The good, the bad... and the ugly.

• Author: KABACK, HOFFER

Dividing shareholders into 'good' long-termers and 'bad' short-termers is invidious.

SOME CLEAVE SHAREHOLDERS into two categories: long-term holders (also known as "loyal" and "patient") and short-term traders (aka "speculators out for a quick profit").

Thus, in an October 1998 amicus brief submitted during the hostile bid by Allied-Signal for AMP Inc., TIAA-CREF described itself as "a long-term investor, seeking to build value for its annuity participants. It is not an arbitrageur or short-term investor primarily interested in turning an immediate profit...."

Writing two years earlier in DIRECTORS & BOARDS about this same issue ["Who Really is Worthy of Alignment?" Spring 1996], former U.S. Commerce Secretary and experienced corporate director Barbara Hackman Franklin concluded: "There is confusion because of the apparent assumption that all shareholders are alike and have the same objectives. We all know that is not so. Relationship-investors -- who buy for the long haul and are not overly sensitive to short-term ups and downs in the stock price -- are one group and are ideal from the perspective of a director. But many investors are not of this type. There are many...who buy and sell the stock for short-term profit only and who have no interest in the health of the enterprise in the longer term. We should not be striving to align directors' interests with these shareholders; for if we do, we will push directors into a strictly short-term mentality. That is an inappropriate posture, since directors, I believe, have a larger and broader responsibility above and b eyond the stock price at a given moment...."

Many would second Secretary Franklin's well-articulated views. Nevertheless, agreeing with the one notion that a board need not be guided by today's stock price is not equivalent to embracing the other of dividing shareholders into "good" long-termers and "bad" short-termers:

1. By "long-term," does the categorizer mean how long the holder has already held his shares (the past) or, instead, how long he intends to continue to hold them (the future)? A multiyear holder would generally be anointed as a "good" long-termer even though he privately desires to sell his position right away because he has no faith in either the current management or the board. At the same time, a "speculator" who purchased beaten-down shares yesterday would be labeled a "bad" short-termer even though he intends to hold that position well beyond the near-term...