Activist investors: Publicly listed companies fear them. Corporate governance pundits generally do not trust them. Retail investors quietly applaud them, and most laymen do not understand them. However, it is clear that in today’s complex corporate world, we need them. Activist investors may be the only players in the game that can effectively “Occupy Wall Street”.
We have entered the twilight zone when it comes to corporate governance. The zone where many Boards bury their head in the sand when it comes to breaches in compliance, as in the case of HSBC and the tax evasion scandal of February 2015. Certain Boards passively bow to the dictates of executive management, throwing all accountability on the corporation-as-entity, with no individual responsibility. All other stakeholders, from shareholders to suppliers, to workers, to humble taxpayers are left to peck at what is left of net worth after the share price dives and are left to fork out money for regulation and reconstruction.
To be fair, in the recent past activist investors have been noted for short-termism. Short-termism is the process by which an activist fund may coerce target companies to conduct strategies that may yield high profit in the short term, but that may be detrimental to company performance in the long term. For instance, it is common practice for activist funds to demand the significant reduction in Research & Development activities; yet, R&D is needed for long-term competitive and innovative advancement. Most activist fund activity increases the stock market price of the target company.
However, best practice professionals argue that the temporary increase in share price is misleading and cannot offset long-term business hazards that occur if the activist investors short the target company’s stock. There is truth in this belief. However, we need to take a closer look at activist investors’ strengths when it comes to financial strategies and business growth.
For More: http://www.financialpolicycouncil.org/blog/activist-investor-true-ally-corporate-governance/
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