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Benefits and Pensions MonitorThe Business Of Activism Will We Ever Do It?
People have been predicting that institutional investor activism is just around the corner for … well, just about forever. Decades ago Peter Drucker spoke of how the growth of pension funds would result in these investors becoming controlling owners of the largest companies around, and eventually America’s only true capitalists. They would be active in matters of corporate governance (long before this term was ever used), vigorously changing the companies they owned for both the good of shareholders and the good of the society that they were part of. Despite some isolated activism by some large funds in the U.S. and Canada, we aren’t anywhere near this point, so it is valid to ask why, and in effect question whether we could ever get there. Michael Flaherman, chair of the investment committee of Calpers summed it up pretty well in some recent research done by the Milken Institute. “Corporate pension funds and university endowments shy away from public criticism of companies because they have to manage a series of relationships: with their peers, customers, suppliers, donors, and others. Mutual funds, on the other hand, gather assets by managing 401(k) plans, so they too have some huge, ingrained conflicts of interest.” Not that public funds are immune from externalities, as the economists call them. As another speaker in the same report noted, “Private and corporate pension funds think like corporations, whereas public pension funds think like politicians.” A CASE STUDY—Hewlett-Packard A good case study of how intertwining relationships can blunt some activism can be seen in the Hewlett-Packard battle to merge with Compaq last year, which resulted in a Hewlett family member launching a lawsuit against the company that bore his name. Whether or not the deal, which eventually took place, was a good one or not is still a matter of opinion, but the actions of Hewlett-Packard board member Walter Hewlett shows the difficulties of implementing good governance when everybody seems to wear more than one hat. Example 1 – Walter Hewlett thinks the deal to buy Compaq isn’t a good one, but knows that he is in a minority on the board. If he, as a Hewlett descendant, votes ‘no,’ the deal will go ahead anyway, but a skittish Compaq will demand a higher purchase price from HP.
If he votes ‘yes’ he can watch the family firm buy, to his mind, a failing company. If he fights, he causes the company to pay even more for Compaq (probably resulting in a class action lawsuit from shareholders who might feel that Hewlett did not perform his fiduciary duty). Oh, Hewlett also had fiduciary duties as trustee of the family trust, holding millions in HP stock, as well as being chair of a related foundation, again holding company stock. How could he vote for a deal he hated, to avoid paying more to buy Compaq eventually, and which he was sure would drive the stock of HP down over the long term? The result was a saw-off, with Hewlett voting one way as director, and against the merger as a trustee. Example 2 – Skip forward a bit to a lawsuit that Hewlett launches after the shareholders vote yes. Hewlett alleges that the CEO of the firm, Carly Fiorina, muscled Deutsche Bank, which owned 17 million shares of HP into voting for the deal, which ended up being a tie-breaker, just minutes before the vote. Days previously, the bank had decided to vote all its shares against the deal, and even contemplated publicly declaring its opposition. But after a phone call from Fiorina on the morning of the vote, the vote changed. Hewlett alleged that this was due to the bank seeking to win future banking work from HP, rather than an actual change of mind. There was, however, no e v i d e n c e that HP u s e d i t s b u s i n e s s relationship with the bank as a weapon to earn votes. The bank may have decided on its own to support the merger to safeguard its banking business with HP, but the judge in the case later clearly indicated that HP did nothing wrong. So where are we? Protecting “the true owners” of a company is not easy. Even defining who they are can be difficult. Working on their behalf is open to misinterpretation and seeming, and sometimes real, conflicts of interest. No wonder there is more talk about activism than real action. Jim Helik is co-author of the book “Energy Markets Risk Management,’ a textbook published by the Canadian Securities Institute. He also teaches at the School of Business, Ryerson University, in Toronto. |
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