In an odd twist of 21st Century doublethink, today’s business journalists refer to hedge fund managers that buy nuisance positions in corporations in hopes of flipping them for quick profit as “activist investors”. That such hedge fund managers are neither activists nor investors in any sense of the words seems to only serve to perversely cement the “activist investor” label in modern day financial lexicon.
T. Boone Pickens, an aging oil baron known more these days as an advocate for large scale alternative energy solutions, made much of his fortune as an “activist investor”. Except at the height of his influence over the market in the 1980s the technique was referred to as “greenmail”, a riff off of the criminal practice of blackmail. It was called “greenmail” because the acquirer made no secret that the reason they had bought a position in a corporation was that they thought they could force management to buy them off just to make them go away.
Greenmail worked because the dirty little secret behind the facade of most publicly traded U.S. corporations (then as now) is that they are often hopelessly corrupt. Executive management is dominated by professional managers with little market or product (or even business) acumen that have fought their way up the career ladder through a toxic combination of moxie, serendipity, opportunism, ruthlessness, cronyism, and careful political burnishing of their personal facades.
Corporations can function with corrupt and incompetent management because of two valuable advantages that they possess: inertia and salaried positions.
The paradox of corporate inertia. While a corporation’s size and complexity can make enacting necessary improvements almost impossible, the same bureaucracy and culture, coupled with built up brand equity and inertia on the part of its customers, can allow a corrupt corporation to stumble forward for years (and even decades) before feeling too much financial pain.
The golden noose of salaried positions. In American society, nothing is more prized than the white collar salaried exempt position. Such positions come with comfortable and steady compensation schemes and medical benefits, if not 401(k) plans. Corporations use this enticement to hire the legions of engineers, designers, manufacturing professionals, marketers, and accountants necessary to continue to prime the profit pump with products and services and to manufacture, deliver, and account for their profitability after they leave the drawing board. Once employees are brought on and locked into salaried positions, they get comfortable with that steady paycheck, making leaving disruptive at best and impossible at worst. Bad management will make the white collar workforce grumble, but only some will leave and the rest will hope to wait it out.
Wall Street likes corporations that are headed by professional corporate managers, because they cater to the short term focus that dominates U.S. financial markets. Greedy corporate managers also help generate billions of dollars in fees from share offerings, divestitures, and acquisitions. “Activist investors” like T. Boone Pickens and Carl Icahn like professionally managed corporations because they are ripe targets for proxy fights that will make them billions. Everybody is happy! Well, except for customers and employees. And how are they going to do anything about it?