Monday, October 27, 2014

Royalists versus Governistas

There is a very entertaining professional dispute between corporate royalists represented by the Wachtell law firm and academic governistas represented by Harvard Law School’s Lucian Bebchuk. You can follow it in the Harvard Law School Forum on Corporate Governance. The royalists argue management and the board knows best and should not be pestered by greedy short-term shareholder-activists. The governistas support shareholder-activists actions as a challenge to correct poorly managed firms with weak boards. I support the governistas position on two grounds. First, well run institutions with strong boards have nothing to fear from shareholder activists (AKA the chicken soup defense-it doesn’t hurt). Second, shareholder activists can provide a useful disciple for poorly performing firms.

Some recent examples of useful activist disciple include the following:

1)     Yahoo: the sum of Yahoo’s parts, Alibaba, Yahoo Japan and Yahoo USA, substantially exceed Yahoo’s current market value. This value gap represents the Marissa Meyer, current CEO, discount. Starwood, an activist shareholder sent a letter outlining a litany of issues including poor tax planning bloated overhead, and bad acquisitions. It also suggested a merger with AOL to help resolve some of the issues.
2)     DuPont: under pressure from Peltz’s Trian group to breakup because of among other things bloated overhead. Consider DuPont’s 2012 sale of its coatings division to Carlyle. EBITDA increased from $340 to 815 mm in just 2 years. Highlights inflated expenses and under management the division suffered while DuPont owned it. I hope DuPont kept some of the upside thru a retained interest as Schmuck Insurance .
3)     EBay: finally spinning off its fast growing PayPal division after continuous prodding from Carl Icahn.
4)     Darden Restaurants: another successful Starwood initiative relating to the long under- performing chain. Resulted in the replacement of the entire board and a new management team.
5)     Hewlett Packard: finally responding to long suffering shareholders with the spinoff of its computer division.

Shareholder activists are not always right, but nonetheless, they should not be ignored. The activists are willing to bet with their own capital. Consequently, they have more skin in the game than the royalists. This, for me, makes them more credible.

I do not think the royalists are evil - just misguided. No one likes to be questioned. Also, organizational inertia makes it hard to change from previously successful actions even though they may no longer work due to industry changes.

So in my book it is governistas’ 4-royalist’s 0, but the game is not over.


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