Shareholder Activism and Political Correctness

Dealbook issued a novel politically correct gender bias attack on shareholder activists. It noted that six of the 23 S&P 500 firms headed by women have been targeted by activists. This limited sample over a short time period is alleged to constitute circumstantial evidence of gender bias. Putting aside the statistical issues consider the following:

1)     Activists are probably the most equal opportunity group of investors in existence. All they care about is perceived value gaps which they can exploit. This is usually represented by ROE< cost of equity or market values<breakup value. Race, color, creed, nationality, or gender are not screens they use to identify targets. This is not because they are nice guys. Rather it is because they must make profit to attract investor funds. If you underperform you pop up on their list and they will be calling you regardless of whether you are male, female, transgender, or a eunuch.

2)     The specific  harassed female lead firms identified in Dealbook  all have stories and performance issues which would justify inclusion on any activists list:

a) Pepsi: suffering from a profit decline related to sagging soda revenues-the same problem impacting Coca Cola. Activists raised concerns regarding the continued operation of the drinks and snacks businesses at Pepsi. This represents a legitimate view that shareholder value can be increased by spinning off the snack division.

b) Yahoo: Starboard raised issues concerning the tax efficient disposal of the Alibaba shares and the continued operation of Yahoo as an independent entity. Given Yahoo’s past performance problems these seem like appropriate questions to ask.

c) DuPont: Peltz wants to spinoff DuPont’s business units to improve efficiency. The CEO’s vigorous defense has been questioned by her recent surprise disposal of a large block of stock.

d) Mondelez: also suffered profit declines. The CEO’s judgment when CEO of Kraft (Mondelez was spun-off from Kraft) was questioned by Warren Buffett regarding the use of undervalued stock to fund an acquisition. Does Dealbook think Buffett is gender biased as well?

e)Hewlett-Packard: Meg Whitman has a difficult job turning around accident prone HP.  Any wonder why investors are concerned?

Thus, more than one conclusion, gender bias, can be drawn from the companies cited. Dealbook seems to be suggesting that female CEOs are immune to scrutiny and should be granted extra leeway. Is this political correctness or a disguised attack on shareholder activists?

My money is on the activists. Their self interested focus on profit ensures their gender blindness.

Before thinking I am a male chauvinist pig-keep in mind I have two daughters and especially frown upon anyone using gender to discriminate against them or anyone else.

J

Find Your Sustainable Competitive Advantage

“In business, I look for economic castles protected byunbreachable ‘moats’.”

Warren Buffett

Famed investor Warren Buffett is known to favor companies with a 'natural moat', a built in protection that gives companies some protection against competition.  Economists call this a sustainable competitive advantage.  The idea is simple, find what you do well, better than anyone else - that is your competitive advantage.  But you need more.  It isn't enough to have a competitive advantage - you need a sustainable competitive advantage.  If someone can start up a new business tomorrow, delivering the same product and service as your company, you don't have a sustainable competitive advantage. 

Sustainable competitive advantages come from many sources.  In some industries, larger companies benefit from economies of scale making it hard for smaller companies to enter. Other advantages are created through access to supplies or raw materials.  This can occur naturally from the physical location of a company or access many be driven by relationships - familiarity with a particular country, etc.  Intellectual benefits occur when a company has a particular patent or copyright that others cannot duplicate.  

On an individual level an example of an intellectual benefit combined with relationships would be the economist Larry Summers, a leading contender to be next chairman of the Federal Reserve.   Obviously a very smart individual, Summers has honed his personal competitive advantage through a career of challenging positions and a myriad of political contacts.  Of course, competitive advantages in politics are often unsustainable, and it is not assured that Summers will be chosen for the Fed post.  Nevertheless, the comparative advantage will serve him well in multiple pursuits and the intellectual capital and connections are indeed sustainable.

In developing business (and personal) strategy, look for situations where barriers of entry exist, or create a sustainable advantage by differentiating your product in ways that are hard to reproduce.  Soft drinks are a good example.  Coke and Pepsi are trademarks that are known throughout the world.  Other soft drink companies come and go - but none have risen to the level of Coke and Pepsi.  Those two brands are the go-to soft drinks of the world.  

This doesn't mean that companies with well established brand names are immune from competition.  Just think of Kodak.  A dramatic catalyst  can easily change the fortunes of a company - or an industry. For Kodak it was technology.  Other catalysts include regulatory shifts, demographic changes, political events, and changes in consumer tastes.  Which brings us back to Coke and Pepsi.  Noticing a shift away from colas, Coke has broadened its product line to include drinks like Dasani water, Powerade and Minute Maid and non-drink products like Dannon that can still benefit from the company's distribution and promotional expertise.  Excellent companies adapt to keep the competitive advantage sustainable.