Today VEA Senior Advisor Annalisa Barrett will appear at the San Diego CFA Society’s Putting Investors First presentation, a part of f the CFA Institute Future of Finance initiative, which is about taking a leadership role—as individual members and collectively as a global organization 129,000 members strong—to shape a trustworthy, forward-thinking financial industry that better serves society.
From her planned remarks:
To be sure, a focus on corporate governance and activism in corporate America is not new. And, certainly, companies engaging with shareholders is not new. However, there is more focus on the issue recently because of increased activity by activist funds that use attention-grabbing tactics to communicate their ideas. And, in fact, the sheer number of firms that use activist tactics have increased dramatically. According to a Special Report by Preqin:
“These funds appear to be growing in terms of both numbers and size, with Preqin data indicating that activist hedge funds now account for more than $100bn in combined assets under management. Activism is becoming a more widely utilized approach and this is leading to more hedge fund managers seeing viable opportunities for investment in this area; there were 28 new hedge funds with an activist approach launched in 2013, representing the highest number of activist fund launches since 2007.”
Additionally, boards of directors and their advisors are spending a lot more time thinking about the potential involvement for activism at their companies.
• The recent proxy contest at DuPont has received a lot of media attention. Former CEO of Medtronic, now Harvard Professor Bill George has called it the “Battle for the Soul of American Capitalism.” In an article last week he said that “outside activists play a useful role when they recommend transformation to poor management teams at under-performing companies.” However, he also voices great concern that “activist pressures will result in significant reductions in long-term corporate performance.”
• Just yesterday on CNBC, the Head of JP Morgan’s Technology, Media and Telecom Group said that they are spending one-third of their time advising boards and management teams about activism-related issues.
• A study conducted by PwC found that nearly one-third (29%) of directors surveyed said their “board had interacted with an activist shareholder and held extensive board discussions about activism in the last 12 months.”
• The academic research and other empirical studies on the effectiveness of activism remains undecided. As noted in the 2015 PwC report on Shareholder Activism:
o “Some contend that hedge fund activism improves a company’s stock price (at least in the short term), operational performance, and other measures of share value (including more disciplined capital investments).
o Others contend that, over the long term, hedge fund activism increases the company’s share price volatility as well as its leverage, without measurable improvements around cash management or R&D spending.”