In the United States, where shareholder influence on corporations is significant, activist funds have long exercised influence over corporate management and performance creation. There is a widespread perception that activist funds eliminate inefficiencies in corporate management and optimize capital allocation and asset efficiency.
For this reason, management at risk of low performance proactively enhances management efficiency before activist funds take action and makes efforts to achieve better management decisions.
In this regard, Jesse M. Fried, a professor at Harvard Law School, noted, "Activist funds pressure management that does not wish for change or lacks the ability to make value-creating decisions to resolve issues," adding that "management attempts various improvements to increase shareholder value before such actions occur." Professor Fried, a scholar studying the legal and economic impacts related to activist funds, is a professor at Harvard Law School.
The general perception in the U.S. market is that the activities of activist funds can enhance corporate management transparency and contribute to improving financial performance in the long run. However, some believe that activist funds could hinder long-term strategies or innovations by focusing on short-term stock price increases. Professor Fried stated, "Nevertheless, activist funds play an important role in strengthening management accountability and increasing corporate value." The following is a Q&A with Professor Fried.
What impact do activist funds have on corporate management and value?
"Activist funds improve management and increase shareholder value in two ways. First, management does not want to have a relationship with activist funds because the management may feel pressure or face the possibility of being replaced. Therefore, the mere possibility of activist funds emerging can lead management to focus on creating shareholder value. Secondly, if management fails to maximize shareholder value, activist funds can persuade or pressure management to improve corporate operations, enhance shareholder value, or even replace management."
What role do activist funds play in optimizing capital allocation and asset efficiency?
"Corporations are often operated inefficiently. This is because management either does not want change or lacks the ability to make value-creating decisions. Such inefficiencies refer to situations where corporations do not allocate cash to generate higher revenue for shareholders, do not partition or sell assets that could create higher value, or do not manage assets properly. Solving these issues can lead to an increase in stock prices. Therefore, activist funds identify inefficiencies and pressure management to resolve them."
Have activist funds affected corporate management transparency in the U.S.?
"In the U.S., corporate transparency issues are not significant. This is because strong securities laws ensure that most important information is disclosed to the market. Thus, activist funds do not demand additional disclosures. Instead, activist funds increase accountability by making the management realize that they may be replaced if they underperform."
It is said that activist funds could hinder a corporation's long-term strategy or innovation.
"A corporation's long-term strategy can be good or bad for shareholders. If activist funds determine that a long-term strategy is not in shareholders' best interest, they will intervene to change the corporation's direction. While activist funds may try to intervene in good long-term strategies, it is ultimately less likely they will gain support from other shareholders, since they are small shareholders themselves."
What impact does it have on long-term financial performance?
"Based on experience, there have been more cases where activist fund interventions have improved corporations' long-term performance than those where corporate performance has declined. Of course, there may be instances where activist fund interventions harm corporate performance. However, overall, I believe that activist funds play an important role in strengthening management accountability and increasing shareholder value over time."
Could excessive intervention by activist funds lead to market instability or economic risks?
"I do not see it that way."
Is there a time when activist funds demand restructuring to reduce labor costs?
"Employees at risk of being fired may have grievances. The possibility of being fired at any time is one of the darker aspects of American capitalism. However, due to this economic structure, American corporations can easily raise funds and grow. Fired employees generally find other jobs. The unemployment rate in the U.S. is low, and it is an attractive country for foreigners looking for jobs."
How to balance short-term performance and long-term value creation in corporations?
"There may be situations where short-term performance and long-term value creation of corporations conflict. In such cases, management should focus more on long-term value creation. If management can persuade the market that their long-term strategy is solid, the stock price will reflect that, and activist funds will not intervene in management. If the strategy is not as solid as management believes, they will need to explain to activist funds and others what they are doing to enhance performance and shareholder value."
Plus Point
Activist fund Dalton announces participation in management of Kolmar Korea.
Dalton Investment, an activist fund established in Los Angeles, California, in 1999, is reportedly set to make significant inroads into the management of Kolmar Holdings, the holding company of the Kolmar Korea Group in cosmetics and pharmaceuticals. On March 14, Dalton announced it acquired 230,337 shares of Kolmar Holdings, increasing its stake from 5.02% to 5.69%. It also stated it would change its stock holding purpose from 'simple investment' to 'management participation.' In the announcement, Dalton said, "In the event of matters related to the company's operations, we plan to exercise influence within the scope and method permitted by relevant laws to align with management objectives, considering the interests of shareholders and stakeholders." Following the announcement, Kolmar Holdings' stock price significantly rose. The stock price jumped from 7,140 won on March 14 to 9,280 won on the 17th, and reached 9,300 won on the 24th. Typically, when activist funds participate in management, there are movements to increase dividends, buy back shares, and enhance shareholder value, leading to buying pressure and price increases. Dalton has been purchasing shares of Kolmar Holdings since early 2024, and by October 2024, its stake exceeded 5%, triggering disclosure obligations.
Previously, on March 12, Dalton proposed to recommend Im Sung-yoon, the representative of Dalton, as a non-executive director at the Kolmar Holdings annual general meeting (AGM) scheduled for March 31. Non-executive directors do not serve full-time but supervise the company's decision-making process.
Dalton is expected to demand share buybacks and other measures from Kolmar at this AGM. As of the third quarter of 2024, Kolmar Holdings has cash and cash equivalents amounting to 63.216 billion won, and its price-to-book ratio (PBR) is 0.57. A PBR of less than 1 is considered undervalued. Share buybacks serve as a typical shareholder return measure, reducing the number of shares circulating in the market, thus raising stock prices.
Currently, market analysts suggest that the possibility of a management rights dispute is low. This is because Kolmar Holdings' largest shareholder and related party holds more than 48%, making it difficult for Dalton to independently shake management rights. The change in the purpose of equity holding to 'securing management rights' is interpreted as a pressure tactic. Dalton established Dalton Korea in February and reportedly has already invested in more than ten companies, including Kolmar Holdings.