Activist Investing for the Long Term
The full house-cleaning was an unusual move by shareholders—and an exclamation point on the rise of a new breed of investor activists since the 2008 financial crisis. The new activists say their motive is to fix what’s wrong with ailing businesses and leave them in better shape than they found them.
Several of these activists shared the stage at the Milken Institute Global Conference for a panel titled “How Activist Investing Is Reshaping the Boardroom: A New Dawn for Corporate Governance?” The investors’ central message: They’re in this business for the long term—and they aren’t the pirates that targeted companies can make them out to be.
“I think activism is here to stay,” said Anne Sheehan, director of corporate governance at the California State Teachers’ Retirement System pension fund, which has frequently backed activist investors. “You’re always going to have companies that need a little catalyst to push them to improve their performance,” she said.
Starboard in 2014 saw Darden as a company with declining profit margins and a stock that had gone nowhere for years, as its flagship Olive Garden chain struggled. Shareholders’ vote to dump the board in favor of Starboard’s slate gave Jeffrey Smith, Starboard’s CEO, a chance to take control and revamp the business. Darden stock has since rocketed more than 60%.
Smith, one of the Milken session panelists, was joined by Gene Lee, who had been Darden’s president and was picked by Smith to succeed ousted CEO Clarence Otis.
“Jeff came in and he learned the business,” Lee said. What’s more, he said, the company embraced the idea of remaking itself under Starboard. “Everybody was accepting of the change,” he said.
Another activist investor, Clifton Robbins of Blue Harbour Group LP, said he founded his firm 12 years ago specifically to play the role of friendly activist with companies. He has since bought into firms including fast-food chain Jack in the Box, retailer Chico’s FAS, Internet tech firm Akamai and others that have been willing to listen to his business advice.
“It’s called activist investing, and the investing is the most important part,” Robbins said.
Still, Raymond J. McGuire, global head of corporate and investment banking at Citi, said data indicate that most activist hedge funds have failed to beat the average market return since 2008—raising the issue of whether the energy expended by activist investors has been worth it.
And panel moderator David Faber, a CNBC journalist, questioned whether many activists have relied heavily on short-term financial-engineering moves—such as demanding large stock buybacks or dividends—to temporarily boost target companies’ shares.
“Some critics ... say the toolbox is empty,” Faber said.
But Smith said Starboard’s focus continues to be finding companies that need operational help. “We’re looking for companies where there’s an opportunity to improve their business,” he said. “The capital structure toolbox isn’t always there, but I think the operational toolbox always is.”