Activist shareholders are destroying companies and causing widespread job losses even at firms that aren't directly targeted, according to leading U.S. corporate lawyer Martin Lipton.
Mr. Lipton told an Ontario Securities Commission conference Tuesday that shareholders are becoming too powerful a force in the corporate world, especially some of the most prominent hedge fund activist investors like Carl Icahn and Bill Ackman.
They can drive up the price of a stock just by taking a position in a company, he said, but in the longer term drive companies to sell off assets and pay out cash to investors, leaving them weaker and more vulnerable.
"There is quality empirical evidence that short-termism and activism have an adverse impact on the long-term prospects of companies generally, and not just those who have been attacked but those who have adjusted to forestall attacks," he said.
Mr. Lipton is a founding partner of prominent New York law firm Wachtell, Lipton, Rosen and Katz, and has been credited with inventing poison pills in the 1980s as a way for companies to deter unwanted corporate raiders.
He told the OSC's annual Dialogue Day conference in Toronto that research shows 60 per cent of companies targeted by activists disappear within 2.5 years.
Even worse, he said the far larger majority of companies that are not directly targeted by activists are now adopting policies to deter takeovers by cutting costs, reducing spending on research and development and laying off employees to improve short-term profitability.
"There is a disconnect in society between shareholder-centric governance of corporations and what I'd call management-centric, where the focus is on the long-term success of the company to build value," he said.
Leo Strine, chancellor of the powerful Delaware Chancery Court, told the conference the activists rely on support from mainstream pension, labour and mutual funds, which should give more thought to using their voting power in the interests of their members to further broader economic goals like saving jobs.
"If they're going to be the referee, then they ought to referee on behalf of the people whose money they represent," Mr. Strine said.
But OSC vice-chairman Jim Turner told the panel there is also evidence activist hedge funds have also created value, saying shares of Canadian Pacific has soared since Mr. Ackman's Pershing Square bought a stake in the company and replaced the CEO.
Mr. Strine also told the OSC conference that Delaware has created a new form of incorporation for companies, called a public benefit corporation, which allows companies to give primacy to socially responsible goals – including environmental protection – and not just act primarily in shareholder interests.
He said there may be calls for Canadian regulators to create the same corporate option.
"It's something that might be coming your way, and I would encourage you to give some thought to that," he said.