Why do investors refuse to act?

March 3rd, 2010
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Contributed by: Michael R. Levin, The Activist Investor
Investor behavior sometimes puzzles me. They can own an absolute dog of a name, one that always underperforms. Yet, they do nothing about it. Why?

I refer to companies where management is part of the problem, possibly a big part. Some companies, especially in this economy, do everything in their power to both grow profitably and implement constructive investor input. Management avoids entrenchment and receives fair and reasonable compensation. The board of directors acts on behalf of shareholders.

Many others, though, exemplify why professional activist investors got into this line of work in the first place – unresponsive to investors, shielded by directors from poor performance, paid outrageous amounts in spite of their company’s poor performance.

I’ve asked a few PMs about this.

“It’s not our style”: I take this to mean that they just don’t feel right confronting management, asking tough questions, and doing something when management fails to respond. Baloney - here are some of the most aggressive financiers around, veterans of trading floors and M&A wars, who become quiet and shy when they need to turn around a failing investment.

Limits access to the company: So, nosy questions means they lose the chance to consort with the CEO. I wonder about the real value of this access, especially with an underperformer.

We don’t want the activist perception: I’ve heard a couple of versions, including not wanting other investors to think less of them, and not wanting the CEOs of other portfolio companies to think that the PM will come after them, too. I don’t know why they care what other investors think. As for CEOs of other companies, the good ones have nothing to worry about, and the others should have a healthy fear of what investors think of them.



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