Why Would the SEC Try to Limit Activism? | National Review

Why Would the SEC Try to Limit Activism? | National Review

(Jonathan Ernst/Reuters)

A New York Times article on Monday describes a proposed rule from the Securities and Exchange Commission that would mitigate the activities of activist investors, who often call for management changes at the companies in which they invest. From the Times:

In December, the commission proposed rules that would force investors to disclose swap positions they had amassed in companies within one day if they exceeded $300 million, 5 percent of a company or, in certain circumstances, as little as $150 million. The proposal followed the collapse of Archegos Capital Management, which used billions in swaps to make what turned out to be bad bets — a sudden failure that cost global banks billions in losses and roiled the stock market.

Swaps are esoteric financial instruments that get their name from the way they exchange one stream of income for another. They are a central way by which activist investors build up positions in companies before other investors or the target company becomes aware of their interest.

The one-day reporting requirement for swaps in the S.E.C.’s proposal is even shorter than the time in which chief executives must disclose their own trading in their company’s stock; chief executives have two business days to disclose stock purchases or sales.

The Times article leads with the fact that “unlikely allies, including roughly 80 law and finance professors, as well as hedge funds and labor activists” are pushing back against the proposed SEC regulations. The Times summarized their views:

The law professors and others argue that forcing activist investors to report their positions in swaps so quickly would make it uneconomical to take big positions in companies. They say other investors could immediately trade against them, or corporate boards could swiftly put in place defenses or other attacks against activists trying to build a big enough stake to force changes.

Even the critics of elements of shareholder activism among them, the professors wrote, recognize that “activism can be a means to address corporate underperformance and malfeasance, and hold management and boards of directors accountable to the ultimate owners of targeted companies.”

The professors argued that the S.E.C. could simply ask investors to disclose these positions directly to the commission, not the general public. Activist investors currently have a 10-day window to disclose that they’ve built a stake of more than 5 percent of a company’s stock, which the S.E.C. also recently proposed shortening to five days.

At Bloomberg yesterday, Matt Levine weighed in:

In general though it seems obviously good that activism exists. For one thing, it often does make companies more valuable: An activist shareholder, who owns a big chunk of the company and only makes money if the stock goes up, will sometimes have better incentives and motivations than a chief executive officer who owns less of the company and collects a large salary even if the stock goes down.

More fundamentally, though, activism is one of the few ways that shareholders can exercise real power over the companies that they theoretically own. As we often discuss around here, if a company’s board and managers want to ignore their shareholders, they mostly can. The only ways that shareholders in the U.S. can actually fire the board and CEO of a public company are (1) a proxy fight or (2) a hostile takeover.

They don’t do that very often. But this is the background that makes other, softer forms of pressure work. If BlackRock Inc. calls up a company and says “we are a big shareholder and we’d like you to reduce your greenhouse gas emissions,” the executives will generally listen to BlackRock and care what it thinks, because they know that, if they don’t, BlackRock will become disgruntled, and if enough big shareholders become disgruntled enough an activist might show up and win a proxy fight. (Sometimes the disgruntled big institutional shareholders will quietly invite an activist to show up; this is informally called an “RFA,” or “request for activist.”) There just isn’t that much that BlackRock can do on its own: The board controls the company, board elections are not competitive (outside of proxy fights) and most of what shareholders vote on is non-binding; BlackRock has a lot of shares, and so a lot of votes, but it can’t do much with them. But if an activist shows up, BlackRock — or other shareholders — can vote out the board. And the managers know that, which is why they feel the need to keep shareholders happy.

The relationship between corporate management and shareholders is a principal-agent problem. Corporations are the private property of their owners. Management should take direction from shareholders. Activism often means that shareholder interest — whether for higher profits; or more involvement in environmental, social, and governance issues; or to help clean up a neighborhood park near a factory — is better represented by management decisions.

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About the Author

Tony Beasley
Tony Beasley writes for the Local News, US and the World Section of ANH.