Study: Activist Investors Too Often Fail

Ivy League reports contend activists frequently fall short in their objectives because they don’t play the long game.



Activist investors often don’t do well because they tend to misunderstand how their targets work, according to a study in the Yale Law Journal.

It found that “activists have a higher risk of mistargeting—mistakenly shaking things up at firms that only appear to be under-performing.”

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The activists do not see the whole picture about their target companies, as they are focused on the short term and thus make a lot of mistakes with negative consequences, in the estimation of the law journal entry’s authors, Zohar Goshen, a Columbia Law School professor, and Reilly S. Steel, a lawyer who is pursuing a political science doctorate at Princeton University.

The telling statistic: The Bloomberg Activist Hedge Fund index returned 132% from inception in 2013 to the end of 2022. The S&P 500 did better during the period, up 145%. Ongoing statistical evidence for how often activists get what they want is harder to come by, and the Yale report did not offer that. One study, published by Harvard Law School in 2020, stated that in 2017, activists had a 34% success rate.

The Yale study gave several examples of activist mistargeting, including Bill Ackman’s failed attempt to revamp perennially ailing department store chain J.C. Penney. The hedge fund chief installed a CEO who did away with discounts and clearance sales, promising “everyday low pricing.” Customers did not cotton to this approach, and revenue dropped. Ackman’s firm Pershing Square admitted defeat and sold its stake at a loss in 2013.

J.C. Penney has continued to have a rough time, including a bankruptcy filing and many store closings, and since 2020 has been owned by mall landlords Simon Property Group and Brookfield Asset Management. Although the owners do not report the much-shrunken retailer’s performance, analysts say it appears to be making some headway.

Other illustrations the report cited included when Carl Icahn pushed Netflix to sell itself, but the company resisted—and has flourished since. Another was Dan Loeb’s Third Point, which tried to make Sony break itself up by separating its electronics and entertainment. Same sorry result.

Of course, there are numerous examples of activists’ success that the report did not cite. Consider hedge firm Engine No. 1, which won a proxy fight to seat three environmental-minded directors on ExxonMobil’s board. The hedge fund did so by enlisting large pension programs—notably the California Public Employees’ Retirement System, the California State Teachers’ Retirement System and the New York State Common Retirement Fund—and others, such as Vanguard Group, to win the contest. Since then, the energy giant has committed itself to efforts to reduce greenhouse gas emissions.

In 2006, Trian Partners forced fast-food chain Wendy’s to spin off its Tim Hortons donut unit. Trian argues now that the spin-off permitted Wendy’s to focus more on its core operations and on competing with rivals like Burger King and McDonald’s.

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How Short-Term Activists Hurt Long-Term Investors

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A New ‘Blueprint’ for Increasing Equity in Investing—and Why It Matters

Authors present their new Investor Blueprint for Racial and Economic Equity at NY Fed event.



Investors have a crucial role to play in advancing equity in American society, and a new report offers concrete steps on how they can do it.

The report, known as the Investor Blueprint for Racial and Economic Equity, was prepared by three organizations: the nonprofit PolicyLink; CapEQ, an impact investing and advisory firm; and FSG, a nonprofit consultancy. Several of its authors presented their work Thursday at a panel discussion hosted by the Federal Reserve Bank of New York.

“No matter the short-term politicized climate we currently live in, advancing equity is the most pragmatic approach to securing the precursors to stable, long-term profits and economic stability: a healthy labor force, an economically secure consumer base, stable democratic systems, and a well-functioning society,” the authors wrote in the report foreword.

Those goals—as well as questions about the current culture war over environmental, social and governance investing—were a recurrent theme at the Thursday event, which also featured two investors who adhere to such principles in their own work: Liz Roberts, head of impact investing at MassMutual, and Aron Betru, chief operating officer at private equity firm Trident.

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The investor community has too often contributed to the problems of racial and economic inequality, said Michael McAfee, PolicyLink’s president and CEO. But shared equity should be the goal, he argued, not only as a means to achieving shared prosperity in the U.S., but also resilience on the world stage.

“Advancing equity is the most pragmatic approach to long-term prosperity,” McAfee said. “Capital is the key pathway toward the equitable outcomes we desire. We want to support investors to become champions of equity.”

The Blueprint contains two parts. In Part 1, the authors explain why it is so critical to center issues of equity in investment strategies—to make all investing equitable. It explores the scope of the problem: “how growing inequality constitutes a systemic risk that threatens all of society,” as the authors put it.

In Part 2, the authors put those ideals into action, laying out a framework of 10 critical equity outcomes investors should aim for, including everything from equitable governance and leadership to wealth generation and economic and social mobility.

This section of the blueprint also contains concrete action steps: Investors should increase diversity and build representative leadership; embed racial and economic equity throughout the investment lifecycle; invest in fund managers of color; engage stakeholders in designing and deploying new investments for inclusion; and more.

After the presentation, Trident’s Betru spoke about the opportunity he sees in bringing those principles to bear in his work. Trident differentiates itself by investing in small businesses, he noted, which may seem to have limited upside, but actually offer much bigger potential return on investment than large firms. Nearly all net new job growth in the U.S. since the pandemic has come from small businesses, he pointed out.

“You have to find places where other people are not going,” Betru said. Such situations usually contain “asymmetrical information,” so a diligent investor can find opportunities that others overlook.

Betru also brushed aside the idea that prioritizing diversity dilutes a “commercial-first” company objective: “To be truly commercial, you have to mobilize all resources available to you,” he said.

Roberts, of MassMutual, agreed. Putting money into the same investments as the rest of the investment community just contributes to the problem, she noted, and explained that one concrete step she tries to take is to increase diversity on her own team.

Her company’s efforts around ESG investing were catalyzed by the death of George Floyd, Roberts said, and there was an intentional effort to emphasize the “social” component of ESG, which often gets dwarfed by the environmental concerns.

Asked once more how to respond to the backlash that has emerged over ESG investing, McAfee became passionate. “If you don’t have the heart to continue to perfect this democracy, to ensure that all people can live in a just and fair society, you should go home,” he said. “This is your time to hold steady and do the work.”

Betru agreed. “Having different perspectives on the table is meant to make us better,” he said. “I can’t believe anyone believes diversity of thought is a bad thing.”

 

 

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