Long-time corporate executive apologist Martin Lipton finally figured out that there is something worse than unhappy institutional investors calling for better performance from corporate executives and directors — activist hedge funds. So, he offers an olive branch by suggesting that the institutions do what they have been doing all along — act like the long-term investors that they are. There are some worthwhile ideas in his piece, with two exceptions. First, he describes the destructive actions companies take to protect themselves from activists without acknowledging he is the architect and advocate of these devices. Second, his call for joint pursuit of sustainable growth would have more credibility if he would describe what he would consider to be constructive engagement by long-term investors.
BlackRock, Vanguard, and State Street, as well as a number of other major institutional investors, are saying that their support for the long-term plans of a company and their support of its management against activist attacks are conditioned on their satisfaction (1) that the long-term plans have been carefully considered and are understood by the directors, (2) with the company’s corporate governance, (3) with the expertise and independence of the directors, (4) with their ability to engage directly with the directors, (5) with the frequency and quality of regular evaluation of the performance of the directors, and (6) that executive compensation is tied to performance and total shareholder return.
Taking them at face value, these institutions recognize that by not confining their support to only those situations where a change in strategy or management is clearly and appropriately warranted, they are forcing all companies to manage as an activist would and thereby reduce capital investment, research and development, employee training, marketing, new product introduction and—most damaging—steady employment. While they have not been explicit, hopefully the institutions recognize that they are the last hope in taming the activists and reversing short-termism short of federal legislation that is unlikely to pass and is by no means desirable—that cure often being worse than the illness. However, when it is recognized that short-termism is having a major adverse impact on long-term growth of companies and serious retardation of growth of GDP with a major contribution to inequality, there is a likelihood that serious legislation could be enacted, or at least as is being proposed by the European Union, legislation encouraging institutional investors to focus on long-term investment.