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Maneet Ahuja

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Corporate Raiders or Corporate Redeemers?

Posted: 05/28/2012 12:11 pm

Long derided as "corporate raiders" only interested in making a fast buck often to the long-term detriment of their target companies, some recent successful activist investor campaigns have done much to rightfully disprove this long-held misconception.

In a utopian investment world, there would be no need for activist investors. Companies would be run efficiently and prudently by management teams that are competent and properly incentivized. Unsurprisingly, such a world does not yet exist. Those responsible for moving business enterprises as close as possible to that state are a company's Board of Directors.

The role of a public company Board is a noble one -- to protect and represent the best interests of shareholders and other stakeholders -- and one that should be taken very seriously. For various reasons, directors don't always perform these duties as well as they could. From time to time, the need for speed is lost upon certain Boards. Other Boards are hampered by long-standing business, charitable or personal alliances that inhibit change. "Not invented here" syndrome oftentimes puts to rest some of the best ideas that penetrate the boardroom from the outside. As a result some companies are left with suboptimal oversight and public shareholders without an adequate voice.

This is naturally a poor outcome for all stakeholders of including employees, to customers and of course, the company's shareholders. It is under these circumstances -- when shareholders have grown weary but lack the platform to effectuate change -- where the role and influence of the activist investor can be uniquely valuable.

Take the recent example of Canadian Pacific, a railroad operator that had underperformed for years while management continued to collect compensation that would have suggested otherwise. When Bill Ackman, who runs hedge fund Pershing Square Capital Management, showed up on the scene with over a 12 percent stake in the company last October, he requested two board seats and the Canadian Pacific Board's consideration of legendary railroad executive Hunter Harrison -- who many deemed to be the greatest railroad operator of all time -- as the new CEO to spearhead the company's turnaround efforts.

Seemingly receptive at first, management ultimately resisted and tried to fight off Ackman, clinging to the latest iteration of its master plan to fix the company on its own. Frustrated shareholders didn't buy it, however. Seeing the writing on the wall, CEO Fred Green stepped down from his post, while four other directors announced they would not seek re-election, just prior to the vote on May 17th. After a proxy contest which lasted several months, Ackman's slate of seven directors were ushered in with overwhelming support from shareholders, paving the way for a regime change at the company whose culture had descended into one of complacency and excuses. Ackman and his newly implemented board members seek to improve the company's profitability by bringing its operations in line with peers and turning the company from the worst to one of the best Class I North American railroads -- an outcome few can dispute as anything but positive.

At Yahoo, it didn't take a shareholder vote to get Dan Loeb of Third Point Capital as well as two of his designees' seats on the company's Board. After ignoring Loeb's business-focused campaign platform for months -- Yahoo's Board only capitulated after Loeb made public his discovery that recently appointed CEO Scott Thompson had lied on his resume about an undergraduate degree in computer science which he never received. After helping usher the departure of Thompson's predecessor, CEO Carol Bartz, and sparking the resignation of numerous long-term board members including founder Jerry Yang and Chairman Roy Bostock, this was the final straw. Under intense pressure and the glare of the media spotlight, Thompson ultimately stepped down and Yahoo settled with Loeb before a shareholder vote was even required. With an interim CEO in place, Loeb is looking for a recalibration of the company's efforts in restoring Yahoo as a premier internet property with a number of valuable brands and sites while simultaneously considering ways to unlock the value of the company's valuable Asian assets -- a logical strategy which previous management simply lost sight of.

Engaged shareholders that seek and achieve board representation cannot be short-term traders almost by definition. If an activist investor gains a seat on a public company board it will be subject to that company's internal trading restrictions which typically allow only brief windows during which shares can be bought or sold. The prompt transparency and short-swing profit disgorgement provisions imposed by the SEC's rules further protect against malfeasance. Moreover, state fiduciary laws protect the other shareholders from self-dealing or disloyalty by any director, let alone those nominated by an activist.

Were it not for the efforts of these shareholder activists, Canadian Pacific and Yahoo would likely continue to be governed and run by ineffective and insular boards and executives, leaving shareholders to suffer. Ackman and Loeb, whose campaigns are predicated on long-term strategies and fixes, unlike slash and burn tactics often associated with activist investors, should be recognized for fighting on the behalf of shareholders, helping boost the morale of employees and shaking up companies in dire need of reinvigoration. And it is not only the shareholders of the companies activists target who benefit from their actions -- successful contests like these serve as a wakeup call to corporate America and beyond and keep executives on their toes -- creating a larger ripple effect for which we should be grateful.

Maneet Ahuja is CNBC's Hedge Fund Specialist and a producer on "Squawk Box." Prior to joining CNBC in 2008, she was a part of The Wall Street Journal's Money & Investing team. She began her career on Wall Street in 2002 at age 17 in Citigroup's Corporate & Investment Banking division as a credit risk analyst, and is a member of the inaugural "Forbes 30 Under 30" list (Jan. 2012). She is the author of "The Alpha Masters: Unlocking the Genius of the World's Top Hedge Funds."

 
 
 
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