(James Saft is a Reuters columnist. The opinions expressed are
By James Saft
May 6 Warren Buffett and Charlie Munger might be
the greatest investing team of all time but they are dead wrong
about the merits of activist investing.
"I don't think it's good for America," Munger said when
asked about activist investing, the practice of building stakes
in companies in order to try to pressure management to change
The irony is that Berkshire's annual jamboree is sometimes
called the 'Woodstock of capitalism'. Nothing could be more
capitalist than the owners of companies influencing how they are
run, and yet in the form of shareholder capitalism now practiced
in the U.S., with its self-protecting circles of top management,
boards and consultants, this sometimes feels like a principle
more honored in the breach than in the observance.
Buffett was a bit more nuanced than Munger, noting that
activism "won't go away and scares the hell out of all our
Both statements are true, and here's hoping they stay that
Buffett has attracted criticism from no less an activist
than Carl Icahn, who penned a piece in Barron's taking exception
to Buffett's decision to abstain from a vote on a widely panned
executive compensation plan at Coca-Cola, of which he
owns about 9 percent. Buffett instead is reported to have
elected to work behind the scenes towards a revision.
That unwillingness to publicly call out managers, often the
result of a chummy familiarity, is typical of those who own
large stakes in companies, many of whom, like Buffett, aren't
just investors but agents acting on behalf of other investors.
Buffett and Munger, of course, are much to be preferred to
the usual run of mutual fund or pension manager, who often
neglect corporate governance, thereby abetting the growth and
growth of executive compensation. This 'beat the stock market'
culture of investing has led many to see corporate governance as
a sideshow, believing instead that their role is to pick market
winners and avoid losers.
That's a lot easier than getting your hands dirty with
corporate governance, which is usually less immediately
gratifying than watching prices go up and down on a trading
Unfortunately it has, along with inadequate shareholder
protections in law, led to a situation in which top insiders are
able to extract more than their fair share of the value
That's opened up the way for investors like Icahn, who swoop
in and publicly pressure companies to change policies, often by
returning more cash to shareholders via dividends or share
None of this is to say that Icahn and other activists are
always, or even usually, right. Arguably their voices are louder
than they ought to be because of the deafening silence from so
many other share owners.
But activists do play a generally useful role despite
sometimes arbitraging a broken system to their own advantage. As
it stands, company governance is a system of opposing forces
which can't come into balance because insiders are too difficult
to dislodge. That's why activists are so irritating to
management, and also why they are so needed.
Critics often says that activists act myopically, bringing
on short-term spikes but hurting longer-term performance. The
data tells a different story.
A 2013 study of more than 2,000 hedge fund interventions by
activists found improved operating performance in the five years
after the fracas. That held true also for interventions using
hostile techniques, according to the study by Lucian Bebchuk of
Harvard Law School, Alon Brav of the Fuqua School of Business at
Duke and Wei Jiang of Columbia Business School.
The study found "no evidence that the initial positive stock
price spike accompanying activist interventions fails to
appreciate their long-term costs and therefore tends to be
followed by negative long-term consequences; the data is
consistent with the initial spike reflecting correctly the
intervention's long-term consequences."
There is a real possibility that the next 20 years of
investing will be a lot less juicy for shareholders than the
last 50. While the reasons why this may prove true are complex,
demographics alone argue that far more investors will be in the
stage of life in which they are selling their stakes to live on
rather than building them up. It is also easy to observe that
the equity risk premium, a simple measurement of what the stock
market offers, has been in long-term decline.
If a long period of low returns does come, one of the
easiest ways for investors, otherwise known as owners, to make
good will come through better corporate governance.
That would be a Woodstock, in other words, with many more
(At the time of publication James Saft did not own any direct
investments in securities mentioned in this article. He may be
an owner indirectly as an investor in a fund. You can email him
at firstname.lastname@example.org and find more columns at blogs.reuters.com/james-saft)
(Editing by James Dalgleish)