First - sign up for our free daily newsletter to stay in the activist investing know. The Presidential contender Hillary Clinton has made some rather interesting statements about short-termism, which many have taken as an attack on the growing army of activist investors.
In a speech at NYU’s Stern Business School, she used words like “quarterly capitalism” and “cut and run shareholders.” Her ultimate plans are to rewrite the tax code to empower “outside investors who want to build companies” and discourage “hit and run activists whose goal is to force an immediate payout”.
The issue at hand is whether the activist investors have led to a decrease in investments by corporates for future innovation and growth.
A study by economist William Lazonick certainly proves so. The study examined 248 firms listed continuously in the S&P index between 1984 and 2013; it found a relentless rise in buybacks’ share of net income: 25% in the 1984-1993 decade; 37% in 1994-2003; 47% in 2004-13. Firms have returned around $914 billion to shareholders in the last financial year.
Even some sections of Wall Street are with her on this proposal. Carl Icahn, one of the more famous activist investors, agrees with Hillary on many of her proposals, noting that he is a fan. Her proposal is strikingly similar in intent to the one proposed by Laurence Fink, CEO of Blackrock. Blackrock is amongst the most influential shareholders in the world with $4.8 trillion of assets under management.
In a letter to Fortune 500 CEOs, Fink laments the short term demands of capital markets. He implores that returning capital to shareholders should be part of a balanced capital strategy and should not “jeopardize the company’s ability to generate sustainable long term return.”
According to Fink, “we are currently living in a gambling society” and is proposing changing the tax policy to promote long term investors. Currently, long term benefits kick in after a holding period of one year; he wants that to change to three.
Many political pundits believe Hillary’s hit out against activists is a sound strategy. Many investors and corporate executives (for obvious reasons) were already in favor of restricting the activists. In a broad stroke, she can appease the Democrats in the hardcore Elizabeth Warren camp without alienating the entirety of Wall Street, which represents some of her largest donors.
The senator from New York has done a fine balancing act in this round. The proposal laid out is pragmatic and focuses on real problems facing the economy. Buy and hold long-term investors have been clamoring for ages to change restrictions related to the influence hedge funds and activist investors have.
They’ll likely welcome Hillary with open arms to get a much-needed check on the short-termism prevailing on Main Street. The big issue is, which side will she choose when the harder questions start to get asked by Wall Street.