Beyond investing by growth and value, large- and small-cap, pension investors and their consultants soon might have a new money management strategy to pigeonhole in their asset allocation — corporate activism. "Active" management will have new meanings in an era of corporate governance activism. Fund sponsors will have to join the movement in some form, willingly or not, as developing events push them to activism.
Only three corporate activist money managers have a track record: Relational Investors LP in San Diego; Hermes Pension Management Ltd. in London; and Lens Investment Management LLC in Portland, Maine, which stopped managing money but continues as an adviser on shareholder activist strategies.
But the recent formation of H Team Capital LLC, New York, could start a trend. H Team will seek capital appreciation "by acting as a catalyst for positive change in companies where management and shareholder interests are not aligned, and by demanding greater management accountability," according to a company statement. H Team "intends to be an active investor in its portfolio companies."
Highfields Capital Management LP, a Boston hedge fund and another activist investor, is the largest shareholder in Janus Capital Management Inc., with 9.1%. Earlier this year, Highfields campaigned to press for corporate governance changes at Janus.
Walter Niemasik Jr., president, Snyder Capital Management LP, San Francisco, said the corporate environment is riper for activist managers now, helping to foster their formation. He said boards of directors are determined to be more independent of management. Boards also are increasingly willing to listen to shareholders, especially institutional investors.
Shareholders, too, are more receptive to the campaigns of activists, adding to the power of these activist managers to influence corporate change and thus boost their portfolio performance. Witness the increasing vote in favor of shareholder resolutions, such as on poison pill anti-takeover measures, executive options, lucrative executive severance agreements, and annual directors' elections.
The Securities and Exchange Commission's recently proposed proxy rules will promote activist managers. Indeed, an SEC official suggests money managers have an obligation to become activists. "Yes, there may be circumstances when I believe an investment adviser may have to become a shareholder activist," Robert Plaze, the SEC's associate director, division of investment management, said.
Helping to foster activist managers will be databases being developed by Institutional Shareholder Services Inc., Bethesda, Md., and Governance Metrics International, New York., along with the huge databases of proxy votes by mutual funds, which will become public later this year. They all will be invaluable to academic research and designing corporate governance investment strategies.
Academic research into corporate governance has been limited, because of the lack of easily accessible data on such policies and practices, noted Abbie J. Smith, accounting professor at the Graduate School of Business at the University of Chicago and a director of Dimensional Fund Advisors Inc., Santa Monica, Calif.
For pension executives, corporate activism is another facet of the growing complexity of managing money, from alternative asset classes to securities litigation. Dealing with this complexity will be more costly and will require bigger staffs, or more consulting help. But in the end the issue will still be: can activist managers beat the market?