The CEOs of Procter & Gamble, Honeywell, and Pfizer are all under pressure to split up their companies. The reasons are different but root cause is the same: the rapacious hunger of short-term investors.
Procter & Gamble, seller of toothpaste and toilet paper, drew headlines this week by narrowly winning a proxy battle with Nelson Peltz, an activist fund manager who wanted a board seat and a plan to split the company into three. (Peltz isn’t conceding defeat, and he may yet get his way.) Honeywell, the industrial conglomerate, is spinning off two divisions after hedge fund manager Daniel Loeb urged a split. And Pfizer, the pharmaceutical giant, is once again considering breaking itself apart to boost its stock price, this time by putting its consumer healthcare business on the block.
None of the companies is losing money. All of them are healthy, profitable enterprises. But their CEOs are having their arms twisted to deliver greater returns to shareholders, no matter the long-term impact to the businesses.
Fear of the wrath of shareholders is nothing new, but in recent years the stakes have been raised as investors like Peltz, Carl Ichan, Paul Singer, and 3G Capital have amassed huge war chests and are targeting some of the world’s biggest companies. In a survey of C-level executives and board members by McKinsey and the Canadian Pension board, 63% said the pressure to deliver on short-term financial goals has increased in the last five years. And 79% said their time frame for producing returns was two years or less.
When companies are managed for the short term, they’re more likely to lay off workers, cut investment in research and development, and spend their profits on share buybacks, which enrich shareholders without growing their business. They’re also less willing to pay for workforce training and sustainability measures which may pay dividends in years or decades, but not weeks or months.
In one analysis by McKinsey—whose managing partner, Dominic Barton, has been an active campaigner against short termism—164 companies identified as focusing on the long term were found to be more profitable and less volatile than other companies of similar size.
Activist investors and their defenders say their approach is simply how the free market works. Activists target corporations that have grown fat and sluggish, and they provide the impetus for management to streamline and focus on delivering value to their owners, the shareholders.
Steven Kaplan, a University of Chicago business professor, notes that companies have been complaining about short-term investing for 40 years, and in that time American corporations have only grown more profitable. Amazon and Tesla, two companies that have yet to produce consistent profits, haven’t attracted activists because investors see their value, he says. “If you have a good strategy and you’re making good investments, the market rewards it,” says Kaplan.
There is another approach for companies that are lacking the buzz of Amazon, but are unwilling to sacrifice long-term growth for immediate returns: Tell their short-term shareholders to find another place to invest. That’s the advice of Mark Bertolini, the CEO of Aetna, who says he doesn’t want investors who are looking for quick gain.
“You can manage your shareholder base,” he said on Sept. 25, at a panel organized by Fortune and Time magazine. “If you have the courage to do it, you can make it happen and have people that support you. While you may take a short-term hit, that’s OK. I’m not in it to sell shares tomorrow.”