Making the Call: The Role of Long-term Institutional Investors in Activism

Having a strong investor/corporate dialogue well before an activist campaign arises is the way to encourage companies to proactively improve the drivers of long-term value creation—such as bolstering their governance, honing strategies for growth, and engaging with long-term investors. Strong long-term performance is the best way to limit opportunity for an activist campaign. Indeed, rather than being a spectator, long-term investors have a significant role to play alongside companies to counteract short-term activist behaviors. It is well within the power of these long-term investors to either amplify or dampen the short-term impact of activism, serving as essential players of the activism ‘game.’

Despite their relatively small AUM, activists are an important and growing influence on companies’ short- or long-term behavior globally. Activists have different goals, time horizons, risk profiles, and levels of engagement than most long-term shareholders. These differences can unduly compress corporate time horizons, at times to the detriment of long-term value creation.
Many activists choose to emphasize the short term at the expense of the long term, perhaps as a result of their event-driven orientation and comparatively higher discount rates. Activists run the gamut from long-term-oriented to short-term-oriented and employ a range of tactics. Research on whether activists create long-term value is mixed, and comparisons are unreliable, given the widespread prevalence of activism in the US market. It is clearer that activist hedge funds discount future cash flows more than other shareholders, favoring corporate strategies that generate near-term results. Given that short-term and long-term shareholders can have very different objectives, it is critical that long-term investors carefully consider their support of activist investors.
Investors and companies can mitigate the short-term impact of activism by preparing for and responding to activist campaigns in ways that emphasize long-term value. Asset owners could evaluate whether to invest in activist funds and, if so, only under terms that encourage longer-term behavior. Asset managers and asset owners have the opportunity to decide whether and under what conditions to vote with activists, lend their shares to activists, engage with activists, and engage with companies that activists target. Companies can gauge whether improvements in the key drivers of long-term value, such as bolstering their governance, honing strategies for growth, and engaging with long-term investors, would preempt an activist campaign.

In the activist game, long-term investors often determine the final score.

Making the Call: The Role of Long-term Institutional Investors in Activism

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Related Resources:

Investors play significant role in counteracting short-term activists, new study finds

Activists Beware: Huge Investors Debut New Long-Term Index

After a record 2019 for activist investors, here’s how companies can protect themselves