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Mar 16, 2016

Activism promotes short-termism, say majority of directors

Directors believe activism promotes governance issues but promotes short-term ownership, finds study

Most board directors believe shareholder activism promotes short-termism, short-circuiting decisions that they believe will provide more sustainable and long-term growth, finds a new study.

Sixty-two percent of directors surveyed by NYSE Governance Services and executive search firm Spencer Stuart say that while hedge fund activism has created an awareness of the need for good governance, the practice reinforces and rewards decisions made with a focus on short-term returns.

One board member surveyed says shareholder activism has created an environment where the wants of a few significant shareholders is prioritized over the greater corporate good. ‘Activists tend to have a general knowledge but rarely the specific knowledge required to recommend positive improvements for the company and its other shareholders,’ he continues.

Directors do believe in the importance of shareholder dialogue, however, with almost two thirds (65 percent) feeling engagement is a way to open meaningful dialogue before critical issues come to a head.

That said, nearly a third (31 percent) worry that shareholder engagement carries ‘undue risk’ of board or individual director liability. Another 28 percent say it heightens the risk of violating Reg FD, 21 percent think it can divide the CEO and board, and 14 percent believe it leaves the board open to ‘undue influence’.

Not everyone agrees with the study’s findings, however. ‘Directors sometimes forget that their shareholders are the owners of the company and the ones who elect the directors to serve as their fiduciary representatives,’ explains veteran director Mark Sheffert, chairman and CEO of Manchester Companies. ‘The so-called risks claimed by some of the respondents are manageable with an understanding between the board of directors and investors.’

The study also reports that 48 percent of directors believe the top challenge to their company is economic uncertainty, followed by market risk and cyber-security. More than a third (38 percent) of respondents believe that while their company is doing all it can, cyber-risk is out of their hands. Other challenges cited include the problems of long-term strategic planning and business disruption or innovation.

Directors also describe the top attributes they want to see in a new board member: the most prevalent characteristic, chosen by 83 percent of respondents, is industry expertise. This is followed by financial expertise (78 percent), a board appointment that maintains gender diversity (59 percent) and experience of being a CEO (55 percent).

The results of the survey, which profiles nearly 400 board directors in North America, are detailed in the current issue of Corporate Board Member and are available to read for free here.