There's no denying that powerful activist hedge funds have increased pressure on America's largest corporations, often by putting a time-clock on corporate turnarounds, adding an owner to corporate boardrooms, or by placing a spotlight on non-productive assets like excess corporate cash and failing business lines. But, as a campaign emerges to correct an apparent short-termism on Wall Street and in corporate boardrooms, activists aren't being labeled as a cause of the problem.
Mark Wiseman, chief executive of the over $230 billion Canadian Pension Plan Investment Board, told Forbes he believes activist hedge funds are a just a symptom of myopia in Corporate America and among the asset managers who collectively own the largest companies in North America.
When asked if the rise of activist hedge funds has driven short term thinking, Wiseman said by telephone, "my view is the activists are a bit of a red herring."
His comments may run counter to conventional wisdom. At upcoming shareholder meetings across the country, under-attack corporate boards will surely accuse activists of trying to engineer short-term stock gains at the expense of long-term investment. For their part, activist hedge funds challenging companies such as
Money flows, meanwhile, show that shareholder activism is one of the fastest-growing and best performing investment strategies in the years since the financial crisis. Between 2009 and the third quarter of 2014, assets under management at activist hedge funds have grown at a compound annual rate of 26.8%, from $36.2 billion in AUM to $112.1 billion, according to a January report by JPMorgan titled The activist revolution.
But, CPPIB's Wiseman says it is a breakdown between institutional investors and corporate boards, not activist shareholders, that's the bigger cause of an emphasis on making the next quarter's numbers over multi-year growth projects and strategies.
"Activists own just a small percentage of a stock. In most cases, it's the institutional investors who are the real owners. Frankly, if they were doing a better job engaging with the company as an owner and the company was doing a better job engaging with the owners, there should be no opportunity for activists,” he says.
One example Wiseman cites is railroad
Wiseman is co-chair of Focusing Capital on the Long Term, an initiative to correct an apparent short-termism in business and markets, which also counts boldface business leaders including Dominic Barton, CEO of consulting giant McKinsey & Co, and Larry Fink, CEO of $4 trillion asset manager
In April, the FCLT initiative hosted a summit in Manhattan that featured many prominent business leaders, and recently it mailed a diagnosis of the short-termism disease to the heads of largest 500 companies America. In coming months, FCLT is likely to present specific recommendations on how to create incentives, business plans and leadership structures that accommodate shift away from shortsightedness.
From Wiseman's perspective, decision making on Wall Street and Main Street simply needs to better reflect the money it's representing: the saver.
Although 401k accounts, endowments, and pension funds with time horizons that span decades represent the overwhelming majority of money funneling through Wall Street and into the debt and equity of corporations, Wiseman argues their interests aren't adequately being represented.
He gives a hypothetical of a company that's formulating a ten-year plan for expansion or capital expenditure, which may take years to show returns but will ultimately pay off greatly over the long-run. He cites
The reason: Management and board teams rubber stamping such spending plans will likely be long gone before they see a payoff, as will the company's shareholder base, which may also have turned over many times. In some respects, private equity deals like CPPIB's joint takeover of
The solution, Wiseman and FCLT believe, is to increase dialogue between a company seeking to make a long-term investment and its shareholders, while also tweaking incentives so that pay on both the investor and manager side matches returns. With better defined targets on investment return, management teams can better hold themselves accountable, presumably wining enough confidence among investors that short-term results are de-emphasized.
There are already many examples of the practice at work.
When
The stock is up over five-fold since acquiring Pharmasset, and as new plans and drugs come to market, Gilead has the credibility to make bold, long-term bets on treatments that will grow its top line in the future.
But long-term capex and carefully planned acquisitions sometimes do backfire. One such instance is Navistar, a manufacturer of commercial and military vehicles that bet billions it could transform the industry by creating a diesel engine.
After years of spending under CEO Daniel Ustian, the company's diesel engine didn't win regulatory approvals and it never went to market. In came billionaire activist Carl Icahn, who argued the bleeding should be stopped. He even said at investor conferences Ustian reminded him of a crazy uncle, working in his garage on machine with low odds of success, asking constantly for more time and money. Ultimately, Icahn and other shareholders were given board seats, Ustian was fired, and the company moved on from its failed diesel experiment.
Wiseman argues it's thoroughly laid out long-term plans, with constant dialogue from investors, that can free companies to think for the long-term but also keep accountability in place.
“We are not doing this for platitudes," Wiseman says of the initiative. "This can lead to better economic growth and prosperity for society overall," he adds.
