Latepost Marty Lipton: Shareholder Champion, Stakeholder Protector Or Administration Tool?

I do non personally know Marty Lipton, nor receive got I met him. Based on what I receive got read nigh him in addition to past times him (he is a prolific writer), he strikes me every bit an extremely competent lawyer in addition to he is sure enough a skillful friend in addition to champion of New York University (the establishment that I instruct at), chairing the board of the trustees for the university. I receive got never, though, idea of him every bit a champion of long term shareholders inwards publicly traded companies, which is the run he plays inwards a recent article past times Andrew Sorkin inwards the New York Times.

The article itself was precipitated past times a post, titled "Bite the Apple, Poison the Apple", past times Mr. Lipton inwards the Harvard Law School Forum on Corporate Governance in addition to Financial Regulation, where he argued that the threat to the society from activist shareholders (and David Einhorn, inwards particular) should serve every bit a clarion telephone cry upwards for activity to bargain amongst the misuse of shareholder power. I am non sure what powers Mr. Einhorn misused inwards making his illustration that Apple should do something amongst its cash, but knowing Mr. Lipton's views on corporate governance (which is to side amongst incumbent managers, no affair what), I was non surprised past times the article, but I was that it was picked upwards inwards the New York Times past times Sorkin. In his article, Sorkin implicitly accepts Lipton's stance that activist investors are curt term, that they do harm to companies past times beingness song in addition to that long term shareholders are non served past times activism.  I mean value he is incorrect on all iii counts.

1. Activist Investors are no to a greater extent than curt term than whatever other investor group

To address the query of whether activist investors are interested inwards the long term, Sorkin quotes Leo Strine, the Chief Judge of the Delaware Court of Chancery, who seems to receive got seen show to conclude that "the response is ordinarily no".  I consider myself to last a long term shareholder: I do my homework earlier buying the shares in addition to I receive got a median asset menses of 8 years. I don't operate nether whatever illusions nigh what drives activist investors to do what they do, which is the wishing to make money on their investments (and who does not?). However, I receive got non seen whatever show that would Pb me to believe that activist investors are whatever to a greater extent than curt term than whatever other grouping of investors, in addition to at that topographic point is, inwards fact, show to the contrary. 

• Holding period: The studies that I receive got seen of both artnoy%20Thomas%20-%20The%20Returns%20to%20Hedge%20Fund%20Activism.pdf" target="_blank">institutional activists (holding menses of nigh twenty months, on average) and private activists render show that they grip their investments for longer than their passive counterparts. In fact, Sorkin undercuts his statement that stockholders are curt term past times noting that Nelson Peltz has been a stockholder inwards Heinz for to a greater extent than than half dozen years, Bill Ackman is a long term investor in addition to manager at JC Penney in addition to David Einhorn has held Apple stock for many years. 
• Cash focus: It is truthful that activist investors oft force for companies to render to a greater extent than cash to stockholders, either every bit dividends or inwards stock buybacks, but why is this show that they are curt term? Assuming that companies that reinvest coin dorsum into their ain businesses are to a greater extent than long term than companies that render cash makes no sense, if these companies operate inwards bad businesses. The companies that are typically targeted past times activists are mature companies that receive got cash surpluses in addition to relatively few investments in addition to returning cash dorsum to their stockholders strikes me every bit precisely what investors would wishing them to do.

It is possible that Judge Strine was misquoted on his claim that activist investors are ordinarily curt term, in addition to if so, he should ready the tape straight. It is also possible that he has show to dorsum his claim, in addition to if he does, I would dearest to catch it. There is a tertiary possibility that he was engaging inwards closed to casual empiricism, which nosotros are all inclined to do forthwith in addition to then, but is a unsafe practice, if yous are the main guess inwards 1 of the most powerful courts (at to the lowest degree when it comes to describe of piece of work organization law) inwards the country.

2. Activist investors receive got every correct to last vocal, fifty-fifty if they are wrong

Sorkin is disturbed past times the usage of the media past times activists to brand their illustration for change, in addition to that the alter that they are pushing for may non last the "right" alter for other shareholders inwards the long term. I don't part his trepidation nigh either one. As a long term investor who is looking for cost catalysts, I envy the megaphones that activist investors receive got to broadcast their views in addition to last their ain catalysts. Not also that activist investors are non lone inwards using the media to brand their cases. In fact, the media's favorite long term investor, Warren Buffet, has never been shy nigh using the media to skillful resultant to generate returns on his investments.

Do private equity investors force for changes that may non last inwards sync amongst long term stockholders? Sure! I receive got argued that activist investors are oft likewise focused on "financial' value creation in addition to likewise petty on "operating" value creation. However, it is a bound from at that topographic point to claim, every bit Mr. Lipton has, that David Einhorn does non receive got the correct to brand his statement or that doing it inwards public is somehow damaging to Apple. As a shareholder, he has every correct to brand his illustration in addition to the repose of the shareholders receive got the correct to determine whether they grip amongst his proposal or amongst incumbent managers (who may oppose it).  You don't receive got to believe that managers are ever incorrect in addition to activist investors are ever correct to also believe that it is salubrious for everyone concerned for managers to receive got to explicate what they are doing to stockholders. If managers are credible (and their rails tape volition play a run inwards this) in addition to tin brand a skillful illustration that they are correct (and activist investors are wrong), they stand upwards a skillful run a peril of winning over stockholders to their side. If managers are non credible and/or turn down to brand a illustration for their actions, I mean value that stockholders volition in addition to should last to a greater extent than receptive to activist investors' suggestions. 

3. Long term shareholders are good served past times activism

As a shareholder inwards whatever company, I welcome the appearance of an activist investor (or two) into the shareholder ranks. The game, every bit it is structured, is tilted inwards favor on incumbent managers. Activist investors, motivated every bit they are past times self interest, aid to shift the residuum dorsum (even if it is just a petty bit). In fact, inwards the absence of activism, yous tin repose assured that boards of directors volition travel on to last prophylactic stamps for  CEOs pushing through their ain agendas, aided in addition to abetted past times an ecosystem of lawyers, bankers in addition to consultants who make money of the condition quo. And the condition quo stinks at many companies, amongst nigh tertiary of all publicly traded companies actively destroying value for their owners. (I volition dorsum this upwards inwards a hereafter post) It is these companies that are disproportionately targeted past times activist investors in addition to deservedly so, in addition to long term stockholders welcome them, for the most part. In fact, the show suggests that stock prices at companies targeted past times activist investors travel upwards on the statement of the targeting, in addition to remain upwards for the long term. 

As for Mr. Lipton, he has either created or had a mitt inwards creating closed to of the worst abominations inwards corporate governance. From fathering the "poison pill" to arguing that  stockholders should receive got no enjoin on CEO pay, he has been on the management's side of every corporate governance number over the finally iii decades. In fact, reviewing his briefs over the years, it is clear that his occupation is non amongst activist investors but amongst whatever investors who deign to query administration motives or actions. To Mr. Lipton, the just skillful stockholders are masochists, who takes the penalization that is meted out silently, heighten no protests in addition to vote amongst their feet.  As a stockholder, I would rather receive got David Einhorn, at his worst, on my side than Mr. Lipton at his most magnanimous. To argue, every bit Mr. Lipton does inwards his brief on Apple, that his entreaties on part of administration are inwards the best interests of long term stockholders is analogous to making a illustration that Marie Antoinette was actually championing the drive of French bakers when she supposedly asked her starving public to consume cake. 

What nigh the other stakeholders inwards the firm? When apologists for administration usage the interests of other stakeholders every bit their shield against accountability, I, for one, convey it for it is, a smokescreen. I don't believe that managers who  insulate themselves against stockholder pressures tending nigh protecting the interests of employees, customers or society. In fact, I volition wager that these managers volition usage the same "other stakeholder interests receive got to last served" excuse amongst each of these groups, spell the just involvement grouping that is finally served is their own.

In fact, I mean value that the society that Mr. Lipton focused on, inwards his post, Apple, illustrates my point. I dearest the society in addition to its products but every bit a stockholder, I receive got travel increasingly frustrated amongst its managers, inwards general, in addition to Tim Cook, inwards particular. In fact, I am non alone, since a tertiary of the stockholders at the annual coming together a curt spell agone voted against his pay package. As I catch Mr. Cook travel from forum to forum, proverb cipher of nub in addition to wreaking havoc on the stock cost almost every fourth dimension he talks, I wishing to a greater extent than activism, non less. 

Bottom line

Managers at public companies are human, brand mistakes, in addition to are oft unwilling to alter their minds (or ways) without pressure level from stockholders. The boards of directors at these companies, inwards spite of all of the corporate governance legislation passed inwards the finally few decades (or maybe because of the legislation) tend to travel along amongst incumbent management, unless pushed to act. That force volition non come upwards from traditional institutional investors, who are likewise timid or lazy to challenge the condition quo, in addition to the pocket-size shareholders (long term or curt term) receive got petty run a peril of beingness heard. Without activist investors rocking the boat, who is left to challenge managers to explicate their actions?  

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