Is Shareholder Democracy Just a Good Sound Bite?

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By Cydney Posner

In this article in the New York Times' DealBook, Andrew Ross Sorkin acknowledges that shareholder democracy may not be all it's cracked up to be. The article quotes from a memo to clients by Marty Lipton, who contends that "long-term shareholders in public companies are being undermined ‘by a gaggle of activist hedge funds who troll through S.E.C. filings looking for opportunities to demand a change in a company's strategy or portfolio that will create a short-term profit without regard to the impact on the company's long-term prospects.'" Apparently, in something of a spiritual conversion, Sorkin acknowledges that while "‘shareholder democracy' may be a good sound bite, Mr. Lipton has a point worth considering. It increasingly appears that the rise of ‘shareholder democracy' is leading, in some cases, to a perverse game in which so-called activist investors take to the media to pump or dump stocks in hopes of creating a fleeting rise or fall in a company's stock price." Sorkin does not mean to suggest that shareholder democracy is  necessarily "a bad thing. Shareholders have successfully and properly brought pressure to bear on underperforming companies, pushed out entrenched directors and, in some cases, pressed for operational changes to address health and the environment. At a time when investors are calling for managements and directors to think more about the long term, this latest breed of activism is also multiplying. But are these activists interested in the long term?" Also propounding this view is Chancellor Strine: "'Many activist investors hold their stock for a very short period of time and may have the potential to reap profits based on short-term trading strategies that arbitrage corporate policies….Why should we expect corporations to chart a sound long-term course of economic growth, if the so-called investors who determine the fate of their managers do not themselves act or think with the long term in mind?'"  The academic literature on the effect of activism on shareholder value over the long-term is "mixed and inconclusive."  Having once criticized Lipton's advice as "dangerous" and  disparaged his "efforts ‘to stiff-arm the people who actually own the company,'"  Sorkin is now somewhat contrite: "But nearly five years later, with the perspective of the financial crisis, Mr. Lipton's underlying worry that certain shareholders will abuse the powers of democracy is not unfounded. The question, as is often the case, is whether the influence of a few interested in the short term overwhelms the best interests of the many in the long term."

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