NEW YORK (
) -- I attended a fantastic conference on corporate governance last week at the Millstein Center at Yale University in New Haven. The conference (like the center itself) is organized by Ira Millstein, the famed corporate lawyer from Weil Gotshal & Manges.
I'm a believer in strong corporate governance and come at it from the perspective of equity investor via my hedge fund. I've gone to bat against several boards over the years (most famously
that I perceived of as weak and not best representing their shareholders.
One would think I would hold very different views on governance than Ira Millstein, as he and his firm are paid by corporate clients to protect their boards from "overly-aggressive" investors like me trying to push for "distracting" changes.
But in fact I found myself agreeing with almost each point Ira made during the various panels and off-line discussions at the group. He's a very practical and sensible man and he wants to see strong boards that protect their shareholders' interests, not insulate their managements from legitimate criticisms.
I was more surprised to find myself disagreeing with many of the participants at the conference who I would have thought I'd be on the same side with -- other long-term investors from pension funds, unions, institutional asset managers and even economists, think-tank types or academics who would seem to be on the side of the investor versus "fat cat" managers.
One of the more common criticisms on these investors' minds at the conference was how "short-term investors" were hurting our capital markets even more than bad CEOs or bad boards.
Marty Whitman of Third Avenue seethed on one of the panels saying: "It's offensive to even call these short-term guys "investors." I would refer to them as nothing more than "market participants."
Heads nodded. There was clapping encouragement. And the questions that followed from audience members overwhelmingly concurred.
According to most of these attendees, the average hold time of most investors in American companies today is six to eight months. The reason for that is not them (remember they are pensions, labor funds, and mutual funds). They are long-term holders. They are trustworthy. They are doing God's work. The bad guys who caused the flash crash and who force "good" managers to focus on short-term quarterly results are hedge funds (like me). Hedge funds are short-termists. Hedge funds are opportunists. Hedge funds are bad.
Not only did this viewpoint go unopposed at the conference (although Ira Millstein did take a swipe at it at one point), I couldn't believe some of the proposals floated by attendees to fix the problem:
- We should let "long-term" shareholders' votes count for more than those of "short-term" shareholders.
- We should institute a "short-term" trading tax to discourage these hedge funds from making any money.
- We should make "short-term" investors buy different stock (maybe even at a cheaper price) that doesn't have any voting rights.
Some woman from the Aspen Institute spoke several times and passionately about how all these measures should be adopted. Jeff Kindler, the former CEO of
who left the company in December with a sweet $34 million non-compete retirement package (not including other departure goodies) and a former head of the pro-CEO Business Roundtable, championed the Aspen Institute's efforts to get these measures adopted. Kindler described these efforts almost as if it was bi-partisan (CEOs and investors - the "good" kind) and healthy.
Quite simply, I was aghast at what I heard. I was sickened last year when the so-called "proxy access" rule in Dodd-Frank was accepted by pro-business and pro-labor unions and pension funds. The rule allows only investors who had held stock in a company for three years or more could propose any changes to a poorly-performing board of directors. In my view, that rule (even though it's being contested in the courts at the moment) will never be used as it's written.
Let me be the first to say that "hedge funds" can screw things up just as much as corporate CEOs. Back in 2006 and 2007, Carl Icahn and many other "activist" hedge funds often pushed companies to simply disgorge their cash from their balance sheets in dividends or buybacks without any medium-term plan for improving the "core" business. Many hedge funds left their target companies worse off than before they got involved and weaker heading into the financial crisis.
However, let's also remember that many or most of those "dumb" hedge funds paid the price in not being able to raise any more capital post-crisis. Carl Icahn recently returned all his outsiders' cash to investors to go back to being a family office. So, let's not pretend that hedge funds don't face consequences if they are too "short-termist." In fact, I would argue that they have much more to lose much faster than either pension funds or poorly-performing boards.
Look at Yahoo! They are well into their second decade of bad performance. Am I a "short-term" market participant for calling on half of their board to be voted out tomorrow at their shareholders' meeting? Am I being premature? Does management deserve more patient long-term holders of the stock who trust management's infinite wisdom to turn things around?
The vast majority of the long-term holders of Yahoo! are mutual funds. This stock has been a major sore spot for them. And yet none of them has led the charge to force significant change at the company? Why? Because they are really not set up to do that.
I believe in one share, one vote. I believe there are all kinds of "good" and "bad" hedge funds, just like any other investor type. I believe that anyone, whether they are a three-year holder of the stock or a three-week holder, can have good ideas for how to help a company get back on track.
Ira Millstein discussed at one point in the conference how he had advised both Westinghouse and
in his career. "At one point," he remembered, "they were both about the same size and with the same potential. One died while the other grew to be one of the biggest companies in America. Both could have taken a long-term view on how to grow the business, but only one did.
So, I just don't buy it that boards today can't think long-term. It's about the credibility of management's plan for the company and if they can convince investors to support it."
I couldn't agree more. This class warfare between investors is unproductive. It reminds me when the banks wanted the short-sellers put out of business by the government. The only reason for that was because the shorts were right.
Ironically, if more "short-term" investors were allowed to present their "credible plans" about how to turn around a company, we might have more companies following better long-term plans than we do at the moment.
At the time of publication, Jackson was long Yahoo!
Eric Jackson is founder and president of Ironfire Capital and the general partner and investment manager of Ironfire Capital US Fund LP and Ironfire Capital International Fund, Ltd. You can follow Jackson on Twitter at www.twitter.com/ericjackson or @ericjackson