Whenever activist American investors venture north of the border, they prompt feelings ranging from despair among executives and directors of targeted companies to delight among Canadian shareholders, who, in some cases, have put up with lacklustre results and do-nothing boards for far too long. Share prices tend to immediately rise, amid vows to shake up boards and managements, implement aggressive reforms, sell off assets and boost dividends. But critics say the new breed of activist fund managers care only about quick scores.
Occasionally, notably in the case of Bill Ackman and his battle with Canadian Pacific, the pressure from activist investors works, the old guard is swept out and shareholders win. And even if nothing happens, the instigators typically depart with more than enough profit – and more converts to their hedge funds – to make the sojourn worthwhile. An academic study in 2011 showed that U.S. equities with activist investors involved outperformed the broader market by more than 20 per cent on an annual basis. No wonder activist funds have been one of the faster-growing segments in the vast hedge fund universe.
Now, we have billionaire investor Carl Icahn taking a run at chronic underperformer Talisman Energy. His almost 6 per cent stake in the energy producer makes him the second-largest shareholder and gives him the foothold he needs to agitate for change. Most of these shakeup artists are delighted to portray themselves as tireless protectors of shareholder interests whose efforts make boards more accountable and produce better-run companies with healthier long-term prospects.
Those who rail against activists insist that, unlike, say a value investor like Warren Buffett, the Icahns of the world never stick around long enough to worry about the long-term impact of the changes. This type of activism comes with a heavy cost that is already visible in a slew of companies run by people who are more concerned about meeting quarterly revenue and profit targets – and safeguarding their hefty bonuses – than committing, for instance, to research and development of new products or processes that might take years to produce a shareholder-friendly payoff.
Nobel laureate economist Edmund Phelps casts a wider net of blame for this trend, citing the pernicious influence of all equity funds. "This idea of people's capitalism, where everybody owns a little bit of every company [through mutual funds] is just a disaster," the Columbia University professor told me recently. "It means that no company is owned by anybody who knows anything about it really. That's just no good. ... It's not consistent with highly innovative companies, which raises all sorts of questions about which ones society should be betting on."
Back in the debt-fuelled takeover craze of the 1980s, the 77-year-old Mr. Icahn and others of a similarly acquisitive bent were known as corporate raiders and greenmailers for their lucrative assaults on entrenched managements. Today, they wear somewhat friendlier garb, but the goals are similar: to squeeze more value out of laggard performers and then move on to the next target. Any shakeup of Canada's clubby boardrooms by these activists that improves governance and accountability ought to be welcomed. But there exists a happy medium between the short-term goals of the invaders and the long-term interests of the Canadian economy.