Activist investing: forget hedge funds, leave it to private investors
Demands from “activist investor” hedge funds are every bit as short-termist as the management teams they are trying to shake up, says Matthew Lynn. Private investors will take a long view.
Hardly a week seems to go by without a fresh activist assault on a major British company. Last week, it was the turn of the energy giant SSE. Elliott Management, one of the most aggressive activist investors, attacked the company for not spinning off its renewables business, preferring instead to keep itself intact and beefing up its plans for switching out of fossil fuels.
Elliott, of course, is best known in the UK market for its long-running campaign against the pharmaceuticals giant GSK, which has had to scramble to defend chief executive Emma Walmsley in response to the pressure. Meanwhile, Shell is under attack from the hedge fund manager Daniel Loeb, who is campaigning for it to split out its renewables unit from fossil fuels. And Barclays has managed to see off the campaign for change led by the activist Edward Bramson for now, but either he or someone else may be back soon, pressuring either the bank or another major company. The list goes on and on.
The wrong kind of activism
Of course, there is nothing wrong with shareholders demanding changes at major companies. Management teams can often become very inward-looking and complacent. They stick with strategies long after they have completely run out of steam, ignore new ideas, persist with pet projects even when they have failed, and concentrate more on rewarding senior management than the shareholders. Boards of independent directors are meant to stop that from happening, but are drawn from a small, self-perpetuating clique, with little incentive to provide any proper oversight.
And yet there are two big problems with the way change is forced on companies right now. The activists’ campaigns are starting to look every bit as tired as the companies they are trying to reform. Each time one is launched the demands are tediously familiar. A demerger? Check. More aggressive share buy-backs? Check. Sweating the balance sheet to release more cash? Check. A special dividend for shareholders? Check. Throw in something about changing the board or updating the marketing and that is about it. In reality, it is very flimsy and very repetitive, as if they are working from a script. You would get a more individual conversation from someone at a call centre.
What’s more, most of the campaigns are run by hedge-fund managers, investing borrowed money and looking for a quick profit. Their demands typically involve some financial engineering designed to generate a 20% to 30% boost to the share price over a few months and not much else. They are every bit as short-termist as the management teams they are trying to shake up and sometimes even more so.
Bring in the private investors
What activist investment needs is more involvement from private shareholders. There are some early signs of that happening. For example, the London-based investment platform Tulipshare is mobilising small shareholders to lobby for changes at big companies. It has already used votes to try and force Apple to make it easier for iPhones to be repaired (now that really is a good idea, as anyone who has paid for a new screen will know). It is now campaigning for Coca-Cola to use less plastic (another good idea, come to think of it, since we all know it tastes better out of a glass bottle anyway). This week, the company raised an extra €9.5m in funding to fund further growth.
This kind of platform might work or it might not, but there are big advantages to smaller, private shareholders pressing for changes at a company instead of a handful of giant hedge funds. They are a lot more committed to the long term. Sure, there are some day traders who just want to flip in and out of an equity in the space of a few days. But most private investors would prefer to buy shares in well-run companies and forget about them for a few years, confident that they will earn a decent return. And that means they are more likely to press for real changes in a business, rather than short-term, financially-driven fixes.