A few weeks ago, Chesapeake Energy Corp. announced Oklahoma City icon Aubrey McClendon's retirement, the latest twist in a highly public campaign by “activist” shareholders to bring about changes at Chesapeake.
A different group of activist investors has taken a position in SandRidge Energy Inc., also calling for change. Targeting Chesapeake and SandRidge has certainly attracted the attention of shareholders. It should also command the thoughtful concern of Oklahomans.
Activist shareholders — like ordinary investors — take a position in a public company hoping to make a profit. Unlike ordinary shareholders, though, activists buy stock intending to push for changes in the company that they think will make its stock price go higher.
They use a variety of tactics, such as private negotiations, publicity campaigns, litigation and proxy battles to get management to accede to their demands, even taking over the board of directors sometimes.
As a general matter, it is important to realize that activists have the right as shareholders — owners of the company — to do these things. And it's safe to assume that many activist grievances about companies and management are legitimate.
But that doesn't make it less potentially painful for Oklahoma City should shareholder activism lead to layoffs, restructuring or even a sale — it doesn't take a long memory to recall the dislocation caused by Anadarko Petroleum's acquisition of Kerr-McGee Corporation in 2006, which the Greater Oklahoma City Chamber of Commerce at the time estimated would cost the local economy almost $247 million annually.
And it doesn't make less ugly the spectacle of a company people feel like they know having to justify to people they don't know (the activists and other shareholders) its corporate actions and strategies, and even its existence, through the prism of its stock price.
Taking a step back, then, how does one fairly and dispassionately assess what activist investors do?
Hostile takeovers, about which much has been written, provide a useful framework for thinking about activist investing. Although the two are not the same, they are functionally similar in that they involve corporate overtures that are unwelcome by the target company, and the same controversial defensive tactics sanctioned by law, such as poison pills and staggered boards, come into play.
A poison pill is so called because the acquirer's declaration of its intent acts as a trigger to give new rights to existing shareholders. Having staggered boards means that directors are elected — and can only be removed — a few at a time. Both of these make takeovers, and activist investing, more difficult and expensive.
Warren Buffett made remarks at a 1985 conference on takeovers at Columbia Law School that provide wise counsel for thinking about takeovers and, by extrapolation, activist investors. In those remarks, he focused on the dilemma of who gets to decide a company's fate in an imperfect world:
“[T]he very best managed companies I know of have frequently sold in the market at substantial discounts from what they were worth that day on a negotiated basis. It isn't just the weak managements or the companies that are not meeting their potential that are vulnerable to takeovers because of market disparities from negotiated business value.”
In other words, stocks go up and down and, to some extent, make companies vulnerable to takeovers — and activists — regardless of what management does or doesn't do.
This is a problem, Buffett says, because it can lead to “revolving-door ownership of businesses,” as he puts it.
He also accepts that people may be far from perfect:
“[T]he people who end up buying businesses ... many times do so for very good reasons; [but sometimes] … purchases reflect the megalomania of people who, through natural selection based on political skills or hunger for power, move to the top of organizations.”
But after reciting these and other concerns, he posits that the basic problem is still that someone has to make big corporate decisions. According to Buffett, that someone has to be shareholders, management (which Buffet groups together with the board of directors), or the government, or some combination thereof.
In the end, he sides with shareholders, and by extension, activist shareholders. Even in an imperfect world, Buffet notes that management alone cannot have the ultimate say because “their personal equation is simply far different from that of the owners. If they can keep the keys to the store, they usually will.”
Oklahomans have every reason to want “to keep the keys to the store,” too, but maybe the best way to do that, following Buffet's pragmatic conclusion, is to be open to some shareholders' ideas and to prove to shareholders that keeping the keys in Oklahoma is in their best interests as well.
Ian Ogilvie works for a financial services company in Oklahoma City. His column appears here monthly.