Opinion: The Fallacy of Activism’s Impact on Corporate Activities

  • 0
  • 28. May 2015

Peter LPeter Lupoffupoff
CEO & Portfolio Manager,
Tiburon Capital Management, LLC

Better corporate stewardship, heightened community of interest between managements and stakeholders through aligned compensation, protracted low interest rates and asset reflation via global quantitative easing created a perfect environment to foment shareholder-friendly events.[1] Concurrent with this organic evolution, managers who’ve visibly pressed for such behaviors have performed well and raised significant amounts of money in the process. Drivers of these events are likely independent of activist’s campaigns and their attributed successes. The coincidence of activist involvement and the occurrence of shareholder-friendly events suggest continued flow of investor capital into activism and further campaigns and outcomes (largely notwithstanding activist activities).

Activist Assets Under Management Growth

Activists AuM GrowthSource: Morgan Stanley 

Activism is a Tool of Event-Driven Managers, Not a Separate Strategy
Activism is not an event – it is merely a tool for hastening or enhancing the probability of a potential catalyst. I am hard pressed to understand the ardor for investing more narrowly in a tool of a strategy versus a broader event-driven strategy allocation. I believe there is moral hazard in a narrowly defined activist approach and that arguably, “activism” returns are coincident with or correlate to the underlying events already likely, rather than causing them. 

The Moral Hazard in Narrowly Defining an Event-Driven Strategy by the Tool of Activism
Among the myriad catalysts that can unlock value, why would you choose to limit yourself to those where waging an activist campaign is the basis solely? Further, if a company is considering the action the activist desires (many do, and say so), what purpose then, in publicly pressing for what inevitably comes (other than marketing)? The very nature and act of any exhaustive campaign, particularly if waged publicly, give rise to the moral hazard that the manager increasingly, in light of the failure of his/her cause, seeks and finds support in data (confirmation bias) to justify the time and effort. Finally, when activist public entreaties help drive share price to full value before the contemplated event’s occurrence, others can simply harvest gains with timely exit. The activist may have the moral hazard of needing to hold positions, face-saving, because of the public nature of their skirmish. In other words, event-driven managers (vs activists more narrowly) participating in the same situations can more dispassionately trade the positions when the risk/reward skews in irrational ways, well before any catalyst unfolds.

The Coincidence of Activism and Shareholder-Friendly Factors
There are many drivers converging to hasten shareholder-friendly events worldwide. These drivers are independent of activist’s campaigns and their growing asset growth and attributed successes. Given their coincidence, one will beget the other. Activists will call for shareholder-friendly events. Companies will consider them (many prior to activist’s entreaties). Successes due to increased market pressures and visibility, ROIC considerations, will favorably influence activists’ AUM growth, despite the moral hazard of activism – the tool, masquerading as activism – the strategy. The rest of us can trade with or against these financially interested Actors.

[1] See Tiburon White Paper, The Seismic Shift towards a New Corporate Social Contract, Lupoff, Shark Bites, Vol 4, Article 1, September, 2013 http://tiburonholdings.net/uploads/The_Seismic_Shift_towards_a_New_Corporate_Social_Contract_Final.pdf