Is Shareholder Activism Good for Business?
“Shareholder activism is the new reality,” Professor Jan Simon at IESE New York / Photo: Tito Rolón
Shareholder activism is the "new reality."
And this may not be a bad thing. Because despite drawing a lot of negative attention, there is evidence to suggest that shareholder activism might have a positive long-term effect on value.
That is the contention of IESE Professor Jan Simon, who was the featured speaker at a conference hosted by IESE New York this month: "For all the Noise, do Shareholder Activists Create Shareholder Value?"
According to Simon, shareholder activists have been "making a lot of noise" for the last few years, and it’s "unlikely that they will be going away."
The objective for shareholder activists, says Simon, is to provoke change: whether social, environmental, political, or financial. He argues that from a legal and economic perspective, however, they can also create value. Engagement with the company’s board or management being a prime tool used to do so.
"Study after study shows that if shareholders are engaged with their board, more value is created," said Simon. "To put it simply, they have a vested interest in doing so."
Where Are They Coming From and How Do They Operate?
Simon sought to draw a distinction between the "corporate raiders" of the 1980s (fictionalised by the character of "Gordon Gekko" portrayed by Michael Douglas in the 1987 movie, Wall Street) and today’s shareholder activists. Most "raiders," said Simon, don’t invest in companies.
The real question, he said, is to look beyond the "bad rap" and gain some sense of the value of what activists are saying.
"It’s not so much ‘where do we go from here?’ because shareholder activists are not going anywhere," he said. "The key issue is to try to understand where these shareholder activists are coming from – and establish whether what they are saying makes sense or not."
Evidence suggests that when activists target underperforming organizations, the value created can be significant.
Hedge fund activists, he said, typically take time-limited, concentrated stakes in cash-rich, underleveraged companies that are underperforming, relative to their peers. According to Simon, research shows that these hedge fund activists, as a group, create positive abnormal returns of between 7 and 10 per cent.
Very few shareholder activists, he stressed, have been successful with companies that are performing relatively well.
The most common activist tactic is to attempt to change the board of a company. And they enjoy a 73 per cent success rate, said Simon.
"If you are a board member, you should be nervous if they want you out."
Weighing up the Pros and Cons
There is and will continue to be significant criticism of shareholder activism, Simon conceded; chief among which is the charge of negative impact on long-term shareholders. A common argument is that although there is usually a payoff for the activist who will profit in the short term, in the longer term, the company will see negative abnormal returns.
A recent study from Harvard Law School, however, throws some fresh light on this hypothesis. The Long-Term Effects of Hedge Fund Activism looks at companies taken over by shareholder activists before the 2008 credit crisis. Simon cited the evidence from the study that shows that these companies had enjoyed positive long-term operating performance.
"It seems that activist shareholders have, as a group, made the companies better and not worse." And there is "no evidence" of negative long-term return after the hedge funds exit.
"Shareholder activism is here to stay, and I think is a good thing – and something that is positively appreciated by good boards," said Simon. "You can’t ignore shareholder activism. It’s the new reality."
IESE in New York
Organized by IESE Alumni and Friends, "For all the Noise, do Shareholder Activists Create Shareholder Value?" was held June 11 at IESE’s New York campus in Manhattan, which is fast gaining reputation as one of the world’s foremost hubs for research into global business.
Professor Simon teaches capital markets, investments, alternative investments and sports management in IESE's MBA program.
He has served as Executive Director for Goldman Sachs, helping to set up the pan-European sales trading desk in London. He also serves on the board of management across a range of start-up companies around the world.