Activist investors are needed more than ever

Activist hedge funds are often seen as evil, brutal and short-term oriented villains. Sometimes the shoe fits. But more often there is a role for activists essential to shareholder capitalism. For various reasons, their campaigns are becoming more important.

One is the rise of passive investing, which tries to replicate index returns rather than beat them. Only one in three dollars invested by institutions in America’s thousands of largest public companies is actively allocated, according to Man Group, an investment firm. The biggest passive asset managers, such as BlackRock, charge low fees and run lean investment oversight teams that aren’t designed to identify empire-building leaders or lazy programs. The result is an increasingly apathetic corporate electorate. Efforts to franchise the ultimate owners of funds are unlikely to solve the problem. They usually want to earn returns but leave the decision making to someone else.

There are other ways to hold bosses’ feet to the fire. Leveraged buyouts from private equity firms have been a constant threat to underperforming executives since the 1980s. The easiest way to deter a hostile takeover is to raise your company’s share price. Today, however, the buyout industry is reeling from the effects of higher interest rates, and is unlikely to fully recover for some time.

Although the ways in which managers are held to account have decreased, the need to increase profits by enforcing control has increased. When interest rates were low, large technology firms hired aggressively and expanded into peripheral lines of business. Now profits are more important than growth. The past decade has also seen increased demand for managers to respond to environmental, social and governance (ESG) concerns. Some shareholders campaign for ESG—rightly so—but the risk of businesses losing focus and losing money as they are drawn into politics has increased.

In such an environment, activists are welcome to present themselves as owners, not managers, for whose benefit businesses should be run. And because the market is screwed, activists are more likely to improve a firm’s operations than force it to sell itself in search of a quick buck. That should respect the fears of those who see activists as corporate stooges rather than efficiency drivers.

Find out the vote

Fortunately, the activists’ job is getting easier. New rules that came into effect in America last September should make it easier for them to get board seats by allowing shareholders to vote for candidates individually, rather than as a block. The wave of shareholder votes that had been expected for an immediate nail-biter has yet to arrive. But more battles between complacent activists and managers wouldn’t be a bad thing.

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