Mar 30 2014, 1:00pm CDT | by Forbes
Some very high powered judicial figures and institutional investor giants are coming down hard on insatiable promotional shareholder hedge fund activists like Bill Ackman, Daniel Loeb or Carl Icahn for self-interested activities that are distracting boards of directors on matters of short term influence on stock prices. It is a sign that some establishment powers-that-be believe the pressure for common stocks to perform in order to raise hedge fund returns may not necessarily be in the public interest of the long term benefits of finance capitalism.
I call it an extraordinary intervention into the debate when the Chief Justice in the state of Delaware Court, where many hard-fought battles take place, Mr. Leo Strine, published in the Columbia Law Review a long tongue-in-cheek attack on the advocates of short-term share maximization. Mr. Martin Lipton, the senior partner of law firm Wachtell Lipton, could not have found a better placed ally even if he had seconded the Chief Justice of the U.S. Supreme Court to his side. Strine has ridden to the rescue of Lipton in his fairly emotional debate with his bete noir, Harvard law professor Lucian Bebchuk. Strine charges Bebchuk with wanting all power to the money managers rather than the corporate managers.
Strine loads the dice by differentiating money managers like BlackRock who make decisions for the “end-user” long-term investors. It’s clear Strine properly questions why the directors and managers of large public corporations “must follow the immediate whim of a momentary majority of shareholders” tempted by the activists into some short-term adventure that could push the stock up. Pushing the stock up 10% for a hedge fund that is making leveraged bets is pleasant for their well-heeled investors, but may not be in the long term interests of the majority of shareholders in institutions that are making longer lasting bets. If corporate managers are astute, they will recognize their allegiance to interests of the mutual fund or pension manager over the opportunistic demands of a hedge fund who is looking for immediate performance.
In fact, Strine has a very powerful ally in BlackRock’s Larry Fink, who tends to manage passively managed index funds for the long run. Fink is on record for thinking that the current emphasis of companies on buying in their own stock and regularly raising the cash dividend is to keep investors happy over the short run at the expense of using the money for capital expenditures that might benefit the company over the longer run. Can it be that the dearth of capital expenditures, of new investment in plant and equipment, is a terrible sacrificial price to pay to keep Ackman, Loeb and their ilk for adopting a more short term price appreciation strategy.
Strine has bigger philosophical fish to fry. He is against democracy for democracy’s sake and opposes annual election of directors, which makes them privy to a popularity contest each year that may be resolved by too much focus just on the stock price. In other words, Strine’s argument is that maximization of shareholder value should have the highest priority. If that were to be so, then, boards and shareholders would always vote for an auction to be held where the highest bidder wins. Strine wants all power to the “money manager agents who wield the end-users’ money to buy and sell stocks for their benefit.” Bebchuk is not going to be happy with the Judge’s description of him as promoting ” a crude divide between good and evil.”
So, the narrow battle between Bebchuk and Lipton has been added the ideological turf war between Strine and Fink against Bebchuk. No doubt the current malaise in the American economy is part of the motivation for this growing divide between short and long term thinking, between activists on the one hand with money managers and the company’s officers and directors. A combination of governance and stock market leadership is becoming crucial. All the better then for the high level debate.
Source: Forbes Business
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