The Wall Street Journal’s Alan Murray suggested a rather novel idea this week. He argued:
Hedge funds — at least the five percent of them who pursue activist investing strategies — look to me like the saviors of capitalism. They are in the best position to hold CEOs accountable – and someone other than regulators, trial lawyers and left-leaning public pension funds needs to play that role.
I like Alan, but I’m glad he isn’t slugging for the Yankees this week. Because, this time, he really struck out.
An important part of the evolution of modern capitalism has been its wide and dynamic base of stakeholder participation —of share owners as well as consumers. That model has given people a stake in supporting key drivers of the economy along with a sense that they are benefiting from them. It is a system that requires public consent as well as efficiency.
The fact is that too little is known about most hedge funds and how they will affect all the stakeholders who have come to depend upon the modern, transparent corporation. Its often secretive practitioners seem to want to keep it that way. We know a great deal about their economic prowess. Much less is understood about their concepts of responsibility, their vision for the future of capitalism and how they plan to govern. And there is that little thing called derivatives that can see huge fortunes wiped out overnight.
Some hedge funds efforts, like those involving Carl Icahn, have proven mixed in terms of results and rather destabilizing to large groups affected. An occasional shake-up can be good for organizations, especially those run by the smug and self-satisfied. A regular series of earthquakes probably is not.
One can debate whether or not capitalism needs a savior. I am fairly certain, however, that hedge funds are an unlikely candidate for that task. Some might argue that the best way to ensure an efficient and accountable market is to have more and better informed shareholders —and a system of governance that allows investors a meaningful role in exercising the privileges and responsibilities that go with ownership. I distinguish here from the Wal-Mart approach, which seems to regard shareholder involvement and proxy initiatives as some kind of subversive activity requiring extensive background checks, and goodness knows what else, of the proponents.
A century or so ago society was promised a new approach to capitalism which was also supposed to make companies and managers more efficient. It was dominated by a handful of actors on a stage where J.P. Morgan had the leading role. It didn’t end so well, as I recall. Concentrations of power, in the long run and very often sooner, generally produce more suspicion, political outrage and public discontent than widespread improvements in progress and prosperity.
I will be the first to admit that there are serious weaknesses with the way most boards work. Management self interest often saps performance and makes companies far less productive, accountable and responsible than they need to be. Think of recent experiences with Home Depot and Hollinger, for instance. But before we throw out the concept of the widely held, shareholder owned, stakeholder dependent corporation, let’s understand better what we are getting with the inheritors of this tough-minded approach that seems to be the defining hallmark of hedge funds.
It would be unwise to adopt a cure —or a savior— that could prove more costly than the illness.