Paul Singer is the Founder, President, Co-Chief Executive Officer, and Co-Chief Investment Officer of Elliott Investment Management L.P. This post is based on an essay that first appeared in one of Elliott’s recent quarterly letters to investors.
Public ownership of shares is, in many ways, the essence of modern capitalism — which, along with the rule of law, has been responsible for the spectacular growth in global living standards over the past 200 years. Today, public ownership of shares is under significant pressure on a number of fronts.
A diminishing pool of public equity market investors is engaged in “active” investing (i.e., actually analyzing the merits of companies and selecting their securities accordingly). A growing plurality of investors chooses indices and engages in virtually no individual company or security analysis. This type of investing delegates security selection to small, anonymous committees at the index construction firms. Among the active investors are classic stock pickers at some mutual funds and hedge funds, a depleted cadre of analysts at investment banks and advisory firms, and a relatively small group of “activist” investors.
Activist investors do not just analyze and select securities and companies in which to invest. They also interact with company managements, publicly and/or privately, in a dialogue that the activist hopes will validate its analysis (or show why it is wrong) and lead to improvements in the company’s performance. Activists aim to influence outcomes and “make something happen” to cause a company’s share price to increase and hold its gains.
The dirty little secret about public capitalism is that many executives and directors of public companies abhor its essence: public ownership of “their” companies. Whether shareholders own shares for one minute or for 30 years, they are owners, deserving all of the privileges of ownership. Of course, their ability to exercise those privileges depends on, among other things, the rights conferred by their shares, the number of shares they are able to acquire, and their ability to voice their views and convince management and/or other shareholders (including index investors) of the merits of their analysis. However, on all of these fronts, the fundamental rights of owners are increasingly being pressured due in large part to the efforts of well-compensated corporate advisors and lobbyists, who masquerade as advocates for a new, more enlightened capitalism.
We have learned from decades of experience that most public company management teams do not like being told what to do, and they really do not like their performance to be critiqued by outsiders who have the temerity to call themselves “owners.” However, imagine if these same executives were not allowed to critique the performance of their own employees. Suppose one of these executives suggested that an employee adopt a performance-improvement plan and that employee responded by alleging that he or she was a victim of a “short-term attack,” one that focused too much on the numbers and overlooked his or her many positive intangible qualities. How would this executive react to such a response?
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