Activist investors are often seen as the epitome of all that’s wrong with capitalism. They cut investment, fire employees, and break contracts to boost the short-term stock price—and cash out before the long-term value destruction comes to light.

The basis of this concern is sound. Investors wish to maximize shareholder value; many of them are mandated by clients, such as pension funds, with financial obligations that need to be satisfied. One way—indeed, arguably the simplest way—to do so is to extract value from other stakeholders. However, this implicitly assumes that the value that a company creates is a fixed pie, so the only way to increase shareholder value is to take from society. In a recent post, I summarized the pie-growing mentality that’s the subject of a new book, Grow the Pie: How Great Companies Deliver Both Purpose and Profit. Investors might instead increase shareholder value by growing the pie—improving productivity, innovation, and focus—thus benefiting society as well.

Which is it? We need to turn to the evidence. It’s certainly possible to find examples of pie-splitting. Renowned activist Bill Ackman—through his hedge fund Pershing Square—took a stake in retailer JC Penney, which then laid off workers and ended its famous customer discounts. This actually ended up harming long-term value for investors, including Pershing Square itself.

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