Shareholder Activists: Stop Being Naive
Jane is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Last Friday, the day the Dow Jones sank 274.88 points, Wal-Mart (NYSE: WMT) stock closed at 65.55, near its 52 week high of 66.66. After hours it was at 65.62. On that same Friday, at its annual meeting, activist shareholders had expressed their negative opinion about alleged bribery in Mexico by voting against some members of the board of directors. They also submitted three proposals. Leading up to those actions, they had managed to generate plenty of publicity about their beefs, both in the general media and niche press such as business and law. All 16 directors, which Wal-Mart supported, were elected. Those shareholder proposals failed. Incidentally, the company’s own two proposals were approved.
No question, that bit of the shareholder activism at Wal-Mart produced great theatre. However, the venture was doomed. After all, the founder’s Walton family owned about half the stock. The reality is that many forms of shareholder activism represent naïve, poorly constructed initiatives. Those include proxy battles, public relations campaigns, resolutions, and litigation. The concerns range from executive compensation to conservation of resources such as energy and water. Many seem financially and/or ethically legitimate, either in the best interests of the company and/or planet earth.
The rub is that to succeed, shareholder activists have to do a lot more than be passionate about their mission, get sympathetic press, and keep up the heat. Shareholder activism is a game with its own rules. To succeed, the activists have to cover a number or even all of these bases:
- The support of many other shareholders in addition to the niche groups. That may or may not work if, say as with Wal-Mart and The New York Times Company, the family of the founders control a lot of stock.
- The credibility of the shareholder leadership as focused on the long term health of the company. Let's rule out grudges and greed. The positioning has to be "in the interest of shareholder value."
- Evidence that the activists have insider-level understanding of the current challenges and the expertise about what is necessary to fix what’s wrong.
- Deep pockets to sustain a high profile effort.
- A track record for similar coups. The world loves winners and aligns with them.
Back in 2009, sophisticated hedge fund manager Bill Ackman of Pershing Square Capital launched a campaign against Target’s (NYSE: TGT) board. He lost. Maybe that was a good thing. Currently, Target is a darling on The Street. For example, it has been able to create and sustain its brand identity as the experience-economy retailer at the low end. At the same time it also features designer brands such as Jason Wu and Missoni. Its ecommerce is a wonder to behold. Target's stock, at 57.20, is near its 52 week high.
Therefore, we wonder about the possible value of what Ackman could have enacted. Also, we likely are thinking that if Wal-Mart activist shareholders are worried, the angst should include the sophistication of Target as a competitor. They might also wring their hands about the less sophisticated dollar stores as nimble competition. There is also the food chain Aldi. This week it sold lettuce for 69-cents versus Wal-Mart's $1.38. Cucumbers were about 20-cents less than at Wal-Mart. These kinds of super bargains aren't loss leaders. They are typical. Only they vary as to what categories of merchandise they will occur in any one week. Has Wal-Mart lost its magic touch in discount pricing?
But even if activist shareholders succeed, there is no guarantee of positive results such as a turnaround. Perhaps Ackman learned something from trying to take on Target. Recently he was more successful. His push has been correlated with the ouster at Canadian Pacific Railway of the chief executive officer (CEO) Fred Green and four board directors. However, this could or could not be the start of improved performance. Hewlett-Packard (NYSE: HPQ) shareholders helped oust CEO Leo Apothehker. However, his replacement Meg Whitman and her strategy are also the target of shareholder discontent. The stock is at 21.57, within a 52 week range of 20.57 to 37.70.
There’s also the danger that ferocious shareholder activity, along with the dumping of the CEO, could trigger a panic in the marketplace. Yes, shareholders helped bring in the new regime of Thorstein Heins, as CEO and President at distressed Research in Motion (NASDAQ: BBRY). Maybe that move could have been productive. However, there is speculation that the turmoil raised concerns in potential purchasers of Blackberry products that they would wind up with orphan devices since the company could fold. Now RIM has retained J.P. Morgan Securities and RBC Capital Markets for a possible sale. Without the very public drama, could RIM have done what was necessary to stand toe-to-toe with the new competition? After all, it still had the advantage, which corporate customers as well as professionals like medical doctors and lawyers valued, of the seeming bullet-proof security.
At AOL (NYSE: AOL), Starboard has received considerable media attention for its push to replace several members of the board with its own picks. Institutional Shareholders Services rejected those recommendations. The Annual Meeting is June 14 and time will tell if Starboard gets what it wants. Meanwhile, the current CEO operating with the present board members, Tim Armstrong, has produced evidence that a turnaround is taking place. The Street agrees. The stock is at 27.11, within a 52 week range of 10.06 to 27.94.
A third category of concerns about the sound and fury of shareholder activism include these. The stock itself could take a hit from the negative publicity. If some activists have an emergency and have to sell, they would have shot themselves in the foot. In addition, management could become distracted and not pay enough attention to the core business. That opens the door for the competition to make its moves. Also new expenses could be incurred by legal reviews and motions. Shareholders who are drawn to activism might first consider less public, less radical strategies in order to be heard by management and the board of directors. Much like how Inside the Beltway works, access to insiders in a low profile manner can often be more effective for generating change than a theatrical show of force, served up with a side of legalities.
The pattern of activism has been out there since the reformist days of Ralph Nader. Shareholders will follow it. However, the smart money is probably not betting on them.
janegenova has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.