The latest edition of The Economist is once again beating the drums for shareholder activism. (As I've said before, I love them despite their ineducability on this issue):
Martin Lipton, a lawyer who has long helped protect incumbent management, not least by inventing the “poison pill”, a potent defence against takeovers, argues that activists encourage firms to do things that boost their share price in the short run but harm their long-term performance. This critique has plenty of adherents, in academia, business and government.
Yet empirical proof that activists exacerbate short-termism is strangely elusive. Indeed, such evidence as there is suggests the opposite. “The Long-Term Effects of Hedge-Fund Activism”, a recent paper by Lucian Bebchuk of Harvard Law School and others, examined the roughly 2,000 interventions at companies by activist funds from 1994 to 2007. Over the five years following an intervention both the share price and the operating performance of the target company improved, on average. The operating performance got stronger towards the end of the five-year period, not weaker.
This is the sort of evidence that has convinced Mary Jo White, the chairman of America’s Securities and Exchange Commission, to argue in a recent speech that activist shareholders should no longer be automatically viewed negatively. These days, she said, “There is widespread acceptance of many of the policy changes that so-called ‘activists’ are seeking to effect.”
But consider the possibility that not all shareholder interventions are created equally, as I argued in Preserving Director Primacy by Managing Shareholder Interventions (August 27, 2013), available at SSRN: http://ssrn.com/abstract=2298415:
This is a draft chapter for a forthcoming research handbook on shareholder power and activism. This chapter provides an analysis of shareholder activism based on the so-called director primacy model of corporate governance, which argues for a board-centric, rather than a shareholder-centric, understanding of corporate governance.
Even though the primacy of the board of director primacy 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 chapter 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.
In any case, I was deeply amused by the headline of The Economist article: "Anything you can do, Icahn do better."
As the kids say, OMG! (they do still say that, don't they?)
I have had numerous occasions over the years to document my utter disdain for Carl Icahn and his track record:
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Dec 30, 2013 ... Perrenial corporate raider Carl Icahn reportedly is trying to bully Wachtell Lipton for representing his targets: Wachtell thinks it knows exactly ...
www.professorbainbridge.com/.../is-carl-icahn-trying-to-deny-his-targets- legal-counsel-of-their-choice.html
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Sep 19, 2013 ... Carl Icahn's asinine screed in favor of shareholder activism from today's WSJ included this knee slapper: Is it fair that CEOs make 700 times ...
www.professorbainbridge.com/.../carl-icahns-crocodile-tears-re-ceo- compensation.html
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Sep 19, 2013 ... Carl Icahn got rich out of ruining companies by extorting greenmail from spineless targets and running companies like TWA into the ground.
www.professorbainbridge.com/.../carl-icahns-tired-shareholder-democracy- fable.html
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Dec 10, 2013 ... David Benoit reports that Carl Icahn has had a good run this year: Carl Icahn, long seen as the archenemy of chief executives, is finding the ...
www.professorbainbridge.com/.../what-has-carl-icahn-ever-made-other-than- money-.html
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Sep 19, 2013 ... In the asinine screed by Carl Icahn in today's WSJ, in which he makes a dubious case for shareholder activism, Carl nearly breaks his arm ...
www.professorbainbridge.com/.../carl-icahns-dubious-praise-for-his-own- hedge-funds-performance.html
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Mar 25, 2013 ... When I first heard that Carl Icahn was considering bidding for Dell, I was quite surprised. Icahn's not a private equity guy who buys and ...
www.professorbainbridge.com/.../delaware-courts-should-allow-dells-board- to-fend-off-carl-icahns-financial-play.html
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Jan 8, 2014 ... Carney writes: You may have heard that Ralph Nader has called on Carl Icahnto help him resist the plan by Liberty Media to acquire the rest of ...
www.professorbainbridge.com/.../john-carney-on-whats-really-going-on- with-the-ralph-nader-carl-icahn-axis.html
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