One change made life a lot easier for activist investors -- and opened the floodgates

Shareholder activism is an expensive venture. 

True, sending a tweet that you’re buying Apple shares, like Carl Icahn does, costs very little. But if you wind up in a full-blown fight for shareholder support, that can cost a bundle. 

After Nelson Peltz lost this kind of fight with DuPont a few years ago, he said he spent $8 million on the campaign. 

But it could’ve cost much more, were it not for a simple, and shareholder friendly rule change by the Securities and Exchange Commission. In 2010 the SEC said companies would have to include a shareholder’s nominees for the board when it mailed out its proxy materials  — the documents that investors use to vote at a company’s annual meeting. 

The idea was to make it easier for an investor wanting to nominate a minority slate of director candidates for election on corporate boards inexpensively. While shareholders and activist hedge fund managers long had the right to nominate director candidates, they traditionally had to use their own proxy documents at significant cost. 

These changes “have been grabbed onto and used by activist hedge funds,” said Lynn Stout, professor of corporate and business law at Cornell Law School and the author of The Shareholder Value Myth.

Speaking to Marketplace’s Lizzie O’Leary, she said the SEC change has allowed activist hedge funds to “put enormous influence on boards to do things the way [they] want them to be done.” 

The activist investors, who buy small stakes in companies and agitate for investor-friendly changes, have had a tremendous run in the last few years. They ended 2015 with a whopping $174 billion under management, according to Activist Insight. That’s up from just $56 billion in 2010. 


And that’s led to a record number of campaigns by activists. 

This is worrying for corporations and their impact on the economy, Stout says. 

“The purpose of corporations used to be to innovate, creating universities, building railroads, designing self-driving cars and looking into commercial space transport,” explains Stout. “These are really big, long-term projects … and what corporations are supposed to do.” 

It’s not just the SEC that’s fuelling this. Federal changes in the tax code require companies to tie executive pay to metrics like share price. This drives CEOs to make money now rather than thinking of the future of the company or its long-term contribution to society. 

Changes in the SEC proxy rules described above also mean that companies are increasingly influenced by activist hedge funds whose aim is to make changes and generate high returns in the short term rather than invest in the company’s long term future.  

“The Price of Profits,” our series with Marketplace, looks at what happens when profits become a company’s product. For more, visit priceofprofits.org.

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