Robert J. Jackson, Jr. is Professor of Law and Director of the Program on Corporate Law & Policy at Columbia Law School, where his research emphasizes empirical study of corporate governance and financial markets. Before joining the faculty in 2010, Professor Jackson served as an advisor to senior officials at the Department of the Treasury and in the Office of the Special Master for TARP Executive Compensation. Before that, Professor Jackson practiced in the Executive Compensation Department of Wachtell, Lipton, Rosen and Katz.
Christopher P. Skroupa: There has been extensive academic debate about whether activists create or destroy corporate value. What is the state of the evidence on this question?
Robert J. Jackson: While the weight of the evidence suggests that activism enhances, rather than destroys, long-term value, the question is far from resolved. One recent study found that the short-term value increases associated with activists’ 13D filings are sustained over a period of several years. Another paper, however, has indicated that those findings may simply be the product of a selection effect—that is, that hedge funds are simply good at finding firms that will soon improve their operations and hence their value. Researchers, policymakers, corporate directors and their counsel are still searching for decisive evidence on whether hedge fund activism is good or bad for long-term value creation.
Skroupa: What are the best arguments on each side about the effects of activists on long-term value?
Jackson: The strongest argument in favor of hedge-fund activism has been advanced by Lucian Bebchuk, who has forcefully contended that activists discipline corporate managers. In a world where the poison pill makes hostile takeovers nearly impossible, he argues, the threat of an activist attack, and the proxy fight that often comes with it, is the only way to ensure that corporate managers act in shareholders’ interests.
Martin Lipton, a founding partner of Wachtell, Lipton—the inventor of the poison pill—has offered the strongest argument against hedge-fund activism. Marty worries that managers constantly concerned about a hedge-fund attack will never make the long-term investments needed to create the innovation that has long fueled American economic growth. He argues that, because managers will fear that such investments will lead to short-term value decreases that invite activist attacks, if they are not protected from activists managers will only choose projects with short-term rewards. If this dynamic spreads across our economy, Marty says, we will lose the kinds of innovative investments that have long defined American economic history.
Skroupa: In 2011, your former law firm, Wachtell Lipton, petitioned the SEC to change the rules governing activist disclosure, and the SEC seemed like they would act on the petition–until you and other academics intervened to caution about the wisdom of the change. What is the state of play at the SEC on activists?
Jackson: Shortly after Wachtell filed its petition—which asks the SEC to close the ten-day window activists now have to file a 13D, reducing it to just one day—SEC officials suggested privately that they were inclined to grant the Firm’s request. Professor Bebchuk and I filed a comment letter indicating that there was little evidence to support the Firm’s petition, and we were both delighted—and more than a little relieved—when it later became clear that the SEC had reconsidered.
Since then—nearly five years ago—the SEC has done nothing on this subject. That is a real shame, because Wachtell’s petition, in addition to proposing to shorten the 10-day window, asked the SEC to address hedge-fund activists’ use of derivatives, like total return swaps, to avoid disclosing their positions. On that point the Firm joined the calls of four different federal judges, who asked the SEC years ago to clarify whether derivatives constitute “beneficial ownership” for 13D purposes. Most activists will tell you that using these derivatives is not critical to their business, but they do so because the Commission has never made clear that doing so is improper.
In a forthcoming study, I provide evidence on several prominent activists’ use of these derivatives, and show that in the years since the courts first asked the SEC to clarify these questions their use has been significant. I’m hopeful that, under new leadership, the SEC will address the use of derivatives in the context of hedge-fund activism sooner rather than later.
Skroupa: You informally advised the Clinton campaign this year about corporate-governance matters, and Secretary Clinton emphasized the effects of “quarterly capitalism” on workers and investors. What can we expect to see from a Trump Administration in the area of corporate law and governance, particularly as it relates to shareholder activism?
Jackson: I’m not sure anyone really knows what the President-elect’s views are likely to be on shareholder activism or corporate governance. On the one hand, Donald Trump has had close relationships with activists like Carl Icahn, and I have no doubt that he understands the basic economic intuition that underlies most activism—the need to ensure that corporate management maximize shareholder value. On the other, his transition team recently announced that Paul Atkins, a former Commissioner with very strong pro-management intuitions, is helping the President-elect choose his appointees at the SEC.
To the extent the President-elect campaigned on the notion that he hopes to repeal Dodd-Frank, however, shareholders should be concerned about the reversal of key advances in corporate governance in that law. To take just one example, Dodd-Frank gave all corporate shareholders, for the first time, the opportunity to cast votes expressing their views on executive pay. If the new President decides to reverse that and other shareholder-friendly policy changes, investors will need to find another way to ensure that corporate management is acting in shareholder interests. Given that this is more or less activist investors’ job description, the role for activist investors may be become more important than ever in a Trump Administration.
Christopher P. Skroupa is the founder and CEO of Skytop Strategies, a global organizer of conferences.