors. They’re not operating guys.” Icahn’s failed bid to shake up Motorola, and his only-somewhat-successful campaign at Time Warner are cases in point. (To be fair, Icahn reaped profits for his investors off the Time Warner campaign, and Greenwood says Icahn is among a group of activists that are a cut above the rest.)

The study’s findings go against the commonly held belief that companies benefit from activist attention. That is why shares initially tend to rise when these investors come to town. If the study’s conclusions are correct, in most cases those stocks won’t stay up for long. Especially now that there are few M&A suitors to bail any investors out.

Interestingly, the HBS abstract of the study also calls into question the utility of shareholder activism by standard institutional investors:

Are hedge funds better than large institutional investors at identifying undervalued companies, locating potential acquirers for them, and removing opposition to a takeover? Are they best equipped to monitor management? While blockholding by large institutional investors—pension funds and mutual fund investment companies—is widespread, there is virtually no evidence that these institutional shareholders are effective monitors of management or that their presence in the capital structure increases firm value. When institutional blockholders make formal demands on management, there is no evidence of their success. This working paper outlines the advantages and limits of hedge funds to manage these tasks. Greenwood and Schor's characterization differs markedly from previous work on investor activism, which tends to attribute high announcement returns to improvements in operational performance.

The study is available here in full text. A summary HBS Working Knowledge article is here.

Dutch Dominicans' Heterodoxy

Over at MoJ, Michael Perry cites (seemingly approvingly) the following report:

THE DOMINICAN Order in the Netherlands has issued a radical recommendation that lay ministers chosen by their congregations should be allowed to celebrate the Eucharist if no ordained priests are available.

In a booklet posted to all 1,300 parishes in the country, it says that the Church should drop its priest-centred model of the Mass in favour of one built around a community sharing bread and wine in prayer.

"Whether they are women or men, homo- or heterosexual, married or single, makes no difference. What is important is an infectious attitude of faith," said the brochure, which has been approved by the Dutch order's leaders. However, the Dutch bishops' conference promptly said that the booklet appeared to be "in conflict with the faith of the Roman Catholic Church". It said it had no prior knowledge of the project and needed to study the text further before issuing a full reaction.

The proposal doesn't just appear to be inconsistent with Catholic teaching; it is inconsistent with Catholic teaching. Paragraphs 1141 and 1142 of the Catechism teach that:

The celebrating assembly is the community of the baptized who, "by regeneration and the anointing of the Holy Spirit, are consecrated to be a spiritual house and a holy priesthood, that through all the works of Christian men they may offer spiritual sacrifices."⁹ This "common priesthood" is that of Christ the sole priest, in which all his members participate:

Mother Church earnestly desires that all the faithful should be led to that full, conscious, and active participation in liturgical celebrations which is demanded by the very nature of the liturgy, and to which the Christian people, "a chosen race, a royal priesthood, a holy nation, a redeemed people," have a right and an obligation by reason of their Baptism.

But "the members do not all have the same function." Certain members are called by God, in and through the Church, to a special service of the community. These servants are chosen and consecrated by the sacrament of Holy Orders, by which the Holy Spirit enables them to act in the person of Christ the head, for the service of all the members of the Church. The ordained minister is, as it were, an "icon" of Christ the priest. Since it is in the Eucharist that the sacrament of the Church is made fully visible, it is in his presiding at the Eucharist that the bishop's ministry is most evident, as well as, in communion with him, the ministry of priests and deacons.

Paragraph 893 likewise affirms that:

The bishop is "the steward of the grace of the supreme priesthood," especially in the Eucharist which he offers personally or whose offering he assures through the priests, his co-workers. The Eucharist is the center of the life of the particular Church. The bishop and priests sanctify the Church by their prayer and work, by their ministry of the word and of the sacraments. They sanctify her by their example, "not as domineering over those in your charge but being examples to the flock." Thus, "together with the flock entrusted to them, they may attain to eternal life."

Hence, Pope John Paul II in Ecclesia de Eucharistia affirmed that:

The ministry of priests who have received the sacrament of Holy Orders, in the economy of salvation chosen by Christ, makes clear that the Eucharist which they celebrate is a gift which radically transcends the power of the assembly and is in any event essential for validly linking the Eucharistic consecration to the sacrifice of the Cross and to the Last Supper. The assembly gathered together for the celebration of the Eucharist, if it is to be a truly Eucharistic assembly, absolutely requires the presence of an ordained priest as its president. On the other hand, the community is by itself incapable of providing an ordained minister. This minister is a gift which the assembly receives through episcopal succession going back to the Apostles. It is the Bishop who, through the Sacrament of Holy Orders, makes a new presbyter by conferring upon him the power to consecrate the Eucharist. Consequently, “the Eucharistic mystery cannot be celebrated in any community except by an ordained priest, as the Fourth Lateran Council expressly taught”.

JP II went on to explain that:

All of this shows how distressing and irregular is the situation of a Christian community which, despite having sufficient numbers and variety of faithful to form a parish, does not have a priest to lead it. Parishes are communities of the baptized who express and affirm their identity above all through the celebration of the Eucharistic Sacrifice. But this requires the presence of a presbyter, who alone is qualified to offer the Eucharist in persona Christi. When a community lacks a priest, attempts are rightly made somehow to remedy the situation so that it can continue its Sunday celebrations, and those religious and laity who lead their brothers and sisters in prayer exercise in a praiseworthy way the common priesthood of all the faithful based on the grace of Baptism. But such solutions must be considered merely temporary, while the community awaits a priest.

The sacramental incompleteness of these celebrations should above all inspire the whole community to pray with greater fervour that the Lord will send labourers into his harvest (cf. Mt 9:38). It should also be an incentive to mobilize all the resources needed for an adequate pastoral promotion of vocations, without yielding to the temptation to seek solutions which lower the moral and formative standards demanded of candidates for the priesthood.

As an adult convert from Protestantism, perhaps I am unduly sensitive on this point. Yet, the Dutch Dominician proposal for lay conduct of the Eucharist strikes me as precisely the sort of Protestant heterodoxy regarding the priesthood of all believers that prompted JP II to warn that "The Catholic faithful, therefore, while respecting the religious convictions of these separated brethren, must refrain from receiving the communion distributed in their celebrations, so as not to condone an ambiguity about the nature of the Eucharist and, consequently, to fail in their duty to bear clear witness to the truth."

Moet & Chandon Rose Imperial (France: Champagne) NV

A lovely salmon-pink color, with very fine bubbles. Strawberries, buttered toast, and crisp green apples are the flavor associations I found. Not much nose. Grade: B+

BYU-UCLA

My friend BYU law professor Gordon Smith and I exchanged a bit of smack talk about the BYU-UCLA game. At halftime, it's 20-3 in favor of my Bruins. So Gordon's prediction of a 28-14 BYU win is looking pretty unlikely. BTW, you've got to love the BYU paper's conclusion that Benedict "Arnold is more of a betrayer than [UCLA quarterback and former BYU player Ben] Olson. But just barely." Having swiped the purported best QB of the class of 2002 from BYU would put the icing on a victory cake.

3rd Q 8:20: Uh oh. I don't like BYU's TD drive. 20-10. They've figured something out. For BYU to have 12 10+ yard plays at the mid point of the 3rd quarter is not good. Not good at all.

3rd Q 6:45: Oh crap. Give BYU credit for cashing in on Olson's mistake (and that ugly non-call). Maybe we should have let BYU keep Olson.

3Q 5:42: 3 and out. Olson's not looking like the guy who was the best QB of the high school class of 2002.

3Q 3:20: Finally a stop. Now let's see if UCLA can get a drive going. ... Nope. 3 and out.

4th 9:56: When Unga caught that tipped pass, I was starting to think something supernatural was going on.

4th Q 7:09: 3 first down passes from Olson. Who then gives up a big sack. There was an interesting article in the LAT this week on the perennial question of whether going on a mission hurts the development of Mormon athletes, especially QBs. Max Hall's making the case that there is no adverse effect, while Olson's struggles - win or lose - likely will restart the grumbling around campus.

4th Q 2:05: BYU really hurt itself with penalties, especially that interference by #31. But then again, how on earth did Olson mismanage the play clock? Sheesh.

4th Q 1:16: First and goal. Just pound it in. ... But an end run will work just fine too.

27-17. Whew. That turned into a real nail-biter, when BYU just dominated the third quarter. At the end of the day, however, the defense turned in a couple of big plays and the offense managed one short drive to put the game away.

Kudos to Max Hall for a great game. He looks set to continue the great BYU quarterback tradition.

BYU came in with the longest winning streak -11 - in I-A football. Despite a shaky 3rd quarter, UCLA ended that streak. So kudos to the Bruins. Yet, I don't think we looked like a top 15 team in doing so. The offense never got a long drive going all day. The defense gave up a ton of 10 yard-plus plays. The big question I came out of this game with, however, is whether Ben Olson's just having some trouble learning Jay Norvell's system or is he just not as good as his billing?

Anyway, no cheese for Gordon.

Maize and Boo

During my 8 years of teaching at Illinois, I developed both a deep respect for and a profound dislike of University of Michigan's football team (actually, I'm not that fond of the place as a whole). Watching them get beat last week by Appalachian State was great good fun; watching them get pounded and spanked by Oregon was just amazing.

A week after being upset by Appalachian State, the Wolverines were handed their most-lopsided loss in 39 years as Dennis Dixon and the Ducks cruised 39-7 on Saturday. ... Michigan (0-2) has opened a season with two straight losses at home for the first time since 1959 and has dropped four straight, dating to last season, for the first time in four decades. ...

Michigan Stadium's aisles filled with fans that had seen enough after Oregon made it 39-7 in the third quarter and the Big House was so quiet that a small pocket of Oregon supporters could be heard chanting: "Let's Go Ducks! Let's Go Ducks!"

It couldn't happen to a nicer program.

Schramsberg Blanc de Noirs (Napa Valley) 1996

An excellent Pinot Noir-based methode champenoise sparkling wine. Very fine bubbles in a golden wine. Round and full, although with plenty of acidity. Very food friendly. Grade: B++

MOJ Joint Statement on the Situation at Ave Maria School of Law

From MOJ:

We, the members of Mirror of Justice, are a group of Catholic and Christian law professors and former law professors. We wish to express our profound concern with the course of events at Ave María School of Law (“AMSL”). While we differ among ourselves in our religious and political convictions, we share a commitment to Catholic legal education and respect Ave Maria's serious desire to express its religious identity. We write as legal academics and as persons who believe and expect a Catholic law school to be “a living institutional witness to Christ and his message.” (Ex Corde Ecclesiae, ¶ 49).

The statement goes on to explain the standards by which we evaluated the situation, our understanding of the core facts of gravest concern, and the conclusions we have drawn. In closing, we wrote:

By the failure to live their Christian commitment, the AMSL Dean and Board cause scandal in the legal, academic, and religious communities. This scandal is exacerbated by the fact that their actions are taken on behalf of a law school named for the Blessed Mother of Christ. We echo this sentiment expressed earlier by an MOJ contributor: “The hour is not too late for [AMSL’s Dean and Board] to model for the legal and academic communities the essence of a Catholic Christian law school. In fact, [we] would suggest [that they] have a better, clearer opportunity to mirror Christ now than when [they] first began because the only path left open is through the cross. It may not be what [they] had planned, but God works in mysterious ways.”

We pray that all involved with AMSL will have the courage to exercise the convictions of Christian discipleship to reconcile all parties involved in the matters we have discussed.

I am proud to be part of the blogging community at MOJ and to have co-signed this important statement.

Arend on Goldsmith

Jack Goldsmith's book, The Terror Presidency, is getting an enormous amount of coverage, including a lengthy article by Jeffrey Rosen for the NYT Magazine. My friend, international law expert Tony Arend comments:

One of the great problems of the past has been that both the Executive and the Legislative branches have had a tendency to engage in what might be called "line-drawing exercises" when it comes to certain questions of constitutional power. The Bush Administration has been the master of this, making assertion after assertion about the exclusive powers of the commander-in-chief and admiting of no role for Congress in those areas. But Congress has also engaged in such line-drawing activities in the past-- the War Powers Resolution would be one of the prime examples. In that Resolution, Congress boldly asserted that

The constitutional powers of the President as Commander-in-Chief to introduce United States Armed Forces into hostilities, or into situations where imminent involvement in hostilities is clearly indicated by the circumstances, are exercised only pursuant to (1) a declaration of war, (2) specific statutory authorization, or (3) a national emergency created by attack upon the United States, its territories or possessions, or its armed forces. (emphasis added)

It is, of course, interesting to note that this provision of the War Powers Resolution does not seem to have been taken very seriously by either Branch--perhaps because of its extremism.

While there will be times when courts must decide the precise allocation of powers between the Branches, in many cases relating to foreign affairs and national security, it makes more sense to avoid line-drawing exercises that set up confrontations. More often than not, political accommodation makes more sense. Congress and the President can still have their understandings of the ultimate allocations of power, but they can bracket those claims and negotiate an approach to addressing certain concrete problems. I believe that the original Foreign Intelligence Surveillance Act represented this type of political accommodation. The President did not give up his claims to be able to conduct surveillance without a warrant in cases of a foreign power or agent, but rather the President and Congress agreed to bracket that claim and establish a functioning framework so that the ultimate question of presidential power would not need to be addressed.

We can only hope that in the next administration, the President and Congress will have the wisdom to engage in a political accommodation approach more often than in the past.

Judd's Hill Pinot Noir (Napa Valley) 2005

This is not an especially profound Pinot, but it's a nevertheless a very pleasant one. Lots of varietally correct aromas and flavor associations. Black cherry, black tea, vanilla, and a dash of cinnamon. Grade: B/B+

Union Pension Funds

My Examiner column:

Even though Labor Day is over, it’s still worth thinking about the role of unions in our economy. In some respects, private sector unions are almost powerless. The percentage of private sector workers who are unionized has been declining steadily since the mid-1950s.

Even though our population and the number of private sector jobs both continue to grow, the number of union members in absolute terms peaked in 1970 and today is less than half of its maximum figure. If it weren’t for public sector unions, organized labor would be a spent force.

On the other hand, what they lack in raw numbers, the unions increasingly make up in economic clout via their pension funds. The Teamsters pension fund, to cite but a single example, has more than $100 billion invested.

The National Center for Policy Analysis estimates that union pension holdings now exceed $1.4 trillion, representing almost 15 percent of all outstanding shares of stock. All told, union pension funds represent one of the largest blocks of investors in the U.S. stock market, which gives them enormous potential clout.

Union leaders recognize that their pension funds represent an important source of power.They have become activist investors, using Securities and Exchange Commission rules to put proposals up for a shareholder vote, bargaining with management, influencing the outcome of proxy contests and takeover bids, and even seeking representation on boards of directors.

Defenders of union pension fund activism argue that the unions are simply making use of rights shared by all investors. In fact, however, there’s good reason to think that union pension funds are one of the classes of institutional investors most likely to use their position to self-deal — i.e., to take a non-pro rata share of the firm’s assets and earnings — or to otherwise reap private benefits not shared with other investors.

With respect to union pension fund sponsorship of shareholder proposals under existing law, for example, Yale law professor and corporate governance expert Roberta Romano observes that "examples of potential benefits which would be disproportionately of interest to proposal sponsors are progress on labor rights desired by union fund managers. ..." In contrast, she points out, private sector fund managers are far less likely to get private benefits from activism and, accordingly, "we do not find them engaging in investor activism."

In addition to tangible private benefits, activist union investment managers also get psychic and political benefits. In a blog post at Conglomerate.org, law professor Brett McDonnell opined that when union pension funds "go after powerful, overpaid CEOs, part of their explicit point is a populist attack on privilege. That’s cool with me, and I suspect it’s cool with a lot of their constituents as well."

As a 2005 Wall Street Journal editorial explained, however, this sort of activism is distinctly uncool. It represents what the left calls "the new politics of capital," in which liberal activists attempt to turn entire corporations into lobbyists for their social and political goals, their campaigns all neatly disguised as "shareholder activism."

Not surprisingly, this sort of union activism routinely puts organized labor at odds with the interests of other investors. The pension fund of the union representing Safeway workers used its position as a Safeway shareholder in an attempt to oust directors who had stood up to the union in collective bargaining negotiations.

Indeed, union pension funds tried to remove directors or top managers, or otherwise affect corporate policy, at more than 200 corporations in 2004 alone. Brokerage houses that openly supported privatization of Social Security assets were put on notice that unions would pull their money if such support continued. Union pension funds reportedly have also tried shareholder proposals to obtain employee benefits they couldn’t get through bargaining.

Equally unsurprisingly, however, because most of the private benefits from pension fund activism redounds to the benefit of the fund managers or union leadership, union activism also routinely puts their interests at odds with those of the union members whose pensions they manage. Many union members would have gotten better returns from a low-fee indexed fund in a 401(k) than they get from their union pension fund.

The SEC is considering proposals to further empower shareholder activists. As the commission does so, it would be well advised to consider carefully just which investors would be empowered and toward what ends.

A SOX Lesson in an Odd Place

Glenn Reynolds is posting on Jack Goldsmith's book The Terror Presidency, from which he quotes the following:

[Bush officials running the GWOT] worried nonetheless because they would be judged in an atmosphere different from when they acted, because the criminal investigative process is mysterious and scary, because lawyers' fees can cause devastating financial losses, and because an investigation can produce reputation-ruining dishonor and possibly end one's career, even if you emerge "innocent."

Which prompted a Reynolds reader to write:

Welcome to the post-SarBox, Elliott Spitzer world. We in business face this on a regular basis. I can’t decide whether I’m glad public servants experience the same headaches we do or concerned because an intelligence/military failure costs lives, while a business failure costs only money (though when Spitzer was around, it also sometimes cost freedom).

In business, not only has bad judgment become a crime, so has a good decision made on the basis of incomplete information, which later turns out to have been the wrong call. This is not good for America, where innovation and risk are what we do better than Europe, China, or India.

Precisely.

Until Proven Innocent

That's the title of Stuart Taylor and KC Johnson's new book on the Duke lacrosse case. From Amazon:

Guilty until proven innocent was a concept expressed by Duke University's president Richard Brodhead, among others, betraying a stunning misapprehension of America's justice system in the case of the Duke lacrosse players wrongfully indicted for raping a black stripper in 2006. As well reported in detail by respected legal journalist Taylor and Brooklyn College historian Johnson, the facts of the case speak for themselves: rogue prosecutor Mike Nifong willfully disregarded evidence of the boys' innocence; Duke administrators hung the team members out to dry; much of Duke's faculty and the media rushed to assume guilt in the racially charged case (the New York Times comes in for special opprobrium). But these facts are embedded in repetitiously hammering home the basic points, sarcasm and ranting against the political correctness (i.e., obsession with the race-class-gender triad) of academia and the media. The authors challenge the academic credentials of the black faculty members who attacked the team and criticize the Times's Selena Roberts for choosing to live in lily white Westport, Conn. In total contrast, the closing chapters offer balanced, tautly argued discussions of, and remedies for, the central problems: prosecutorial abuse, the frequency of false rape accusations and academic groupthink.

Dogs and the Law

The Law Blog weighs in on Leona Helmsley's $12 million trust for her dog:

... Rachel Hirschfeld ... ? www.trustpetlawyer.com ? calls herself a pet-trust lawyer. For more pictures of Rachel and her pets, click here.

Hirschfeld, according to the Post, says Helmsley?s dog, Trouble, is getting short shrifted by Helmsley?s lawyers and family. ?It?s outrageous what?s happening here,? Hirschfeld told the Post, citing a report that Helmsley?s Maltese isn?t even living with the man Helmsley asked to take care of her. Trouble, who was reportedly left $12 million by Helmsley, is still is living in Helmsley?s Connecticut home, being cared for by the hired help.

Helmsley?s brother has reportedly turned down Leona?s request to take care of Trouble, and Hirschfeld tells the Post that the judge handling Helmsley?s estate should appoint Trouble her own lawyer to make sure her rights are protected and Helmsley?s wishes are carried out. Apparently, appointing a lawyer for the dog would be unusual, but not unprecedented.

A lawyer for the dog? Please. Can't we find a middle ground in which both Michael Vick and Leona Helmsley are deemed nuts? In which we are good stewards of the animals in our lives, but we don't treat them as the legal or moral equivalent of people?

Red Wine Health News

From the Wine Spectator:

A new study published online in the Journal of Carcinogenesis has reported that laboratory mice fed the chemical resveratrol, a compound found naturally in red wine, developed tumors in the prostate at a much lower rate than mice fed on a normal diet. More importantly, the scientists believe that the research holds good promise for humans since the mice directly ingested a form of the chemical.

One of the study's authors is quoted as saying:  "I drink a glass of Cabernet Sauvignon every night and take resveratrol supplements every day."

Child Labor Against Climate Change

Megan McArdle's found something really appalling:

Upon original reading, I had thought that it must be taken out of context or otherwise misleading:

Climate Care celebrates the fact that it encourages the Indian poor to use their own bodies rather than machines to irrigate the land. Its website declares: ?Sometimes the best source of renewable energy is the human body itself. With some lateral thinking, and some simple materials, energy solutions can often be found which replace fossil fuels with muscle-power.? (2) To show that muscle power is preferable to machine power, the Climate Care website features a cartoon illustration of smiling naked villagers pedalling on a treadle pump next to a small house that has an energy-efficient light bulb and a stove made from ?local materials at minimal cost?. Climate Care points out that even children can use treadle pumps: ?One person - man, woman or even child - can operate the pump by manipulating his/her body weight on two treadles and by holding a bamboo or wooden frame for support.? (3)

Feeling guilty about your two-week break in Barbados, when you flew thousands of miles and lived it up with cocktails on sunlit beaches? Well, offset that guilt by sponsoring eco-friendly child labour in the developing world! Let an eight-year-old peasant pedal away your eco-remorse?

But no, their website is exactly as described. To be fair, there apparently are other projects that don't involve tethering people in developing countries to human hamster wheels, but all in all, that may be one of the most appalling things I've ever read. Special bonus question: why are the smiling brown people naked? Have they given up clothes to save the energy of washing them?