David Ikenberry is a professor of finance and the chair of the finance department in the College of Business. His research has focused on issues relating to stock-market returns as well as the informational efficiency of markets and the reasons why companies buy back their own stock. The growing influence of “activist stockholders” in corporate America has stirred fears that they are mostly speculators looking for quick profits at the expense of established companies. Ikenberry analyzes the background of these high-profile battles. He was interviewed by News Bureau business and law editor Mark Reutter.
“Shareholder activists” are now challenging management at many well-known companies. Carl Icahn’s bid to break up Time Warner and attempts by investor groups to “unlock value” at Wendy’s, Circuit City, General Motors and H.J. Heinz come to mind. What is shareholder activism, and why does it seem to be so common today?
At its crux, shareholders are exercising the voting authority associated with the corporate stock they own. This authority is not unlike citizens exercising their right to vote. Activists are investors who at some point become disgruntled with a company’s management and look to acquire seats on the board as a means of changing the direction of the firm. In the case of Carl Icahn, he not only expressed his intent to acquire board seats at Time Warner, but also advanced a detailed reorganization proposal to split up what many view as a failed merger.
Why don’t activist shareholders simply sell their stock?
“Voting with your feet” is an obvious alternative. But with the tremendous growth of pension funds like TIAA-CREF and index funds, many investors do not have the luxury of selling their positions in large multinational companies. Instead, they need to make sure that those companies are well run and produce a solid return on investment. Moreover, a new type of investment vehicle has emerged, the hedge fund. These private funds follow various techniques to leverage up their return potential, including buying stock in underperforming companies and counting on the gains of a turnaround. One such investor is Ralph Whitworth of Relational Investors LLC, a $2.2 billion investment fund. He is now involved in a closely watched case with a Pennsylvania bank, Sovereign Bancorp. Big pension plans become a ready audience to hear the ideas that activists like Ralph Whitworth and Carl Icahn propose.
What factors lead shareholders to have these quarrels?
The quarrels do not happen randomly. They occur in firms that have suffered from poor performance, particularly stagnant or declining stock prices. After the scandals that destroyed tens of billions of dollars of stockholder value at Enron Corp., WorldCom and other companies, such issues as questionable expansion plans, high executive compensation and poor governance practices understandably draw the ire of investors.
What is the track record for shareholder activism?
The evidence is mixed. Older empirical research concluded that a typical company did not seem to benefit from activist investors. In fact, activism was associated in many cases with a further decline in an already bad situation. However in the 1990s, the rules governing proxy fights changed, which made it easier and less costly for shareholders to organize and engage in activism. I am currently working on a project to reevaluate the impact of the rules change. Preliminary findings suggest that while the track record has improved, shareholder activism still does not lead to “turnaround magic” at a troubled company.
If the track record is mixed, does it follow that the Securities and Exchange Commission should limit or restrict what might appear as obstructionist behavior?
Government intervention is probably unwarranted at present. While we have read a great deal in the press about Time Warner and the earlier battle to oust Michael Eisner as CEO of Walt Disney Co., the frequency of these cases is quite small. In any given year, well below one percent of all U.S. firms are confronted with activist campaigns. Moreover, activist stockholders engage in an important function. Executives need to be held accountable for their actions, and shareholders who are willing to do something about failed mergers or poor capital expenditures are a plus to the economy. And the unspoken threat that these investors pose serves as a powerful force for CEOs and boards of directors to follow best-practice behavior.
