Thursday, February 11, 2010

Cash Hoarding and Activism 2.0

There's a lot of talk of sloshing these and hoarding these days. Bloomberg today ran a story entitled "Jobless Suffer with Corporate Cash Climbing to $1.19 billion". Other recent reports in the Wall Street Journal have called attention to a trillion bucks gathering dust on bank balance sheets. I'm sure there's some double counting in there that I don't have time to sort out, but even in 2010 a trillion dollars or two is non-trivial money.

Here's what I can't figure out:  where are all the activist investors, the Bill Ackmans and Carl Icahns of the world who should be muscling onto the boards of all these cash-hoarders to demand that something be done with the cash:  M&A, capex/expansion, buybacks, dividends, etc.  Is it that we believe that the cash is doing the best job it can just sitting there on corporate balance sheets?

I think the answer is that activist investing -- for all the swashbuckling that the name implies -- is generally a pretty slowmoving train.  You've got to build up a position in a company and push your way onto the board to be heard.  It takes time and effort, and with all the returns that could be had just by buying and holding since last March.  Plus Ackman's still smarting from the underdiversication in a portfolio consisting of nothing but Target stock (whoops!).

But why can't the tactics of activist investing -- assembling voting blocks to pressure boards and senior management to put cash to work or sell off units or whatever -- be adopted to the 2.0 world?  What about organized campaigns?  I know I know, it would be hard as hell to do.  But who thought you could elect a President that way until 2008?  Why can't grass roots techniques be adapted to the corporate arena?  CERES mounts similar campaigns to organize environmentally-minded institutional investors to pressure boards to improve governance around sustainability issues.

Could someone actually make money on it?  Are there regulatory reasons an institutional or discount broker couldn't raise awareness and motivate voting blocks of clients?

A target should be selected for a proof of concept, and once the methodology is in place, it could be rolled out and replicated selectively.


Steed said...

I think cash hoarding is a rational response to the credit crunch and will be alleviated by renewed confidence. This is the longest recession since the depression. Renewed confidence will be very welcome.

In general, though, I like the idea of applying social networking approaches to activist investing. I think it can be focused successfully on public policy / socially important, rather than financially strategic, issues. The financial issues are already the focus of these boards, and I don't think the collective wisdom of the networked blabbermouths will be wiser than the board's. We've all seen those message board blowhards getting things totally wrong, never admitting mistakes, and treating people who actually know what they're doing contemptuously. Many amateur and some professional investors were mad at Alan Greenspan in the late 90s for talking down the tech bubble. An activist investor like Carl Icahn is successful mainly because he accurately perceives what the market believes (about corporate finance issues such as the value of a company's component parts) and he's more willing than the board to do violence to a corporation's inherited structure.

Roggoboggolie said...

The Grouse has sniffed out an opportunity here! That's the good news. The bad news for your entrepreneurial readers is that a handful of web 2.0 shareholder activism sites have sprung up recently. Check out and I have not yet studied these sites (gotta get on that), so I can't comment on how likely they are to succeed in boosting shareholder democracy, or whether they even tackle issues like cash hoarding. But I do like the idea of Moxyvote which allows you to let them vote all your shares according to, for example, the Humane Society proxy voting guidelines. Very cool idea.

Anonymous said...

The boards are hoarding cash because they are distracted by their enhancement cream application efforts. But seriously, why on earth would anyone with unfettered access to clueless investor capital (the mutual fund industry) ever seek to radically change their way of doing business? Because of websphere inhabitants disapproval? Puh-leeze!

Steedman said...

You describe the service that Moxy Vote provides. The site is in beta, though.