Are Activist Investors Ever Good for Shareholders?

In the video below, The Motley Fool speaks with Roger Martin, strategy expert and dean of the Rotman School of Management at the University of Toronto. We discuss activist shareholders, which have been increasingly in the news lately with companies like Herbalife, Dell, and J.C. Penney. The question many individual investors are asking is: Are these activist investors good for the stocks that I own? Martin explains that they will likely create short-term value, but long-term investors should be wary of activist investors.

A transcript follows the video.

The full interview with Roger Martin can be seen here, in which we discuss a number of topics including Bill Ackman, innovation, corporate responsibility, executive compensation, and how to pick out great companies. Martin is the coauthor of Playing to Win, a new book focusing on strategy written with former Procter & Gamble CEO A.G. Lafley.

Brendan Byrnes: Let's talk about activist investors. You saw Icahn recently purchasing a 6% stake in Dell. He's got 10% of Netflix. Bill Ackman we talked about earlier, obviously J.C. Penney. He lost his proxy fight with Target.

If I'm a shareholder and I own one of these companies, should you welcome an activist investor coming in? What effect does that have on strategy?

Roger Martin: I think it really depends. What I've seen of the activist investors ... I actually haven't seen any activist investor out there be able to improve the long run operations of the core company they've gotten involved with.

There's undoubtedly examples where it's happened, but I don't see any consistency of that.

What I see is them triggering something that makes the capital markets very happy in the short term, so when Ackman went in and said, "Fortune Brands, you have to split into three companies," everybody said, "Oh, wow, this is great. We've released all this value," so there's a bump.

The question is, can you make the performance of each of the companies that much better? I think a short-term shareholder, if an activist comes in and forces them to divest something -- sell off their real estate assets or monetize some portfolio of assets -- they can have a bump in the stock.

But I think if you're actually a long-term shareholder -- let's say you're a pension fund or something that wants to hold a given stock for 30 years and an activist comes in -- I don't think it's particularly good for you because what they tend to do is make their money on a one-time bump.

As soon as we create the spinoff and we get a bump then we, the activist, can get out. It's a mixed blessing, depending on what your interest is as a shareholder.