Renowned New York corporate lawyer Martin Lipton was in Toronto on October 8 preaching the evils of shareholder activism to anyone listening at the OSC Dialogue, an annual event hosted by the Ontario Securities Commission at which market participants are brought together on issues and trends facing the capital markets.

Mr. Lipton’s message is stark and unsettling: shareholder activists, and activist hedge funds in particular (so he claims) [1], contribute to a malaise of “short-termism” that has infected corporate North America by, among other things, pressuring management of corporations to shift management strategy away from long-term value creation, the “core engine for economic growth, national competitiveness, real innovation and sustained employment,” [2] and towards short-term measures designed to create immediate increases in stock prices.  If he’s right, this is a problem of crisis proportions, posing nothing less than a threat to the national, and arguably global, economy as a whole.

The trouble, or at least part of the trouble, is that it is not at all obvious that he’s right.  Notwithstanding Mr. Lipton’s claim that “there is quality empirical evidence that short-termism and activism have an adverse impact on the long-term prospects of companies generally”[3] the matter is far from being free of controversy.  Among others, Professor Lucian Bebchuk of Harvard Law School, a leading scholar in the field and a long-time intellectual adversary of Mr. Lipton’s, disputes the claim, arguing that it is not supported by the data. [4]

I have no intention of trying to settle the debate here, in part because I’m not sure that it can be settled.  As Mr. Lipton himself has observed in responding to Professor Bebchuk’s position (though seemingly without recognizing the implications of his observation for his own position):[5]

[n]o empirical study…is capable of measuring the damage done to…companies and the…economy by the short-term focus that dominates both investment strategy and business-management strategy today. There is no way to study the parallel universe that would exist, and the value that could be created for shareholders and other constituents, if these pressures and constraints were lifted and companies and their boards and managements were free to invest for the long term.
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