Shareholder activism can be such a sham: how does owning a large but not overwhelming interest in a company mean you can run roughshod over a board?

• Author: Hindery, Leo, Jr
• Position: IT (STILL

WHO DOESN'T LOVE "shareholder activism"? Well, when it runs amok a lot of responsible people don't. And they shouldn't.

Last quarter when I penned a piece that asked for whom board members work, I quoted an article by James B. Stewart of the New York Times titled, "When Shareholder Democracy Is Sham Democracy." Stewart's title is just as apropos of "shareholder activism" whenever it too runs counter to the best interests of the target company and other shareholders.

Shareholder activism by the pension community and other broadly responsible fiduciary holders is, in my experience, almost always constructive, especially when it targets irresponsible governance. These investors should absolutely use their shareholdings to hold managers and directors accountable for operating failures and compensation abuses.

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However, shareholder activism, which is simply a selfish replay of the "barbarians at the gate" era, is activism run amok and an exchange of shareholder and director responsibility for short-term personal greed.

Many managers of so-called hedge funds--'so-called' because now more often than not they're simply making one-way wagers on the direction of stock prices--have begun to use, in barbarian-like fashion, their large long and short shareholdings either to break up or seriously impair perfectly good companies caught up in downdrafts not necessarily of their making, or to extract 'greenmail.' Let me give you two examples which are no fun to recount.

First is the recently aborted effort of William A. Ackman of Pershing Square Capital Management to use his 17.7% shareholding of J.C. Penney Co. to completely remake the company in his vision. Every initiative of Mr. Ackman's and of his handpicked CEO's failed miserably. But it was his abuse of his legal responsibility as a director and his later sweetheart deal to exit the company which should embarrass him, and inform us.

How does owning a large but not overwhelming interest in a company mean you can run roughshod over a board and violate nearly every rule of responsible corporate governance? How can a director conclude that just because he's no longer getting his way with other board members, he has the right to publicly disclose confidential board discussions in what many of us will long remember as the most vitriolic rejection of public board protocol ever? And how in good conscience can a lead director, who's just overseen the loss of more than $4 billion in sales...