Shareholder activism deserves much of the credit for the bullish stock market in recent years, William A. Ackman, founder and CEO of Pershing Square Capital Management LP, New York, told the more than 560 attendees Monday at a conference of the Council of Institutional Investors in Washington.
“Why is the stock market performing so well, surpassing people’s expectations over the last few years?” Mr. Ackman asked rhetorically. “Activism has a lot to do with it.”
Shareholder activists are the new “barbarians at the gate” threatening to upend corporate boards and management, Mr. Ackman said on stage at the conference in a discussion moderated by Theresa Whitmarsh, executive director of the $104.5 billion Washington State Investment Board, Olympia.
“Private equity, which used to be called the leverage buyout business, those were the barbarians at the gate 20 years ago,” Mr. Ackman said. “Today, the barbarians at the gate are the (long-term-oriented) shareholder activists.”
Shareholder activism "is very much like private equity in terms of how we think about valuation, how we think about making businesses (grow),” Mr. Ackman said. “The difference is we think we can make those changes in a public context where all shareholders benefit as opposed to (private equity) having to take those businesses private, where you are expropriating from the public (shareholders), you are adding a lot of leverage, fixing the business hopefully and selling it back (as a publicly traded company again at a higher price) to the public. I like our strategy. I think it’s much healthier to the overall market.”
Mr. Ackman described Pershing Square’s strategic philosophy as: “We are looking for the highest quality business with the worst management.”
“My core job is taking stakes in big underperforming companies and making them better,” Mr. Ackman said. “It is not philanthropic, but I think it is really good for America.”
Activism has motivated management and boards to perform better generally, Mr. Ackman said.
“There is not a CEO in the country who is not afraid some activist might buy a stake and force them to do something,” Mr. Ackman said. “So companies are … trying to be activists in their own business.” CEOs’ anticipation of activist intervention “has led to meaningfully marginal improvement, better capital allocation,” he said. In addition, the U.S. market benefits because it has more activists than other markets, Mr. Ackman said.
Often an activist with, for example, a 10% stake serves as the catalyst to enable the CEO or board “to make fairly dramatic changes … That gives the CEO more confidence … to make that big investment decision or strategy changes or a spinoff.”
In a similar way, “just the phenomenon of activism generally, I think, has given boards more backbone” in dealing with the CEO. “It used to be when you made it to the top of a Fortune 500 company … the CEO could stay there as long as (he) wanted … You could do a fairly mediocre job and never get fired. There would never be any contest for the board (seats).” Shareholders had no way to reject election of directors to the board, but that has changed, Mr. Ackman said.
“The Council (of Institutional Investors) and shareholder activism” have caused “fairly dramatic” changes in the reform of corporate boards and management, he said. “Now boards are at risk … for not doing their job.”
“The council, proxy advisory services and activists generally have restored the balance back to the owners” of publicly traded companies, Mr. Ackman said.,
Activists cannot accomplish anything without the support of shareholders, Mr. Ackman said.
As an activist, a 5% or 10% stake in a company “doesn’t give us control of the business,” he said. “At the end of the day, the owners will decide what is right.”
Mr. Ackman criticized proposals calling for activists to disclose their plans in advance of buying shares. The argument is investors “missed out on the short-term pop” in price as shares rise at the initiation of accumulation of shares by an activist.
But long-term shareholders “aren’t selling in to that” rising price, he said.
Activists depend on broad shareholder support as activism is inherently an entrepreneurial strategy, Mr. Ackman said.
“There is no activist investor that is forcing a company to do anything,” Mr. Ackman said. Activists float trial balloons at companies. “If the shareholders say ‘no,’ it’s not going to happen.” But “without us there won’t be competition for board seats. … We will never do anything that is not in the best interest of the owners of the company.”
Among other issues, Mr. Ackman said, “short selling is still something I think people are not entirely comfortable with as a ‘good for America’ kind of thing. … Short selling is inherently hostile. The shareholders hate you. Management hates you.”
But short sellers help uncover fraud, he said. “Isn’t it a good thing to have well-capitalized investors searching for fraudulent companies?” Mr. Ackman asked, adding the chairman of the Securities and Exchange Commission should meet with top short sellers every quarter to discuss their top targets as possible sources for examination.
“It would probably be harmful to have disclosure of short selling,” Mr. Ackman said. Disclosure “would be good for us” short sellers because it would eliminate having to explain their positions. “If we take a big short position (and that is publicly disclosed), people will see Pershing Square just went short. The prices will go down. Everyone is going to panic and sell and we’d just cover (the short position). We don’t have to say anything” about disclosing a reason for an unfavorable view of the company.