Excerpted from Third Point LLC's letter to investors,
Lately, a varied chorus of powerful union bosses, politicians and candidates, an asset management company executive, and a few ivory tower types have asserted that activism is short term in nature, engaged in by “hit and run” investors who care only about making a quick buck while leaving a company and its employees in ruins.
They assert that activists blackmail their targets to choke off long-term growth initiatives like research and development in favor of financial gimmicks that artificially and temporarily inflate share prices.
It might surprise people to hear that we agree completely that the sort of activism they describe is abominable. Luckily, it does not really exist, and certainly not at Third Point.
Activists today are very different from corporate raiders of the ‘80’s (about whom these criticisms might have been leveled fairly). Our activist investments, which we consider to be those in which we seek to use our minority shareholding to obtain board seats, have been some of our most complex and have been held for well over the one year threshold identified as offensive by the critics. In almost every example – from Ligand to Yahoo to Sotheby’s – our influence has contributed meaningfully to the sustainability and growth of the companies in question. In each of the three investments above, for example, we brought in all-star CEOs and gave them extensive runway to implement ambitious turnaround plans that would take years to come to fruition. A strong CEO with a coherent operating plan can create value for shareholders along the way as their plans are implemented. Our investors have benefitted from our ability to install visionary leaders like John Higgins, Marissa Mayer, and Tad Smith.
Not every politician is a critic. As you may recall, the case we made for good governance, and implicitly activism, in Japan two years ago was later adopted by Prime Minister Abe and his policy makers to successfully encourage economic momentum and wage growth. His approach has been a success, as better corporate governance principles have led companies like Fanuc to adopt more shareholder friendly approaches and led to increased foreign investments in individual Japanese companies and the overall market.
We believe that activism serves an important function not only for our investors, but also for capital markets and society in general. The success of America’s large and robust capital markets – the greatest in the world – rests on a framework based on principles of democracy like freedom of speech, transparency, and rule of law. The reason that companies (with the exception of a few in the tech space) are able to raise capital so smoothly is because investors understand that a governance structure known as a board is in place to hold management accountable, be responsible for management’s fair compensation, and oversee important capital and strategic decisions. The fact that shareholders have the right to vote for or sometimes remove directors is critical to the ecosystem of the capital markets.
We are proud of the returns we have generated from being engaged, constructive, and sometimes “activist” investors, and even more so that our activities have led to more efficient organizations that are better able to compete, grow, and innovate. We hope the critics will educate themselves about how activists contribute to the American economy. Regardless, we believe the environment for constructive engagement with management teams is one of our more exciting areas of opportunity today and look forward to further successes in this strategy.
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Thanks to our long and successful track record, we have a particular advantage in the area of shareholder activism. We are confident that opportunities will continue to exist to bring our owner’s perspective on capital allocation, profitability, and strategy to corporations.We will also continue to serve as an agent of change in extreme cases, when corporate boards are unable to make necessary management changes due to incompetence or unwillingness to take action.