Activist investing provides one possible answer. Equity activism means using your voice and voting rights to improve companies in ways that maximize value for all shareholders. Seen in that light, index funds should consider activist investors to be natural allies. Some index-fund firms have begun to focus on voting, governance and the potential benefits of of smart, honest professionals to promote best practices across their activism. They’ve deployed teams entire holdings. Certain aspects of corporate governance as a whole have improved—in some firms’ cases meaningfully—thanks in part to these initiatives. On a company-specific level, however, with thousands of companies to be evaluated, it is impossible for these teams to do the kind of comprehensive financial and operational analysis required to identify corporate situations in need of change. Activist investors can play this critical role, so long as the governance teams at large passive investing firms are willing and able to on their merits. Unfortunately, as soon as an evaluate activists’ ideas activist shows up at an underperforming company with an idea for creating value, the company’s advisers frequently seek to make the debate about time horizons. Index-fund firms are encouraged to look with suspicion at any idea whose benefits would crystallize in the near term—regardless of whether the idea represents the best possible alternative for shareholders in the long run as well. The canard that activist shareholders promote short-term gains at the expense of long-term value has been utterly demolished by academic Bebchuk more than 2,000 activist research. Harvard’s Lucian events spanning 13 years and found that these interventions resulted in a 6% rise in stock prices on average and that targeted companies managed to hold on to these gains, above their benchmarks, over a five-year period. Besides being contradicted by the facts, the short-termism accusation makes no logical sense. My firm has a 40-year track record. Our currency is our credibility. If our activism did not create long- and value, we would have a hard time persuading management, boards and other shareholders even to listen to us, much less implement our ideas. Activists who push for solely are “short-term” solutions themselves going to be players. “short-term”
Activist investing provides one possible answer. Equity activism means using your voice and voting rights to improve companies in ways that maximize value for all shareholders. Seen in that light, index funds should consider activist investors to be natural allies. Some index-fund firms have begun to focus on voting, governance and the potential benefits of activism. They’ve deployed teams of smart, honest professionals to promote best practices across their firms’ entire holdings. Certain aspects of corporate governance as a whole have improved—in some cases meaningfully—thanks in part to these initiatives. On a company-specific level, however, with thousands of companies to be evaluated, it is impossible for these teams to do the kind of comprehensive financial and operational analysis required to identify corporate situations in need of change. Activist investors can play this critical role, so long as the governance teams at large passive investing firms are willing and able to evaluate activists’ ideas on their merits. Unfortunately, as soon as an activist shows up at an underperforming company with an idea for creating value, the company’s advisers frequently seek to make the debate about time horizons. Index-fund firms are encouraged to look with suspicion at any idea whose benefits would crystallize in the near term—regardless of whether the idea represents the best possible alternative for shareholders in the long run as well. The canard that activist shareholders promote short-term gains at the expense of long-term value has been utterly demolished by academic research. Harvard’s Lucian Bebchuk more than 2,000 activist events spanning 13 years and found that these interventions resulted in a 6% rise in stock prices on average and that targeted companies managed to hold on to these gains, above their benchmarks, over a five-year period. Besides being contradicted by the facts, the short-termism accusation makes no logical sense. My firm has a 40-year track record. Our currency is our credibility. If our activism did not create long- and value, we would have a hard time persuading management, boards and other shareholders even to listen to us, much less implement our ideas. Activists who push for solely “short-term” solutions are themselves going to be “short-term” players.