October 24, 2004

Sinclair and Shareholder Primacy

Professor Bainbridge wrongs the cause of shareholder primacy in his analysis of Sinclair over the showing of Stolen Honor.

Bainbridge quotes Tom Smith extensively on the matter to the effect that the Sinclair effort is a textbook case of shareholder activism gone amok. In fact, it is just the opposite.

The threat that Bill Lerach and the NYS controller issued was, essentially, to beat down Sinclair's share price via politically motivated selling and judicial action below Sinclair's normal market clearing price. This is a profit opportunity in big screaming capital letters. Yet nobody came to Sinclair's rescue to the benefit of their investors.

No similarly sized market player came and announced that they would be glad to take the money of the pensioners of the State of NY in favor of their own fund holders at bargain prices. If the pension funds of TX, OK, and GA did that, the NYS pension fund threat would evaporate and people in the pension system in NY would start complaining that their agent, the controller of NYS was not acting in their interest. In a better world of shareholder activism, significant chunks of the pension system funds would be taken from the controller's control over the affair.

The Lerach threat of lawsuit was toothless as Prof. Bainbridge himself noted except as an invitation to actual shareholders to sell stock. With a major seller appearing and preannouncing a major sale and no major buyers stepping up to the plate, Sinclair capitulated. But it is the imbalance between activist sellers and activist buyers that caused the problem, not the existence of sellers and buyers acting outside their obvious economic interests. Furthermore, the entire affair is mischaracterized as a war between agents and shareholders but it was not because the true owner of the money isn't the state of NY but rather the pension holders who have imperfect control over their own agent. It was a fight between one form of agent (corporate directors) and another (fund management directors).

Shareholder activism is imperfectly done in the US today and there is a political imbalance among activists that is of concern. That imbalance is at least partially caused by Prof. Bainbridge and others like him who, I suspect, get a much more favorable hearing on the right than on the left.

No matter how much people tut tut over the crass shareholders exercising their rights to buy and sell as they please, some are going to do it on non-economic grounds. It would improve things if we institutionalize the practice and have activists on all sides in that fight. Otherwise we are going to get repeat after repeat of this sort of browbeating from the left.

Posted by TMLutas at October 24, 2004 09:34 AM