Lately, advisors have been critical about activist investors and the focus on shareholder value. The Canadian regulatory landscape provides a perfect environment for shareholders to increase their influence at the board level. At first blush, you might believe that the extra oversight is a good thing. However, as Ed Waitzer of Stikeman Elliott says, “The problem is that shareholders are highly diffuse and self-interested — with rights but no duties.” On the other hand, boards that dismiss shareholders or neglect to deal with unfavourable performance will now be held to greater scrutiny thanks to the increased involvement of activist investors. How did we get here?
Why do activists emerge?
Recently, there have been some examples of shareholder activism, at Yahoo, Research in Motion and CP Rail. As experienced non-executive chairman and activist investor Henry D. Wolfe states, “the best activist investors play a vital role in shaking up complacent boards/managements and positioning companies for maximum performance and value creation. What does not seem to dawn on people (at least not completely) is that if public company boards really understood and did their jobs, there would be no need for raiders, activists or “shareholder empowerment.” The authors of this article “What Good Are Shareholders, Harvard Business Review”), are a perfect example of this in their views that relying on the views of shareholders is a governance system that is doomed to fail.
What is the board’s responsibility when an activist emerges?
The board’s primary responsibility is to ensure that the company’s performance and value is maximized. The question – the only question – in responding to a “concerned” or activist shareholder is what is in the best interests of the company and its shareholders? Directors are there to control management in the interests of shareholders, not be beholden to management or hostile to shareholders.
Self interest by boards when an activist emerges?
And – this is very important – directors cannot act out of self-interest. An activist emerges because the board is not doing its job. If the company assets and performance were being managed efficiently and effectively, there would be no need for shareholder activism. Activism occurs when voices are not heard. Boards need to take a look in the mirror. They need to accept that activists may have ideas that can improve cases of poor management and lackluster board performance. Directors might find this tough to do because it might require that step down and let other directors take over.
Even more surprising, apart from self-interest, are the views of academics, such as Roger Martin, the highly regarded dean of the Rotman School of Management at the University of Toronto. Martin, who is critical of the emphasis on shareholder value, was a member of the RIM board decline in performance and destruction of shareholder value. We also have to remember that Harvard’s Jay Lorsch served on the board of Computer Associates in 2004, when CA paid $200-plus million to the U.S. Department of Justice in restitution to shareholders to settle charges of accounting fraud and obstruction of justice. Joe Nocera, in his New York Times column, states that Lorsch has little use for shareholders. Lorsch believes that employees and customers have a longer term commitment to the organization than shareholders do. Activist shareholders bring these situations to light.
Keeping them honest. Caveat emptor.