Despite their relatively small proportion of assets under management (0.3% of total global equity AUM), activists are a growing influence on companies’ behavior. Recent history has seen many activists choose to emphasize short-term objectives at the expense of a company’s long-term prospects. It is well within the power of institutional investors to either amplify or dampen the short-term impact of activism, serving as essential mediators within the shareholder community.
“Activists are a commonly cited driver of corporate short-term behavior, yet they generally don’t own enough shares to effect change alone. What we have found, from market data and testimonials from both companies and investors, is that large asset owners and asset management firms play a crucial role in these situations. Activists need their support for their campaigns to succeed – this gives investors a considerable amount of influence whether they realize it or not.” said Sarah Keohane Williamson, FCLTGlobal’s CEO.
Research on whether activists create long-term value is mixed, and comparisons are unreliable, given the widespread prevalence of activism in the US market. It is clearer that activist hedge funds discount future cash flows more than other shareholders, favoring corporate strategies that generate near-term results. Given that short-term and long-term shareholders can have very different objectives, it is critical that long-term investors carefully consider their support of activist investors.
Making the Call considers what tangible actions investors can take to mediate activist campaigns. “Asset owners can evaluate whether to invest in activist funds and, if so, only under terms that encourage longer-term behavior,” FCLTGlobal states in the report. “Asset owners and asset managers have the opportunity to decide whether to vote with activists, lend their shares to activists, engage with activists, and engage with companies that activists target.”
The topic of activism was broadly debated at FCLTGlobal’s recent Focusing Capital on the Long Term Summit in New York. Many of the insights and findings in the report stem from the discussions had at the event, which hosted CEOs of more than 100 global companies and investment firms.
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FCLTGlobal is a non-profit organization that develops research and tools that encourage long-term investing. Our Membership is comprised of global asset owners, asset managers, and companies that play a leading role in rebalancing capital markets for sustainable growth. Please visit www.fcltglobal.org for more information.
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