Anyone who reads my posts on BloggingStocks knows that I have lot of respect and admiration for that much-maligned group of people known as activist hedge fund mangers. The other day, I discussed a recent study that indicates that these investors are good for small shareholders. This week's issue of Barron's features an interesting piece on Ralph Whitworth and his fund Relational Investors, who played a key role in the ousting of Robert Nardelli from the Home Depot Co. (NYSE:HD). (On a side note, it may not have been quite as tough as it sounds. A $210 million severance package? Boy, they sure showed Nardelli who's boss). The piece also featured a prescient quote from Adam Smith, the 18th century philosopher/economist best known for writing The Wealth of Nations:
"The trade of a joint stock company is always managed by a court of directors...It cannot well be expected that they would watch over it with same anxious vigilance with which the the partners in a private copartnery frequently watch over their own...Negligence and waste, therefore, must always prevail, more or less, in the management of the affairs of such a company."
If the baroque writing style leaves you wondering what exactly that means, Gordon Gekko spells it out in the movie Wall Street referring to the fictional company Teldar Paper, whose management he is at war with:
"Today, management has no stake in the company! All together, these men sitting up here own less than three percent of the company. And where does Mr. Cromwell put his million-dollar salary? Not in Teldar stock; he owns less than one percent. You own the company. That's right, you, the stockholder. And you are all being royally screwed over by these, these bureaucrats, with their luncheons, their hunting and fishing trips, their corporate jets and golden parachutes."
This unavoidable problem is why we will always need activist hedge funds in my opinion. If management teams do not have to live in fear of investors like Carl Icahn, Ralph Whitworth, and Pirate Capital (and Gordon Gekko), there will be nothing to prevent the "negligence and waste" that Adam Smith warned about in 1776 (and you thought the Declaration of Independence was the most important event of that year!).
Here are a couple of my favorite websites for keeping on what activist investors/hedge funds are up to:
StreetInsider.com 13D Tracker: This is a great site for getting news and analysis on the latest news from activist investors. A 13D is the form that any investor must file with Securities and Exchange Commission upon gaining ownership of at least 5% of the outstanding shares of a company.
If you're really ambitious, or even just bored, browse the latest 13Ds as they are filed at the SEC. What could be more fun?
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