June 23, 2015

Activism, Short-Termism, and the SEC

"Remarks at the 21st Annual Stanford Directors’ College"

Commissioner Daniel M. Gallagher | Securities and Exchange Commission

Today, I’d like to pull together some themes that I have been thinking, speaking, and writing about during my tenure and address them more holistically. Specifically, I’d like to share with you some thoughts about shareholder activism, short-termism, and the SEC.

I. What is activism?

Like many others, I view activism broadly: it is simply the actions of investors who are dissatisfied with management’s decision-making and corporate strategy and who, rather than selling their shares, try to force those companies to change.[1] But why bother? Despite the best efforts of certain policymakers over the last six years, the U.S. capital markets are still the deepest and most liquid in the world, and for many investors, it is trivially easy to exit one’s investment by selling and walking away. But an index fund manager can’t just sell the shares of the companies in the index. A hedge fund manager may see more alpha in driving improvements at a single company than in stock-picking. And a socially-motivated investment fund manager or gadfly can get a platform for idiosyncratic goals.

Are these activists good or bad? Often this question is posed as Manichean: light vs dark, good vs evil. This binary view of the world, divided between those who are either pro- or anti-activism, is convenient, but it is also far too simplistic. We need to break down activism one degree further, and ask: is it aimed at creating long-term shareholder wealth, and does it actually do so?[2] Some activism is, and does; other activism is not, or does not.[3]

II. The SEC’s role regarding activism

So how does the SEC determine which is which? Simple: it doesn’t, and shouldn’t. The various states have been entrusted with determining the substantive rights of shareholders, while the SEC’s role traditionally has been to set the proper conditions for investors to be able to make an intelligent, informed determination for themselves — that is, to create a level playing field, chiefly through disclosure.[4] And traditionally, the SEC has been an expert groundskeeper. Unfortunately, that prudent division of responsibilities has been eroded, in some instances through our own actions or inaction in the face of changing markets, and other times through our own overzealous implementation of legislative enactments. As a result, as groundskeepers go, the SEC increasingly has more in common with Caddyshack’s Carl Spackler.[5] Maybe this is due to our relentless pursuit of the many gophers in the Dodd-Frank Act over the last five years! I would like to discuss a few specific areas to illustrate my point.

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