This whole charade of long-term investors having more rights and privileges than short-term investors bothers activist investors. We bring constructive ideas to our portfolio companies regardless of the holding period. We resent deeply the accusation that we want only to cripple companies through clever, narrow, and ultimately short-sighted tactical maneuvers.

Earlier, we considered the evidence about whether activist investors adopt that dreaded short-term thinking. We showed how investors use the proceeds from share repurchases to invest in speculative R&D and other long-term ideas. We have three arguments that refute the long- and short-term canard:

1. ❖Use of share repurchase proceeds
   

2. ❖Comparable holding periods to mutual funds
   

3. ❖Positive long-term impact on portfolio companies.
   

No evidence shows activist investors think too short-term, or more short-term than any other investors, and that this alleged short-term thinking hurts companies.

We now put to rest the very idea behind the distinction. We show it makes no sense to distinguish between short- and long-term investors, and its proponents use it mainly to entrench CEOs and BoDs.

Corporate Finance 101

The distinction between short- and long-term investors either amuses or angers (or both) anyone with even a rudimentary knowledge of corporate finance. The financial math of investments and valuation shows clearly that in investment decisions, in a market as liquid as the one for US equities, short- and long-term are exactly the same.

Without going into the proof, the long-term consists of an infinite series of short-term periods. For a formal demonstration, see your favorite corporate finance textbook, like Brealey and Myers (Chapter Five of the current edition).

To elaborate a bit, corporate finance theory finds that proper valuation of an equity security entails estimating the present value of a series of risk-adjusted future cash flows. Done correctly, that value does not depend on how long the investor holds the investment. In other words, short- and long-term make a distinction without a difference.

We don’t even have a rigorous financial definition of “short-term” and “long-term”. Somehow it has come to mean holding an investment for at least one year (for shareholder proposals) or three or five years (for proxy access). No one can show why 36 months’ of ownership entitles a shareholder to proxy access, and 35 months does not. These periods thus become arbitrary and random. We finance types loathe arbitrary and random.

Why Bother?

If there’s no difference, why make the distinction?

Corporate interests continue to worship (ok, maybe only tolerate) “long-term” investors and disparage “short-term” ones. Long-term investors don’t necessarily have better ideas than short-term ones. Why does an otherwise intelligent shareholder need to wait a certain (long, really) period of time to become credible?

Compare two investors:

1. ❖A mutual fund that owns 8% of an underperforming company for six years
   

2. ❖A hedge fund that owns 8% of the company for six months.
   

What makes the mutual fund’s ideas for turning the company around more credible than the hedge fund’s? Especially when they typically have the same or similar ideas?

We studied the ravings writings of one corporate lackey, Marty Lipton, who regularly accuses activist investors of short-sighted, short-term thinking. We looked for a coherent argument that demonstrates why long-term investors somehow make better shareholders than short-term ones, or that even defines these two classes of investor. We found nothing in his numerous posts at the Harvard Law School corp gov blog.

We also parsed the recent letter from the CEO of BlackRock to portfolio company leaders, in which he urges them to think long-term. He does not define its duration, describe what constitutes short- and long-term behavior, or explain why he favors long-term investors. He hints that short-term investors seek “immediate returns to shareholders, such as buybacks or dividend increases” and long-term ones want spending on “innovation, skilled workforces or essential capital expenditures necessary to sustain long-term growth.” He then admits “there is nothing wrong with returning capital to shareholders” and “some activist investors take a longterm view.”

We can’t find anyone else who can rigorously define the duration or behavior of “short-term” and “long-term” investors. Why, then, would Lipton, Fink, and many others value one over the other?

We think the distinction helps entrench executives and BoDs. CEOs prefer shareholders that will own the company for many years (however many that is). An underperforming CEO can promise to such investors improved results at some unspecified future date. With “long-term” shareholders, he or she worries less about unusual pressure to improve results, or about equity market forces as frustrated shareholders dump their shares.

Familiarity breeds complacency. That is, familiarity with executive teams, born of owning shares for many years, can make shareholders complacent.

Sure, long-term (whatever that means) owners can become activist investors. It happens more often with short-term (whatever that means, too) ones, those who build a credible block over a matter of months with the goal of agitating for constructive change at a poor performer. In financial terms, these short-term investors are identical to long-term ones, and bring the same (or better) ideas. We can think of only one reason CEOs and others like the long-term shareholders, namely they are less likely to challenge the status quo.

Go ahead, favor long-term investors. Reward their patience (or complacency). Just understand that doing so keeps stubborn, underperforming company leaders in their jobs.