Boards 3.0 Versus the Rise of Dual Class Share Listings
Ron Gilson, a professor at the Stanford Law School, and Jeffrey Gordon, the professor at the Columbia Law school, have just published a paper entitled: “Boards of 3.0–An Introduction”.]The basic thesis is that the boards of widely held, publicly traded corporations have three fatal flaws:
- The boards are “thinly informed” ie. they really know very little about the profit drivers of the various business units.
- The boards are “under-resourced” ie. there is no perspective beyond management’s briefings on the matters before them.
- The directors themselves are “boundedly motivated” ie. directors normally have a wide variety of other outside interests so little time to devote.
Interestingly these views about the shortcomings of “normal” boards go back a very long way. While writing about the failure of the South Seas Corporation in 1776, it collapsed in 1720, Adam Smith wrote:
“The directors of such companies being the managers of other people’s money than of their own, it cannot well be expected, that they should watch over it with the same anxious vigilance with which the partners of a private company watch over their own…"Negligence and profusion must always prevail...”
So, nothing has fundamentally changed in the last 350 years of publicly traded companies. That’s quite an assertion!
But not true – ACTIVISM has exploded in the last decade threatening the peaceful sanctuaries of directorships in widely held companies. In the US public markets over the last five years, there has been an average of 272 campaigns per year… and that number represents attacks that have been made public… there might well be 2 to 3 times more in total: they just never come to the public’s attention.
Activist funds come in all shapes and sizes from “slash & burn” franchises to longer-term, “strategic” firms. But it is a huge industry with an estimated 725 full time and part time money managers in the “Activist” category and campaigns are being waged in markets well beyond the United States.The global number of 725 is up from 614 a year earlier.
So, in a classic capitalist manner, the market has acted to replace the incompetent or complacent board. Many trillions in investible dollars have been released by “activists” as they promote their ideas openly to the giant investors: “If we were running this company’s strategy we would….” and typically there is significant effort in time, money and talent in these external third party strategic evaluations.
Asking for no commitment from the fund managers but making them aware of the current strategic shortcomings the “activists” create “wolfpacks”. Well briefed, investors can make a decision to support or not support an “Activist” campaign and given the huge concentration of ownership in large asset managers (most large, publicly traded US companies would have about 75% of their shares held by such asset managers) it does not take many stops to get around to half the company’s shares so an “activist” with an appealing strategic insight into a company might well gain significant support at the end of the day.
A wonderfully complete review of activism in the US markets over the last 5 years is available at: https://corpgov.law.harvard.edu/2019/04/05/review-and-analysis-of-2018-u-s-shareholder-activism/
A broader, global perspective can be found in The Activist Investor Annual Review: https://www.activistinsight.com/resources/reports/
The Activist Investor Annual Review https://www.marketwatch.com/press-release/activist-insight-and-schulte-roth-zabel-release-the-activist-investing-annual-review-2019-2019-02-05
David Beatty is an adjunct professor and Conway Chair of the Clarkson Centre for Business Ethics and Board Effectiveness at the Rotman School of Management. Over his career, he has served on more than 39 boards of directors and been Chair of nine publicly traded companies. He was the founding managing director of the Canadian Coalition for Good Governance (2003 to 2008). A version of this article will also appear in the Winter 2017 edition of Rotman Management, published by the University of Toronto’s Rotman School of Management.