Activist investors taking multiple paths to challenge companies

By Peter Passi

Duluth (Minn.) News-Tribune

(Editor's Note: Duluth News-Tribune business reporter Peter Passi received a scholarship from SABEW chair Marty Steffens to attend the fall SABEW conference held Oct. 20-21.)

CHAPEL HILL, N.C. – SABEW’s fall conference hosted a lively discussion on the growing role of activist investors in publicly held companies.

Moderator Nanette Byrnes, a senior writer for BusinessWeek, said that through mid-September 656 shareholder proposals have been formally introduced — up nearly 13 percent from the 581 introduced during the same period last year.

Pension fund groups have begun to advocate more strongly for changes that reflect their members’ social and environmental concerns, as well as their financial interests.

Also, a class of influential individual investors has emerged in recent years. Folks like billionaire Carl Icahn have demonstrated a willingness to throw their weight around as investors to unlock additional shareholder value, even if it means dismantling a company.

Robert Bushman, (right) a professor at UNC’s Kenan-Flagler Business School, said some of these activist investors have shown themselves to be extremely clever and, at times, ruthless.

He pointed to the example of Perry Capital, a $10 billion hedge firm, that’s now in hot water with the SEC over its dealings with Mylan Laboratories. Perry had a large stake in King Pharmaceuticals and used complicated hedging techniques to acquire a significant voting stake in its larger rival, Mylan, without ever actually purchasing the company’s stock. The fund then used its voting power to help push through Mylan’s buyout of King, realizing a large gain in the process. With Perry’s interests in question, Bushman said, some observers felt Mylan overpaid for King.

Rich Ferlauto serves as pension and benefit director of the American Federation of State, County and Municipal Employees, a union representing about 1.4 million public sector employees and manager of more than $1 trillion in assets.

He said AFSCME focuses on the long-term performance of the companies in which it invests. Typically, the union is looking forward at returns over 10 to 20 years.

But the union isn’t afraid to take on issues, as well. Lately, it has expressed frustrations over high CEO pay that often isn’t tied to a company’s performance. AFSCME recently protested millions of dollars in compensation paid to Countrywide Financial’s CEO, Angelo Mozilo, at a time of record losses for the company, which recently has been shaken by the national subprime lending crisis.

Ferlauto advocates for SEC rule changes that would give shareholders a greater say in the governance of publicly traded companies. Among the changes he seeks is the ability of shareholders to nominate candidates of their own choosing to a company’s board.

On this issue Ferlauto butted heads with Bushman, who suggested that current governance rules spelled out by the SEC have served public companies and investors well. Bushman questioned whether the current system was truly broken.

“ I get concerned when I hear terms like ‘shareholder democracy’ discussed,” Bushman said.

Ferlauto suggested the measured proxy vote changes AFSCME proposes would make companies more responsive to investor interests.

“ We’re not advocates for shareholder democracy, as you say, but we are advocates for director accountability,” he said.

Bushman said investors are making a big impact on companies with the tools they already possess. As the role of foreign capital in U.S. markets continues to grow, Bushman questioned whether it would be wise to weaken the strength of director structure of publicly traded companies.

A corporate governance expert, Pat McGurn, senior vice president of Institutional Shareholder Services, breaks activist investors into four groups:

-- Gadflies, such as Evelyn Y. Davis, who are famous for publicly taking CEOs to task at shareholder meetings.

-- Socially responsible investment funds that promote certain social or environmental agendas. As an estimated $2.3 trillion is now invested in SRI funds, McGurn said people disregard the movement “at their own peril.” He noted that public and labor funds have enjoyed some success in bringing about change in some of the companies in their portfolios, as well.

-- Hedge fund activists can exercise a lot of leverage, too. “Think of them as activist investors on steroids,” McGurn quipped.

-- “Bad boys” — a group of investors that McGurn said “are often in it for a very quick buck.” He said this category of investor sometimes is hungry for ink to promote their views of how companies should change. This group includes the likes of Tom Hudson, founder of Pirate Capital, and Bob Chapman of Chapman Capital.

Here are some potentially useful Web sites for more on activist investing and related issues.

RiskMetrics Group: www.riskmetrics.com
The Council of Institutional Investors: www.cii.org
The Corporate Governance Web site: www.corp.gov.net
The Social Sciences Research Network: www.ssrn.com
The Securities Exchange Commission: www.sec.gov
AFSCME: www.afscme.org

Posted Oct. 31, 2007