Has the Activist Investor Deluge Gone Too Far - or Not Far Enough?

It is in the nature of this economy to push things to their limit. The prevailing wisdom is that natural forces will put an end to anything that is too outlandish - or dangerous. Unfortunately, we have learned the hard way, that this belief in the divine wisdom of markets is misplaced, but that has not stopped anyone from continuing to try.

One outgrowth of the shareholder value movement was the notion that corporate governance could be a positive impetus for aligning managerial imperatives with investors' interests. The successes of this movement have been more limited than not, but compared to the situation that existed a generation ago, stakeholders do have more of a say than they ever have previously, much to the discomfit of many executives.

The state of Delaware, which due to the nature of its company-friendly policies, is the legal domicile of approximately half the public companies in the US (far more than any other state). So when the chief justice of its supreme court decries the 'the activist deluge,' knowledgeable observers may be forgiven a rolling of eyes. Delaware derives a significant portion of its revenues from such registrations, taxes et al. Many investors would be shocked to learn that there has been significant movement, let alone a 'deluge.'

The judge's plaintive cry may, therefore be a sign that hedge funds and other financial predators are abusing the trust which they have been granted by law or that investors are finally receiving their due and corporations resent the loss of their former domination. Either way, the judge's statement is a sign that the balance of power has shifted and anyone with an interest in the outcome had best acknowledge that fact. JL

Stephen Foley reports in the Financial Times:

Institutional shareholders have demanded, and won, considerably more consultation on company strategy and corporate governance, and boards are increasingly engaging with both long-term investors and activist hedge funds that turn up on the shareholder register.

Activist hedge funds and institutional investors have never wielded so much influence on company boards but the trend is in danger of getting out of control, according to one of the most powerful legal arbiters of US corporate governance disputes. Leo Strine, chief justice in Delaware, whose courts have adjudicated many of the most hard-fought shareholder rights cases, has called for a rollback of shareholder powers to prevent a “deluge” of corporate governance votes that he says are distracting managements and costing companies a small fortune.
The chief justice’s proposals, in an article in the latest issue of the Columbia Law Review, include limiting the frequency of say-on-pay votes and charging investors to submit proposals to a company’s annual shareholder meeting. Without such curbs, Mr Strine says, investors could “turn the corporate governance process into a constant ‘Model United Nations’ where managers are repeatedly distracted by referenda on a variety of topics proposed by investors with trifling stakes”.

Mr Strine was confirmed to lead Delaware’s Supreme Court earlier this year, significantly expanding his influence over US corporate governance.

He was previously the outspoken head of Delaware’s chancery court, which oversees businesses incorporated in the state, home to nearly half of all US public companies, where he was known for his colourful courtroom asides and for his activist judgments.
In the article, he expresses scepticism that the shifting balance of power between corporate boards and shareholders has been of benefit to the economy, and that the resulting rise in hedge funds’ activist campaigns will be in the long term interests of investors.
In particular, he criticises the convention of having annual votes for directors and on a company’s compensation policies, both of which should be judged over longer periods, he argues.
Institutional investors are being overwhelmed by the number of votes they are required to cast, he says, and are failing to give them proper attention.

On several occasions last year, including at the Texan oil and gas explorer Apache Corporation, compensation policies that had not materially changed from the previous year suddenly attracted considerable opposition.

Say-on-pay votes could be held every three or four years, says Mr Strine. Shareholders should also be charged a fee for submitting other proposals, just as politicians must pay a fee to stand for election, and banned from resubmitting losing proposals year after year.
Institutional shareholders have demanded, and won, considerably more consultation on company strategy and corporate governance, and boards are increasingly engaging with both long-term investors and activist hedge funds that turn up on the shareholder register.

But activist hedge funds should be made to reveal more about their positions and motives, Mr Strine says, and to make those disclosures more quickly. He cites Bill Ackman’s Pershing Square which, together with Vornado Realty Trust, was able to acquire 27 per cent of the retailer JC Penney before having to disclose its stake.