Shareholder Activism in Uncertain Times

by Larry West  

The recent Governance Watch webcast, Shareholder Activism in Uncertain Times, raised important questions for both management and boards to consider in the midst of an economic climate that is making many companies particularly attractive to activist shareholders, and potentially vulnerable to aggressive moves that could force a board to take actions that may not be in the best long-term interest of the company or the majority of its investors.

The roundtable discussion was moderated by Ethan Klingsberg, a partner at Cleary Gottlieb Steen & Hamilton LLP, and featured three guests:

• Kathy Bostjancic, director for Macroeconomic Analysis at The Conference Board;
• Timothy Ingrassia, co-chairman of Global Mergers & Acquisitions at Goldman Sachs; and
• Glenn Eisenberg, CFO at Timken Co. and a director at both Alpha Natural Resources and Family Dollar Stores.

Bostjancic started the discussion by summarizing the current economic situation and outlook, noting that although the U.S. economy may avoid falling into another official recession, growth is likely to remain very slow through early 2012.

Looking at the third-quarter results, Bostjancic said one surprise was that business investment was up more than 16 percent in real terms for the quarter. That contrasts sharply with the results of a recent CEO confidence survey conducted by The Conference Board, which show CEO confidence plummeting during the last quarter. Bostjancic said it is too early to tell which of these factors is the outlier-whether CEO confidence will improve or business investment will slow-but meanwhile the latest profit numbers look good. As a result, cash is accumulating on many corporate balance sheets.

According to Bostjancic, liquid cash now accounts for 7.1 percent of corporate assets, the highest percentage in nearly half a century, since the fourth quarter of 1963. Prior to the recession, liquid cash was 5.3 percent of corporate assets. From 1980 through 2007, the average was 4.5 percent.

In addition, that 16-percent uptick in business investment last quarter is somewhat deceptive. Typically, when profits rise, investment in equipment and software keep pace almost dollar for dollar, but those investments are currently far below what one would expect given the size of corporate profits. The current gap between profits and spending on equipment and software is $431 billion, the largest in post-war history. That 16-percent increase may be a positive sign, and a small move toward closing the gap, but we still have a long way to go.

Read the rest of this article on the Governance Center Blog

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