On Friday April 4, the Berkeley Business Law Journal and the Berkeley Center for Law, Business and the Economy hosted the 2014 Symposium on Shareholder Activism. With the rise in shareholder activism in publicly traded companies, activist campaigns are “perceived by various stakeholders as threats to be avoided, part of the current landscape, and powerful sources motivating social responsibility.” The Symposium explored this topic through hosting panel discussions with regulators, attorneys, academics and business professionals all sharing their thoughts on shareholder activism.
Panel 2 was moderated by Professor Robert Bartlett and included comments from Jordan M. Barry, Diane Frankle, and Steven Tonsfeldt, professors and practitioners who all have unique expertise in corporate governance matters and shareholder activism. The panel discussed the recent developments that have shaped the current business law landscape, the way recent disclosure regulations have changed the way companies deal with activists, and regulations addressing complexity and transparency of financial derivatives. All of these issues were tied into the general theme of whether there is any benefit to be derived from activist campaigns with a short-term strategy along with how boards deal with activist campaigns.
The panel began by posing three different questions to consider when thinking about shareholder activism. First, what are the shareholders’ incentives? Second, what information do the shareholders have? And third, if shareholders have the incentive and information, do they have the capacity to effect change? Ultimately, the question posed is whether shareholders have leverage to affect change.
All of these questions are affected by derivatives. Professor Barry discussed derivatives and how they “add new layers of opacity.” Derivatives are so complex that even managers have a difficult time understanding them. Their complexity results in obscuring not only operating results but also the risks that companies take.
Professor Barry went on to discuss the issue of incentives and how managers and shareholders may have conflicting incentives when making decisions about the company or voting, respectively. Managers tend to have more of their wealth invested in the company, which would make managers more risk averse whereas shareholders may want a company to take on greater risk. In addition, managers may want to do less work and extract more value from the firm, and derivatives make it easier to do that in some ways.
While managers and shareholders may not have the same incentives, there could also be great variation in incentives across shareholders. Professor Barry suggested that shareholders could themselves have the same interests or they could be composed of different teams pushing in different directions.
Ultimately, the panel explored the issue of derivatives and the problem posed by different incentives amongst individuals who manage the company and those who make up the shareholder base. In looking to the future, the panel noted that the effect of derivatives would grow because the derivatives market has exploded in the last few decades. The panel predicted that it would get harder to detect the market because actors will build expertise, which would make derivative transactions easier.
It is difficult to see what the big picture looks like in this area because derivatives are so opaque but the panel left the audience with a final thought: derivatives will continue to have an effect on the markets and on shareholder activism.