Martin Lipton, co-founder of law firm Wachtell, Lipton, Rosen & Katz and inventor of the poison pill, is continuing his crusade against activist investors by trying to claim the backing of a high profile Center for American Progress report on income inequality (or inclusive prosperity, as the report dubs it).
“Among the matters studied are corporate governance and short-termism and activism,” writes Lipton on the Harvard Law School Forum on Corporate Governance and Financial Regulation blog, saying that findings from the report “support the limitations on activism that many of us believe are essential to the American economy and society.”
A decade ago, no one talked about tail risk hedge funds, which were a minuscule niche of the market. However, today many large investors, including pension funds and other institutions, have mandates that require the inclusion of tail risk protection. In a recent interview with ValueWalk, Kris Sidial of tail risk fund Ambrus Group, a Read More
CAP report condemns hostile takeovers, not activism
Lipton cites a portion of the CAP report that highlights the damage caused by ‘short-termism,’ the focus on posting good quarterly numbers instead of long-term growth, contributing to financial instability and slower productivity growth. It recommends a number of possible solutions including “taking measures to reduce the ease with which hostile takeovers can take place,” a cause near and dear to Lipton’s heart.
But the CAP report may not be as closely aligned with Lipton’s position as he makes it sound.
One of the problems with Lipton’s blanket hostility to activism, is that there are a lot of different activist firms out there using different tools to pursue different agendas. Some use a lot of publicity (like Starboard’s campaign against the former board of Darden last year), others are quiet; some firms are looking for a short-term payday that leaves the company worse off, but others want to stick around for a couple of years and really transform the business. The CAP report was co-chaired by Larry Summers and Ed Balls (with an impressive list of commissioners), so it’s not like they are unaware of activism’s recent growth. More likely, they simply don’t conflate all types of activism like Lipton does.
Decrying ‘short-termism’ is too simplistic
It’s also not a given that ‘short-termism’ is the serious problem that people like to claim it is. Credit Suisse head of global financial strategies Michael Mauboussin recently took on the issue of short-termism and found that the most common arguments don’t hold up to scrutiny. He gives the example of unprofitable companies holding IPOs, a trend that gets a lot of criticism from value investors (including this website). But it doesn’t make sense to claim that investors are completely wrapped up in next quarter’s earnings when so many are willing to invest in companies that don’t expect to turn a profit for the next couple of years. Sure, some executives are too focused on boosting earnings to hit their compensation targets, but decrying short-termism as a systematic problem is too simplistic.