There are a lot of smart, well-meaning people in corporate governance. But, like any academic topic, corporate governance perhaps suffers from the occasional ill effects of hyper-specialization. Sometimes, it might be useful, as least as far as we are able, to peer outside the fishbowl. The new perspective might help us figure out if we're missing something. That is what I shall attempt to do here, in this blog.
So... for starters: I'm going to address what's considered "long-term" in the fishbowl.
The New York Times' Deal Professor - Steven Davidoff - recenty had a piece challenging arguments that hold that shareholders' interests force, in one way or another, companies to embrace short-term outlooks that are ultimately bad for growth and for general prosperity.
One of his arguments is fairly simple: even ostensibly short-term shareholders aren't all that short term. Accordingly, any influence they have on corporate leadership is likewise not short term.
He cites some empirical evidence: hedge funds holding positions for 20 months. And a paper by Prof. Lucian Bebchuk that addresses shareholders holding for two and up to....even 5 whole years.
Now, 2-5 years sounds like an eternity when compared to the milisecond-long-ownerhip of High Frequency Traders (HFTs), with their algorithms and their willingness to spend dough to get information 2 seconds ahead of everyone else. But... for the rest of us in the real economy?
Stepping back -- one has to wonder whether Milton Hershey thought a 20month-5 year time frame was "long." Whether he anticipated building his theme park, his Milton Hershey school, only to dismantle it 5 years later.
Moreover, what is "long-term" for an institutional investor is not the same "long term" for everyone else. The long term position of....what, exactly? Share price? Worker salaries? Technological improvement? It's not always the case that a share price acts as an accurate proxy measure of other sources of company value. In fact, there is a growing consensus that it does not. Otherwise, there wouldn't be share-price-inflating mechanisms like stock buy-backs; shareholders would be content just to buy, to hold, and to sell. And analysts regularly add premiums to company values calculated from discount cash flows - to, for example, account for an owner's ability to do things like give itself buybacks. So the "long-term" maintenance of a share price point does not necessarily mean the "long-term" maintenance of the corporate entity as a whole has been maintained with just as much robustness.
This, of course, is before we get to the "externalities" of firm behavior apart from the well-being of legally recognized and compensated corporate constituents. What is the "long-term" view of the surrounding communities, the company's contractual partners, the U.S. Treasury Department...? We might willingly accept a 5-year-long lifetime for an individual company, but what happens 50 years down the road if all of our companies are geared in such a manner? I have visions of Ross Perot's "giant sucking sound." Yes, that's your jobs going down the toilet. As well as the necessary consumer demand to keep our economy churning along.
But let's presume that share price is an adequate (if rough) approximation of firm wealth for the moment. That being so, firms can't discount the present overmuch. We have to account for the forces of capitalism. Obviously, no company will survive if it neglects the 2-5 year time frame only to concentrate 10-20 years into the future.
One cannot help but wonder what kinds of risks one would take if one only had 5 years to live. Call it a "hedge fund bucket list." We might expect to see saving and investment habits... similar to that of everyday Americans leading up to the housing bubble bust. I.e., none. This might work in an environment of easy credit. But when the carousel stops turning...?? During my time as a litigator, I knew of not a few companies entering bankruptcy shortly after a going-private transaction initiated by a cost-cutting activist.
Thus, there needs to be at least a realistic expectation that the firm will continue indefinitely. Else corporate America might start looking like Columbia's campus after finals: all the coeds have chucked their cheap dorm furniture onto the sidewalk for starving grad students to scavenge.
Davidoff recognizes the different emphasis on acceptable risk that is implied by the existence of an activist shareholder, but insists that the risk is *good* for company growth. But what does he cite as evidence? Share prices. First, this is like measuring the length of your hand....with your hand. Shareholder activism is meant to inflate stock prices. That stock prices are, in fact, inflated.... is just as easily evidence of unfruitful shareholder activism as it is of responsible long-term investment. Arbs may be betting on a merger; the market may be waiting for a one-time big dividend payoff or stock buy-back.... None of these alternatives enhances the long-term chances of the firm.
And even setting aside for the moment the social utility of shareholder activists: that stock prices are riding high right now may not even be a direct result of their "contribution." Rather, one might point to the Fed's quantitative easing and credit facility. Wall street sure has a lot of free money right now to buy, buy, buy. And we all know the law of supply and demand. It may not be a coincidence that the 5-year ride of relatively high or stable stock prices cited by Davidoff lines up with the duration of the Fed's easy money policy.
So, the fact that Apple distributed $45million to its shareholders is not - as it is for Davidoff - conclusive evidence of healthy firm growth strategy, but instead perhaps a boon to shareholders. Where that $45million goes, nobody knows. But it's not going to develop iPhone 235, and it's certainly not going to the improvement of Apple's occasionally feeble supply-chain oversight mechanism.
