Activism Run Amok: Unnecessary shareholder activism is a solution in search of a problem.

• Author: Elson, Charles

I have long been an enthusiast of shareholder activism. While I may not have agreed with every position advocated by activists, I believe that their mere presence has been a positive for ensuring corporate probity and success. It is a good thing for an owner to occasionally challenge well-established corporate dogma that may no longer be productive. However, recent changes in activist posture have made me rethink my traditionally unbridled support and created some concern on my part about the future of the traditionally positive impact of shareholder activism.

For many years, shareholder activism has been a thorn in the side of corporate boards and management. I can recall that when activism began to proliferate over 30 years ago, the progenitors were referred to disparagingly in board publications as "noisemakers." I always thought that this response was, simply put, ridiculous.

An activist doesn't appear unless there is a serious issue involving corporate governance and performance. The poor results complained about are obvious to all, and troubling governance practices explain why a board has allowed such management-led performance issues to continue to exist. The two, regrettably, go hand in hand.

Typically, corporate venom is directed at the character of the activist rather than the board simply attempting to solve the problems that inspired the activism in the first place. It is not the messenger who is to blame, but the troubling issues that they are messaging. Ultimately, it is the other shareholders who will resolve the dispute. If the complaints raised are legitimate, a majority of the shareholders, consisting mainly today of long-term institutional investors, will support the activist position, often electing one or more of the activist board candidates. If not, the activist probably did not appropriately identify a serious enough governance and strategic issue to warrant a lack of investor confidence in the incumbent directors.

Activism is beneficial to the corporation in two important ways. First, it provides the stimulus to fix the problems that affect corporate probity and success. Second, the mere threat of such activism helps to create a culture of greater accountability and promotes structural governance changes that ultimately protect shareholder value. However, despite the beneficial influence on corporate behavior that shareholder engagement has provided over the past 30 years, serious trouble looms on the horizon.

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