Capitalism’s unlikely heroes. Why activist investors are good for the public company

The Economist reports:

As inventions go, the public company is one of capitalism’s greatest. Initial public offerings promote innovation, by providing an exit route for entrepreneurs; being listed makes a firm open to scrutiny; and ordinary people have a chance to invest in capitalism’s wealth-creating machines.

But the past 15 years have cast a shadow over the public company. There was not much sign of scrutiny or wealth creation in fiascos like Enron and Lehman Brothers. Governance has been weakened by the rise of passive index funds, which means that many firms’ largest shareholders are software programs. Institutional investors prefer to sell at the first sign of trouble rather than manage problems—so chief executives obsess about quarterly earnings and grab pay and power while they can. At the same time, tycoons in Silicon Valley have often turned outside investors into second-class citizens, by creating special voting rights for their own shares.


Private-equity barons say their model of concentrated ownership makes more sense. Some governments argue that companies need the steadying hand of the state. But there is a better way. Activist hedge funds take small stakes in firms and act like political campaigners, trying to win other shareholders’ support for their demands: representation on companies’ boards, cost-cutting, spin-offs and returning cash to shareholders. Mad, bad and dangerous to know, activists are often loathed by public-company bosses for their belligerence and opportunism. But the bosses are wrong. Activists are in fact the public company’s unlikely saviours.

The watchful eye.