As regular readers of my blog and/or my sc holarship know, I am a skeptic of shareholder activism. I doubt both whether it's very important and whether it is a good idea. See, e.g., my article Shareh older Activism and Institutional Investors.
In today's W$J there are two articles that might appear, on first glance, to suggest that shareholder activism is both important and effective. The first deals with Washington Redskins owner Dan Snyder's successful proxy contest at Six Flags:
Stockholders representing in excess of 57% of Six Flags' shares outstanding support the Snyder-led plan to remove three of the company's seven board members, including its chief executive and chairman. Barring dissent from the remaining board members, Mr. Snyder is expected to assume the chairman's role, with former ESPN executive Mark Shapiro taking the chief-executive mantle and builder Dwight C. Schar the last board seat.
... With just under 12% of shares under their own control, they were able to sway enough other holders to endorse their vision.
Let's hope for the sake of Six Flags shareholders that Snyder replicates the financial success he's had with the Redskins as opposed to the 'Skins on-the-field mediocrity.
In any case, Journal reporter Berman observes:
Mr. Snyder's four-month mission underscores the influence that activist shareholders lately have been able to wield over corporate managements.
The point would seem to be further supported by a second Journal article on activism by hedge funds:
... activism, often by hedge funds, is pushing share prices higher and forcing management to unlock value. ... The list of companies in the sights of activists includes large firms, such as Time Warner Inc., McDonald's Corp., German stock-market operator Deutsche B�rse AG, Morgan Stanley, Six Flags Inc. and OfficeMax Inc. Sometimes they gently push the companies, with ideas and promises of support; other times they push hard for a sale or other steps.
Sorry, but I don't buy it.
Snyder's success at Six Flags illustrates a couple of truths we have long known: First, proxy contests are the most effective form of shareholder activism. Second, proxy contests are most likely to succeed where there is a central organizing figure who owns a large block of stock around which to rally other shareholders and who has some private motivation for incurring the costs associated with investor activism.
We have seen this phenomenon before, including one of the best known case studies of shareholder activism; namely, the effort to get investors to withhold authority for their shares to be voted to elect directors at Disney?s 2004 annual shareholder meeting. In that case, however, the campaign had a central organizing figure?Roy Disney?with plenty of private motivation for waging battle. Even then, a plurality of the shares was voted to re-elect the incumbent board.
It is also instructive that Disney management later persuaded Roy Disney to drop his various lawsuits against the board and sign a five year standstill agreement pursuant to which he would not run an insurgent slate of directors in return for being named a Director Emeritus and consultant to the company, which nicely illustrates how a company can buy off the requisite central coordinator when that party has a private agenda.
In contrast, when CalPERS, the biggest institutional investor of them all, struck out on its own in 2004, withholding its shares from being voted to elect directors at no less than 2700 companies, including Coke director and legendary investor Warren Buffet, the project went no where.
We don't know what private benefits Snyder and his cohorts might reap from running Six Flags, WSJ reporter Berman, however, does tell us that:
... Mr. Snyder and Mr. Shapiro are eager to take the reins of the company, which has a market capitalization of $695 million and an additional $2.2 billion in debt.
Why, one might reasonably ask? After all, since they only own 12% of the stock, 88 cents out of every dollar of increased shareholder value they generate will go to other investors. Might they have some plan for reaping non-pro rata private benefits (stock options? executive compensation? related party transactions?).
As for hedge fund activism, they have had relatively little success in the absence of a central coordinating figure like Snyder or Disney. They did not, for example, manage to derail the MCI-Verizon merger even those most hedge funds favored Qwest's bid for MCI.
Even when they have a central figure around whom to rally, moreover, hedge funds have not always enjoyed financial rewards. The Journal reports:
... lately, some activists have done a better job creating headlines than value. Activist investors, including Steel Partners and Cannell Capital, waged a bitter proxy fight to gain seats on the board of BKF Capital Group Inc., an asset-management company. But shares of BKF have tumbled to $21 from $43 since March, though they are up from $15 since the end of October. Mr. Icahn purchased about 10% of shares of Blockbuster Inc. and took a board seat earlier this year, after criticizing management's spending plans. But shares of the video-rental chain have tumbled to around $3.60 from a high of more than $10 in April.
Let us suppose, however, that activism by hedge funds managed to do more than just pick off a few low-hanging fruits here and there. Let us suppose that they began to wield substantial influence over many firms. Would that be a good thing?
According to Journal reporter Gregory Zuckerman, "today activists push for higher share prices for all investors in a company, not just for their own stakes." I'm not so sure about that.
As blawgger and corporate law expert Gordon Smith obse rves:
The motivation for activism is that "it is getting tougher to show top-notch returns as more hedge funds pursue similar investment ideas and overall market volatility drops." This is the best argument against shareholder activism that I have seen in a long time. Does anyone (other than a hedge fund manager) believe that hedge fund managers know more about the companies in which they invest than the officers and directors of those companies?
The basic problem is that hedge funds are under constant pressure to maximize short-term returns. The relationship between hedge funds and other shareholders of a company thus is an example of what my UCLA law school colleague Iman Anabtawi calls the problem of divergent shareholder interests. She explains that while shareholders are usually assumed to have a common interest in maximizing shareholder wealth:
Some of the most significant modern shareholders ... have private interests that conflict with (1) the goal of maximizing shareholder value generally or (2) the interests of other shareholders who would choose to maximize shareholder value differently, given their peculiar characteristics. Such private interests may induce influential shareholders to engage in rent-seeking behavior at the expense of overall shareholder welfare.
She then offers an apt example:
Pitted against shareholders? common interest in enhancing share value are significant private interests. Take, for example, a hedge fund shareholder that is about to raise capital for a new fund. As part of its marketing effort, it wants to show impressive returns on its prior fund. To generate such returns, the hedge fund is likely to favor policies by the firms in which it invests that produce short-term gains, even if a more patient investment orientation would generate higher long-term returns. In contrast, a pension fund or life insurance company shareholder is more likely to be concerned about the long-term value of its investments, which will allow it to meet its future obligations.
We therefore would do well to be skeptical of Zuckerman's claim that "activists push for higher share prices for all investors in a company, not just for their own stakes." We therefore also do well to be skeptical of proposals to further empower activist investors. The SEC's effort to expand the rights of shareholders to nominate directors, for example, likely would not have improved corporate governance so much as it would have increased the extent of private rent-seeking by select investors.
