Shareholder Activism Might not be Good for Shareholders

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Vikram Bath

Vikram Bath is the pseudonym of a former business school professor living in the United States with his wife, daughter, and dog. (Dog pictured.) His current interests include amateur philosophy of science, business, and economics. Tweet at him at @vikrambath1.

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12 Responses

  1. Avatar NewDealer says:

    Semi-OT:

    How do you feel about activists who use stock ownership and investments to promote socially responsible practices?Report

  2. Avatar Major Zed says:

    The right amount of cash cushion is a balancing act that makes sense once you start looking into the Modigliani-Miller failure modes. Obviously too little cash increases risk and could require going to the capital markets to raise funds when it might be costly or difficult to do so. Too much cash, though, runs into (1) agency problems wherein the shareholders are not confident the funds won’t be squandered on management perks and (2) the time value problem in that it is probably not earning an appropriate rate of return and would be better for shareholders to be put into their pockets, now rather than later.

    Finding that right balance is tricky and non-obvious, especially if you do not have full information about the firm’s situation and prospects (investment opportunity set). So, yeah, listen to both sides.Report

    • Avatar Vikram Bath in reply to Major Zed says:

      In fairness to Beacon Capital, their letter mentions both of those issues. They say Jos A Bank is creating its own fiefdom and is likely to waste their excess cash on an overpriced acquisition in the future.

      The rate of return issue is something I tend not to worry so much about as a long-term investor personally, but the market seems to care very much about such things.Report

  3. Avatar zic says:

    I think the whole problem with share-holder value is that its measure might too often be calculated as financial value, without consideration of other potential valuations. Good will, for instance. Or investment in R&D. Corporate responsibility.

    CEO pay reflects this, too; a pay scale too often based on short term valuation at the expense of those other values.

    So that make you’re whole conversation. . . fraught. Yes, if the only value worth considering is short-term shareholder profits, you’re probably correct. In that scenario, share-holder activism will often be an effort to garner short-term profits before liquidating the stock; and I think that’s what you might be getting at.

    The problem here is setting up a sensible structure for determining value other then just profit$. And there, I don’t think there’s enough shareholder activism, not by two shakes of a lambs tail.Report

    • Avatar Vikram Bath in reply to zic says:

      My claim is really just that almost all shareholder activism we have now is about increasing leverage and one way or another accelerating payouts to shareholders rather than improving the actual operating business in any meaningful way. Most shareholder activists are startlingly unimaginative.

      I’m on board with the idea that other types of shareholder activism are lacking though.Report

      • Avatar zic in reply to Vikram Bath says:

        So what we’re really discussing is that share-holders interested in short-term gains, not on-going financial health of the company, are more likely to get jiggy with things; to try and influence the company’s direction, and often at the expense of long-term investors.

        It’s sorta like regulatory capture.

        I wonder: is there a term for this phenomena?Report

      • > share-holders interested in short-term gains, not on-going financial health of the company

        Yes, though I framed it as short-term shareholders vs. long-term shareholders. Then again, the guys I mention as being “short-term” are still holding on to their stock for a few years in most cases. For a lot of investors, that would be considered long-term.

        > term for this phenomena?

        I don’t know that there is a domain-specific term. To be honest, I’m not sure anyone other than me thinks this is a problem for it to be given a name.Report

      • Avatar zic in reply to Vikram Bath says:

        @vikram-bath , I think it a problem worthy of a name to help people recognize it when they see it.

        So that makes two. Lovely agreeing with you.Report

      • Avatar Patrick in reply to Vikram Bath says:

        You can add a third vote in there.Report

  4. Avatar Paul Barnes says:

    Check out Stephen Bainbridges blog: http://www.professorbainbridge.com/

    He talk a lot about it.Report

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