Shareholder activism sounds so respectable, even noble. The phrase conjures images of good-corporate-governance folk fighting greedy or dysfunctional management in the company’s best interest. While shareholders can be disciplinarians who right the wrongs of abusive directors, many boardroom activists advance some of the most destructive short-term thinking in business today.
Sparring with management is popular sport for short-termists seeking to maximize the value of their assets. The game ranges from venal to honorable. “Don’t let the Elliott Hedge Fund pursue its self-serving short-term agenda and destroy the long term [sic] value of your investment,” Hess Chief Executive Officer John Hess wrote in a letter to shareholders last week. T-Mobile CEO John Legere blamed “greedy hedge funds” after proxy advisors to MetroPCS investors advised shareholders to block a merger with the wireless giant. In February 2012, Apple’s board agreed to majority voting, a once-fringe officer election process that can have unintended consequences and has become more common at large-cap firms. Coincidentally or not, since the resolution was adopted, Apple announced that it will distribute $45 billion in dividends from its $137-plus billion in cash reserves.
In a way, it makes sense that shareholders have become so active in corporate gamesmanship. Tussles between directors and equity holders have traditionally favored internal stakeholders; legal protections for shareholders are relatively weak. Aside from voting out management, alleging a breach in duty of care is virtually the only legal standard for holding officers accountable for wrongdoing. An alternative is litigation, and the number of securities class actions has fallen, though settlements reached $2.9 billion in 2012, around double the $1.45 billion awarded in 2011, according to a report by Cornerstone Research and Stanford Law School professor Robert Daines.
Still, short-termers have many reasons to be ebullient, as shareholders with relatively weak protections can end-run corporate governance law. These days, companies are at the mercy of a small group of highly engaged investors who want quick results. Blocked mergers and ousters are common. Moreover, spring is proxy season. Corporate lawyers are armed and ready for the “ambush,” a way for a small subset of activists to force a particular action by asking shareholders to vote on proposals that merely require written consent by the board to facilitate shareholders to act.
Proxy season this year is no different. Shareholder resolutions are as plentiful as new buds. According to the Harvard Law School Forum on Corporate Governance and Financial Regulation, about 600 already have been filed this season. They range from proposals for mandated disclosures of political spending to proxy access, majority voting, independent board chairmen, gender diversity, even compensation protocols. It’s not that these proposals aren’t worthy. It’s just that many are designed to boost shareholder value and few address the problem of short-termism.