Activist shareholders turned into villains

SHAREHOLDER activists such as Carl Icahn (pictured) used to be seen as capitalist villains, known as "corporate raiders" and "greenmailers". Now even the head of the Securities and Exchange Commission, America's main markets watchdog, says they have shed their "distinctly negative connotation" and may be a force for good by helping improve how public companies are run. What changed?

Back in the 1970s and 1980s, when Mr Icahn and other veteran shareholder activists were starting out, they often did seem to be getting rich at everyone else's expense, even their fellow shareholders. Typically, they would buy a chunk of shares in a company and then threaten to kick up a fuss about how badly run it was. Rather than face months of bad headlines and distraction, management would often persuade the raiders to go away by paying well above the market price for their shares. Other shareholders did not benefit from this—indeed, in effect they paid for it, so "greenmailing" was soon ended by a combination of peer-group disapproval and regulation.

Today, shareholder activists only prosper by helping all shareholders get richer. In general, they will still buy a chunk of shares; but now they will publish their ideas for how the company could be better managed, and then campaign to get their fellow shareholders to pressurise management into adopting the ideas. The changes they propose vary: sometimes, as when Mr Icahn took on Apple recently, they call on a company with a big cash mountain to hand some of the money back to shareholders; sometimes they seek a change of both strategy and boss, as Dan Loeb did at Yahoo. Although shareholder activists are most active in America, they are increasingly to be found in every corner of the world.

There are still plenty of critics of shareholder activists, who want them to be regulated more heavily. They point out that some of their ideas have turned out disastrously, such as when Bill Ackman got J.C. Penney, a struggling retailer, to appoint Ron Johnson as its boss, or when Chris Hohn, a British shareholder activist, triggered the disastrous sale of ABN-Amro, a big Dutch bank, just before the financial crash. More broadly, the critics claim that shareholder activists push management to do things that boost the share price in the short term—long enough for the activists to take their profit—but reduce the firm's value in the long term. The evidence seems to disprove this. One recent study of 2,000 interventions by activists found that, on average, five years later the share price and operating performance of the target firm had been stronger than that of rival firms. It is such evidence that activism tends to make all shareholders better off that explains why the reputation of shareholder activists continues to improve.

Source: The Economist. See more at: