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Activism Not So Bad For Companies, Says Columbia Law Review Study

Contrary to claims that activism hurts a company’s long term outlook, Lucian Bebchuk, speaking at the Federalist Society Conference in Washington DC, said activism actually helps.

Bebchuk, author of a forthcoming study with Alon Brav, and Wei Jiang titled “The Long-Term Effects of Hedge Fund Activism,” due out in June 2015 from the Columbia law review, says the claims by myopic activists are just wrong, specifically pointing out one activist critic by name – Marty Lipton.

Activism and long term investment horizons

Myopic activists claim activist interventions by investors that do not have long investment horizons tend to produce “myopic” corporate changes, which come at the expense of long-term performance and value. They claim activist interventions are in the long term detrimental to companies and their long-term shareholders.

Bebchuk cites a Dealbook opinion piece written by William George, former Medtronic CEO, as an example of common wisdom. George wrote Activist investors “lobby for significant… changes, hoping to drive up the share price and book quick profits. Then they bail out, leaving corporate management to clean up the mess.”

She notes a common defense being mounted as boards are increasingly being advised to take an adversarial stance when an activist comes calling. Some of these tactics include 10 percent poison pill provisions that limits activist influence, staggered boards that limits the ability to take over a board of directors in a short period of time, and limits on the rights of short-term shareholders that specifically targets activists.

A regression analysis, however, shows a different story. Using control factors in the study for industry, firm size, and year, shows that three, four, and five years after the activist intervention, the levels of company stock performance are higher.

Activism made companies vulnerable

Bebchuk then tackles the question: Did activist interventions during 2004-2007 make companies more vulnerable to the subsequent financial crisis? Her findings were that “changes in operating performance during the crisis period indicates that such targets were not more adversely affected by the crisis than companies without activist interventions.”

As a result of her study, Bebchuck says that, policymakers, institutional investors and boards should:  Reject arguments based on the claim that activist interventions tend to be detrimental to long-term value, as well as reject calls for legal and corporate arrangements that impede and discourage shareholder interventions.