Activist Investors Sidelined by Brutal Market

Of course, the evaporation of credit has taken away one "quick fix" strategy out of the quiver of some activists: Call on the company to take on an unhealthy amount of debt in order to buy back shares to artificially boost EPS and immediately dividend out this cash to shareholders -- all in the name of "creating shareholder value."

Marty Lipton, who has been corporate America's top watchdog against activist investors, recently attacked these kinds of practices, asking: "Can the global economy afford to allow institutional investors, who are seeking to maximize the price of their shares on a daily basis, determine industrial business, policy and strategy of major corporations?"

Of course, there are examples of bad behavior at both ends of this spectrum: greedy, short-termist activists enriching themselves at the expense of long-term holders, and greedy, out-of- touch boards and CEOs filling their own pockets out of the company till while driving a company's value into the ground. There can be highly effective boards and CEOs, as well as highly effective activist investors who advocate actions that are in the company's and its long-term shareholders' interests.

The fact is that Ken Squire's thesis is still correct that the broader environment has made it much more favorable for activist investors to launch campaigns. There are many companies today trading at or near their cash levels. Some of these companies are in this situation due to the wash-out of the broader market, but many are there because of their boards approving poor capital allocations (buying back stock at the top of the market or taking on large amounts of debt which cannot be rolled over), poor acquisitions, excessive compensation, or simply leading their company to value-destroying mediocrity.

A year from now, the SEC is likely to approve a new "proxy access" rule making it much less expensive for activists and other shareholders in general to challenge boards doing a poor job representing their interests in overseeing the company's direction. It's likely that many smaller activist investors will be involved. The most active activists today are the firms going after companies below $2 billion in market capitalization -- on the assumption that they can have more sway over these companies because they can hold a larger percentage of shares than would be possible if they went after the larger public companies.

Yet even the most favorable conditions will promote activist campaigns against large-cap companies if the current generation of large activists continues to be inwardly focused by their redemption and performance problems.

This could be a generational succession moment for activist investors, where the elders give way to a next generation of activist investors taking on the largest companies in corporate America.