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24 Nov. 2015 | Comments (0)
By Judy McLevey, Assistant Director, Governance Center at The Conference Board
Stock buybacks and dividends are two of the most frequent demands of activist hedge funds. A coalition of pension fund fiduciaries raised their concerns in May 2015, stating that “95 percent of corporate earnings are being distributed to shareowners, prompting us to question whether companies are adequately reinvesting for sustainable returns over the long term.”(1) In fact, business investment is at an all-time low and now in negative territory (see chart below). Facing rising short-term pressures to maximize quarterly performance, many companies may be missing opportunities for lasting growth through innovation and investment. In addition to buybacks and dividends, the activist playbook also includes winning board seats and pushing for M&A transactions - a sale of the company, spin-off of key parts of the business, or making an acquisition. With the number of activist hedge funds and AUM - assets under management – continuing to rise, activists are busier than ever and they have taken on ever-larger targets, including DuPont, Apple, and GE.
Activists have dramatically changed the business and governance landscape in recent years. To be sure, activists can play a constructive role in our capitalist society, and the opening up of dialog between company management/boards and investors (including activist investors) is generally a good thing. Where the trouble arises is when activists skew the balance from investing in business for the long-term benefit of shareholders and other stakeholders towards a short-term “Show me the Money” focus. This conflict is examined in a new research paper from The Conference Board - "Is Short-Term Behavior Jeopardizing the Future Prosperity of Business?". Short-termism has become an urgent issue. Activism, quarterly earnings pressure, executive compensation design, and changes in the capital markets that favor trading over investment all play a part. Our report offers recommendations for boards, management, investors, and policy makers to build countervailing forces that can rebalance business towards a longer term view.
(1) Scott M. Stringer, Thomas P. DiNapoli, Kurt A. Summers, Jr. and Betty T. Yee, “Joint Statement on Buybacks and McDonald’s Proxy Access Vote,” letter dated May 20, 2015 (http://comptroller.nyc.gov/wp-content/uploads/2015/05/PR15-05-057.pdf).