After ISS Governance (NYSE: MSCI), a proxy advisory firm, counseled investors to vote against Apple Inc. (AAPL) acceding to Carl Icahn’s demand for a $50 billion share buyback at the upcoming shareholders’ meeting, the activist investor backed down. On February 10, 2014, Mr. Icahn withdrew the non-binding proposal which he had advanced and declared himself satisfied with the $14 billion in buybacks that the Cupertino firm undertook on its own initiative.
The interplay of forces during Mr. Icahn’s attempt to trigger a massive Apple (AAPL) stock buyback may highlight the emergence of a new system of corporate checks and balances during the information age. It could be argued that there are at least four major “players” in this shifting ocean of influences – the corporations themselves, powerful activist investors, proxy advisory companies, and the great mass of smaller investors.
The final element in this emergent, extended form of corporate governance is modern communications technology. The instantaneous, global dissemination of information between these parties through the Internet, Twitter, and other electronic avenues makes it difficult for one to take an action without the others being immediately aware, and thus being empowered to take steps to either support that action or set up obstacles to it.
During the recent 2010s, corporations in the United States have retained bigger cash reserves than at any time in history. According to a 2011 CNBC report, the S&P 500 firms had a total cash pool of $800 billion, most of it invested in securities yielding less than inflation. With highly liquid assets, easily converted to cash, added in, the total hoarded is closer to $1.84 trillion, according to the Wall Street Journal. The rise of activist investors is the response of wealthy, business savvy individuals observing this jackpot and using the leverage of their money in an effort to harvest it.
Activist investors often began as corporate raiders during the 1980s, when they purchased companies and then liquidated their holdings, gutting the company but making astronomical profits, in a process dubbed “asset stripping.” Activist investors are the next generation of raiders, aiming to loosen the purse strings of corporate cash reserves.
Mr. Icahn purchased $1 billion in Apple Inc. (AAPL) shares in January 2014, and simultaneously began pressuring the firm to engage in massive buybacks. His initial target was $150 billion, but he eventually dropped this figure to $50 billion. Though espousing the cause of “corporate democracy,” the investor could not have been unaware of the fact that such a buyback would drive up the value of Apple shares and thus cause a manifold increase in his portfolio of the stock, at which point he would likely sell and make a vast, immediate profit.
At this point, another of the powerful players in today’s corporate world, the proxy advisory firms, stepped in to lend its weight to pushing back against the activist’s pressure. Both ISS Governance (MSCI) and Egan-Jones Ratings Co. urged investors to vote against the non-binding proposal at the shareholders’ meeting. Yet Mr. Icahn’s efforts were not without effect. Apple Inc. (AAPL) bought back $14 billion in shares, moving some of its surplus cash back into the hands of investors. This could be argued to be a compromise position, subjecting the corporation’s operations to outside influences and preventing ossification, while limiting that influence at the same time.
In short, the interactions of corporations, activist investors, proxy advisory firms, and ordinary investors seem as though they may be sorting themselves out – gradually – into a communications based system of checks and balances. This result is being achieved by each party pursuing its own interests, while simultaneously recognizing that each of the others has a role to play in both supporting and checking its fellows. Whether a dynamic new corporate governance model or a wasteful series of power struggles emerges from this process remains to be seen.
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