There’s a new playbook on activist hedge funds.
Against such funds, to be precise, penned by the Conference Board, the New York–based nonprofit business group of corporations and institutional investors best known for its monthly reports on leading economic indicators.
The board in March released tips for “public companies and institutional investors [that] might find themselves involved in an activism campaign mounted by hedge funds.” They include maintaining good intelligence on who owns how much stock and how to avoid becoming a hedge fund target (keeping too much cash on hand instead of returning it to investors is sure to attract attention). How to react is also covered (“ignoring the activists’ demands” is a bad idea). The board cautions companies to keep tabs on who’s lending shares to whom during a proxy fight and suggests thinking twice before investing in hedge funds — presumably to send a message.
The advice comes as activism continues to draw headlines, and despite certain hedge fund blowups. “Even with all the talk of hedge funds imploding, if you look at the current proxy season, you find that a great number of activist campaigns are being initiated and led by hedge funds,” says Matteo Tonello, a senior researcher at the board and the author of the working paper that contains the tips. “This economic climate is very good for hedge funds because they present themselves as an agent of change and show they’re pursuing financial and governance improvements.”
Hedge fund managers are sometimes portrayed as fly-by-night quick-buck artists lusting after short-term gains. Snehal Amin, a partner at the Children’s Investment Fund (UK), or TCI, a well-known, $10 billion activist hedge fund, challenged that notion before a congressional subcommittee in early March by explaining the governance changes TCI is seeking in its proxy battle with CSX Corp., the U.S. rail giant. “We are committed, long-term investors,” Amin said. “We ask our own investors to commit their capital to us for years at a time so we can be faithful to our investing philosophy.” (For more on the battle between TCI and CSX, see “Rail Wars,” page 14.)
To be sure, the Conference Board does not regard hedge funds as a monolithic phenomenon, Tonello says. And even some of the most resistant companies are starting to make nice with activist hedge funds: The New York Times Co. reached an agreement in March with Harbinger Capital Partners Funds and Firebrand Partners to expand its board of directors, adding two hedge-fund-nominated candidates. In early April, Motorola struck a deal that lets activist investor Carl Icahn have two board seats. And TXCO Resources settled its proxy contest with Third Point by replacing two directors with nominees of the hedge fund, about 10 percent of whose $5.5 billion in assets could be characterized as activist investments.
“We like to work in the background and talk to management teams,” says a Third Point analyst who declines to be quoted by name because he isn’t authorized to speak for the company. “Ultimately, we have similar goals and want to make money for shareholders.”
The Conference Board’s mission statement, it may be worth noting, says the group “disseminates knowledge about management and the marketplace to help businesses strengthen their performance and better serve society.”
