Jan. 30, 2023

A Call for Activism

This week, we look at that special ‘class’ of investors who are busy raising their heads again to challenge management in a time of turmoil - the activist. Who are they, what gives them power and when they wield that power what’s the fall out.

This week, we look at that special ‘class’ of investors who are busy raising their heads again to challenge management in a time of turmoil - the activist. Who are they, what gives them power and when they wield that power what’s the fall out.


Richard Kramer: Welcome to Bubble Trouble, conversations between the independent analyst, Richard Kramer... That's me. And the economist and author of the newly published paperback book, Pivot, Will Page. And that's what we do, laying out our inconvenient truths about how financial markets really work.

Now our new strapline is, "If there's a bubble that burst, we pricked it first." Seriously, it's now very hip to mock NFTs, crypto, and tech bubbles, but we've been doing this show for over two years and gnawing on 70 episodes. So you should know by now that this is a countercyclical show, calling out what the sycophants and stenographers are busily propping up.

This week we're gonna look at a special class of investors, who are busy raising their heads above the parapet, to challenge management at times of turmoil. The activist. Who are they? What gives them their power? And when they wield their power, what's the fallout? A call for activism. More in a moment.

Will Page: Okay, Richard, welcome back. This week, I want to do what we used to do back in the early days of Bubble Trouble foundational podcast... Assume no prior knowledge, and build the building blocks of how these markets truly function. Their flaws, their strengths, their weaknesses, their risks, their opportunities.

And I look back at the number of our listeners, and we love feedback. To our listeners, we love feedback. How popular the sycophants and stenographers episode was, it constantly gets cited. And that, that's what I want to do here. Just take one of your flipping remarks about markets, and get underneath it.

And you've talked about activist investors. I want to get an understanding of what does this activism really mean? So, let's start glaring this one up. Let's begin with the basics. Any Tom, Dick, and Harry can buy a stock. That makes them an investor. That gives them voting power. But it doesn't make them active. What types of shareholders are they? Just sort of paint a picture for me of, you have a company. They've gone public. They have shareholders. Bucket them into two or three groups for me.

Richard Kramer: Okay, well. So the simple fact, is one share, one vote, is fairly well established as corporate governance practice around the world. There's a few exceptions here and there. But the reality is, that the vast majority of people who own shares, never think that their shares are worth anything in terms of voting power.

Now, the different classes of investors out there. You've got traditional institutional money managers, or pension funds, and they typically measure their performance versus some sort of benchmark. Often, relative performance. Some of them are income funds and want dividends, i.e., a share of the spoils of the company. Some of them are growth managers, and are only really gonna back companies that grow. And then there are hedge funds, which are both betting on and against companies. They are gonna be long, some companies, and selling short the sales of others.

Now of all of those sorts of investors, there are a relatively small number who would consider themselves activists. Who actively think about what the company should be doing... And when the company is not performing well, thinking that they should get sucked in, get involved, and somehow vote their shares, and influence the direction of the company.

Will Page: So, let's build it out for a second. I guess if you're the company, optimal type of shareholder would be a big investor that's low in activism. Yet if you're on the other side of the fence, you want to be small but high on activism. So you have this kind of weird, asymmetric balance of wanting big checks from people who don't really pay too much attention to what the company's doing. Is that a fair comment?

Richard Kramer: Well the opposite of being an activist, you might consider be passive. Now, there are all sorts of passive funds. Which mean they don't take a specific bet on the market, they just buy an index or all the shares in the market.

Will Page: Mm-hmm.

Richard Kramer: Now a passive investor, in w- a single stock, would just sit back and let management do what it will. Pollute, pay themselves huge sums, fritter away their- the cash flow of the company on crazy acquisitions. But an activist... Which again, might be a traditional pension fund, an institutional investor, or a hedge fund that is betting against the company at times, m- might want to put a proposal to the management, or do more than just vote at the AGM for certain suggestions that get adopted or not, and wants to get more involved.

Now, you know that ESG, Environmental, and Social, and Governance, is a big topic right now. And some of the largest investors in the world are thinking how they want to influence companies to follow their [inaudible 00:04:45] angels on climate change.

Will Page: Mm-hmm.

Richard Kramer: And then there are dedicated activists. There are funds that make a living off of identifying companies that are performing poorly, taking the management to task. And typically these funds... And they get associated with a single individual, because they usually lead the charge. Will take a stake. They often amplify it with options, so that they can make their influence and money go further or seem larger than the actual amount of money they're putting to work. And they genuinely want to spur change, and a lot of times, stick around to see it happen.

So they might want to get rid of management or the CEO, they might want to- the company to stop investing in something that's bad for the world, or they can just be trying to raise issues that forces change in the way the company is run. Or even just make a quick buck, when the stock reacts to the prospect of that change. So there are all sorts of flavors of activists, but I think you- it's fair to say that most of the investors in the market are generally passive.

Will Page: I want to come back to that pure performing companies, and especially pure performing stocks. A topical subject of conversation, in a moment. But just to kind of a share a quick anecdote with you, Richard. I got into an argument with some activist student un-investors at my old University of Edinboro. I was passing through George Square there, and there was a protest demanding that the university disinvest from fossil fuel stocks. So, the Shells, the BPs. The sh- university's big investment fund shouldn't hold stocks in oil companies.

And my point was, if they sell those stocks, someone else buys them, then you've got no influence on the companies they've invested in. So it's almost like [laughs] you're actively arguing to become an inactive investor, 'cause you wouldn't hold the stocks of the companies that you could potentially influence.

Richard Kramer: Indeed, I think there was a climate activist group that bought shares in Exxon-Mobile, so that they would have a seat on the board and could see the inner workings of the company. And because they realized if you're not at the table, you have no voice. And the counter-argument to that, and I think-

Will Page: I wish, I wish you were at George Square with me, 'cause I couldn't make that argument. All I could say is, "You're doing more harm than good." What I couldn't say is, "Here's how to do good again."

Richard Kramer: Well, and so, there is... The counter-argument that a lot of these folks who advocate disinvestment would say, is that what you want to do is hit them where it hurts. Rob these co- companies of the investment capital. But the reality is, there is so much investment capital washing around in the world, that you selling the shares, there's lots of other folks who will buy them.

And at a time when there are record, some may say windfall profits for energy companies because of the price of oil... Someone else is going to say, "Well I'll be happy to buy those shares however I feel about climate change, because I just want the stream of dividends. And my mandate for my investors is to deliver them income growth, dividend growth. And boy, these oil companies are gonna hand back a lot of cash to me as a shareholder. So however I feel about their business, I feel obligated as a professional responsibility, to invest in them."

So I think there's arguments on both sides, but certainly if you disinvest, you don't get a chance to sway the company management with your votes at the AGM.

Will Page: Yeah. It reminds me of bacon and eggs, and chicken and pigs.

Richard Kramer: Mm.

Will Page: You want-

Richard Kramer: Yeah.

Will Page: ... pigs who are at the table, not chickens who are just depositing stuff at the table. I don't want to be canceled by any vegan listeners out there.

But let's move forward, because you talked about pure performing companies. Pure performing stocks. And this active investor, it's topical right now. We'll come to some examples later. But if you just shove active investors into Google U's, you're gonna get more hits now than you would've got let's say a year ago. So, why is the time now for the active investors to be called into action?

Richard Kramer: Well the simplest explanation for that, is that when everything is going up and to the right, we don't have a problem. When all the stocks in the market go up and everybody's performing terrifically, there's not a lot of call for activism. When the weather's always sunny, everyone feels good. But there are always areas of corporate malfeasance, and equally, always stocks that underperform the market. That someone out there will think that they have a better idea of how to correct.

The very nature of the market as a weighing machine, means some stocks are gonna come up light. And there are gonna be some fund managers out there that want to make a name for themselves, by seeing potential in those companies that are lagging the market and where the market basically sees none.

Will Page: Right. So I've got what makes shareholders different, and I've got what makes, what makes active investors different from normal shareholders. But I guess there's the, kind of the positive light, of, "I know how to manage your company better than you do, Mr. Management Team." Is there not criticism for active investors that just armchair drivers? Like, they don't actually run the company themselves?

Richard Kramer: A- absolutely. Now depending on the sector and depending on the nature of the company, there is an activist investor involved in GlaxoSmithKline right now. Now this activist investor is not saying, "Hey, I've got a great idea of how to do drug discovery. I'm a PhD biochemist, and I've come up with something that you guys haven't thought of." They're not saying that.

They're saying, "When we look at your mix of assets, when we look at your capital allocation decisions, we think there are better ways to run the company. We think you're spending to much on this area, and not giving enough time and attention to another area. We think you could be paying more to shareholders in dividends, or maybe you should be investing more or acquiring more."

Whatever they have as an recommendation for the company, it's not going to be something that gets outside of their comfort zone. They're not going to be coming in as engineers, or scientists, inventing the next mouse trap for the company. They're identifying where assets within the company group are mispriced, or where management has misallocated capital.

Will Page: S- so it's more like financial adjustments to the company as opposed to operational adjustments?

Richard Kramer: Yeah. And again, if you're a car company and you're having quality problems with your car, it's not like an activist investor is going to be a Six Sigma e- expert, to be able to come in and audit your factories and help you sort that out. It may be that you've paid a McKinsey, or BCG, or one of these consultants a crap ton of money to do that, and the activist comes along and says, "Well, why are you wasting all your money? Why don't you just invest in the people to do it yourself, so that expertise doesn't bleed out of the company back into the consultants, when they've failed to do the job well?"

Will Page: Before we gret- wrap up part one there, is there any company you want to sort of put a bit of flesh on this topic for? In terms of companies that we're familiar with that we use every day, that maybe had active investors in the past?

Richard Kramer: Well, let me take a great example for you. And it's- comes from one of the most famous of activist investors, a guy named Carl Icahn. And-

Will Page: I've heard of him.

Richard Kramer: And he went into a company called eBay, which I'm sure we all are familiar with, back in 2013 or 2014. And he suggested that eBay should split from the business that it owned at the time, called PayPal. Now in the end, this created huge value, in that PayPal today is a $90 billion market cap company, and eBay is, is $25 billion. And subsequently, eBay then had another activist, called Elliott, come in, and demand large buybacks and dividends... Which they did. And it did take the stock up briefly, but I think that was more aided by pandemic tailwinds at the time.

So in the first case, the activist wanted a structural change to the business. They said, "Look, you've got two business here. A payments business and a, and an e-commerce marketplace, and they should be separate and allowed to chart their own course."

In another, the activist largely wanted to grab more of the cash, which was likely... Certainly if you look at the current performance of eBay at the detriment of the long-term development of the company, of the acquisitions they might have made, or the other investments they could've done. And indeed, companies have very different reactions to activists. Some of them just fold their arms across their chest, and tell them to piss off.

Will Page: [laughs]

Richard Kramer: "They don't know anything about our business." There's a bit of a siege mentality. Other,-

Will Page: Ta- take the microphone away from that person in the front row, please.

Richard Kramer: Abs-

Will Page: ... We have a question in the back.

Richard Kramer: Absolutely.

Others welcome them in. They co-op them. They mollify them. Or like consultants, they use them as air cover, uh, justification for making really tough, brutal changes, that they might otherwise balk at making.

I mean, private equity runs the same playbook, they just do it by levering up the companies up with debt. And some of this is about duration or time mismatch, where there are some activists that frankly all they're looking to get active with is to make a quick buck. To say, "Jeez, I realize Will Page could be a, a lot fitter. And if I suggest to him that he should get a gym membership and he looks like he's about to click on the PureGym website, then everybody's gonna be happier. And we're gonna fast-forward to imagine that Will Page is a- looking like a superhero in, in a year's time."

Other activists are in it for the long haul. They're saying, "We want to invest a big chunk into the company. We would like to get involved on the board. We would like to be the bifocals or second pair of eyes for all the management decisions. Because we can look back at the track record of recent years, and figure that management made a lot of missteps and didn't have someone sitting on their shoulder, giving them the sort of contrarian opinion."

Will Page: So, it's a [inaudible 00:14:50]. Just to close out on part one here, we've got a pretty good foundational understanding of what makes activist investors active. We've also got some examples from history, which is just to me... Just like anything in life, Richard, there's good and bad. There's bad activist investors, who just want to corporate raid and cash grab.

But equally, you pointed to sting- some examples where there's good activist investors, who can steer the company on a different course that perhaps they've wedded themselves too and there's too much political capital in the decisions they've already made. And you need that outli- outlier, black sheep, to say, "You know, I know you've committed to this path, but there's a different path over here with a more prosperous outcome."

Richard Kramer: And I will just make one other point about managements. And when something goes wrong at a company, we always ask a simple question, "Did the company know?" And then just basically lie to you about it. Or, "Did they not know? Were they blindsided?"

Now in a way, the first is better than the second. You'd rather have a company which is run by a psychopathic CEO that's willing-

Will Page: [laughs]

Richard Kramer: ... to lie through his teeth and mislead you, than one who's completely ignorant about their business and is completely unable to see the problems coming before they, they arise. But either way, when something goes wrong, you want to know what's the management gonna do about it?

And when an investor is sitting on large losses in a stock, they're wondering, "Well, what can we do?" And you know, you have the classic... I think you brought it up in a previous podcast. Albert Hirschman, you know, exit or voice. "You can either speak up, or you can run for the hills." And the investors that might own too large of a stake or feel like they have another idea, they might want to exercise their voice as opposed to the ones who just sell up, lick their wounds, and move on.

Will Page: Grand stuff. So we understand who they are, what they do, and some- from examples from the past, how they could do that job well and how they could do that job less well. Long-term visions versus short-term visions.

In part two, I want to bring this right up to the present, and understand some of the cases of activism that's going on in the market right now. We'll be back in a moment.

Welcome back to part two of Bubble Trouble. This episode, A Call for Activism. Understanding the activist investor, what motivates them, what they can do, what the company can do in response. In part one, [inaudible 00:17:11], I learned that my experience of speaking to protestors at the Edinboro University complaining that the university should disinvest from oil and gas companies, was actually counter-productive. And the right thing for people who are worried about climate change, is to buy... [laughs] Is that correct, Richard? To buy stocks in oil and gas companies.

Richard Kramer: Well, I, yeah, there's... An example I just checked out... Which I knew about, but I didn't know the details exactly 'cause it's not my main sector. But there was a tiny hedge fund, called Engine No. 1,-

Will Page: [laughs]

Richard Kramer: ... which won two board seats to Exxon-

Will Page: Wow.

Richard Kramer: ... because they are complaining that the company failed to adjust its business strategy to match global efforts to combat climate change. So they have a very small stake, but they were able to rally lots of other investors behind them by saying, "Look guys, you're an oil company. And if oil's gonna go out of fashion, what are you doing about it?"

Now they have two nominees on the board, and now they're gonna be sitting in the room when Exxon has to make its plans for either drilling more oil or m- shifting to some sort of renewables future.

Will Page: That's incredible. That's ESG for real. That's not virtue signaling, is it? That's the real deal. I'm really impressed with that. I'm loving this. All right, now I mentioned in part one that if you go to Google News and you put activist investor, you'd get way more hits than you would've gotten this time last year.

You eloquently laid out why the market has turned, and why activist investors come to the floor. But this week coming home from work, I see that Disney has got some activist investors. And that... I struggle with that one. Disney's a company that seems to do no wrong. There's been a bob in, and a bob out, and a bob back in again. But-

Richard Kramer: [laughs]

Will Page: ... why is there activist [laughs] investors going on in Disney?

Richard Kramer: So, you know... First of all, the reason why Disney is attracting activist investors is laid out in a very detailed slide deck from the activists. A fellow named Nelson Peltz has a fund named Trian, and his fundamental contention is that Disney has dramatically underperformed peers. It has sacrificed nearly all of its free cash flow, delivered very poor shareholder returns, and ended up paying huge compensation to its various CEOs. Basically mismanaged the company.

Now Nelson Peltz, the portfolio manager who runs Trian, has a long history of involvement in companies as Augustus, Proctor & Gamble, or PepsiCo, or Lazards, and many more. And that slide deck that he put out, a very public dissection of Disney's last 10-year track record, points out many of what we might call inconvenient truths. That Disney shares have massively underperformed the market. They've drained the cash from theme parks and splurged it all on a massive expensive acquisition of 21st Century Fox. And whatever you think of Rupert Murdoch and the impact he's had on society... I would say it's extremely deleterious. He is any extremely canny asset trader, sold absolutely at the top to Disney. And then obviously Disney turned around and s- spend a ton on Disney+ and streaming.

And this has all decimated the cash returns. And it's played out against the backdrop of this Shakespearean drama, with Bob Iger being the CEO, legendary CEO, of the company for 15 or 20 years. Anointing Bob Chapek, his successor. Staying in the background. Undermining him. Returning to run the company. And it's really a pretty juicy, almost tabloid-style, uh,-

Will Page: [laughs]

Richard Kramer: ... situation. Especially with the high profile brand that Disney has, global brand that Disney has. But the important thing here is Nelson Peltz is saying what a lot of investors think, which is Disney is being mismanaged, and Bob Iger coming back is not the white knight there to save the day. He is the cause of many of the problems.

Will Page: It's like, uh, if you think back at university, being in that big lecture hall with 300 students, but only one of them is willing to raise their hand and ask the awkward question of the professor. That's what the activist investor feels like to me. We all own shares, but very few people are willing to stand up to management and ask these tough questions.

And without a... Just to clarify, that, uh... You mentioned this is like a movie playing out. Will I be able to watch this activist investor on Disney+?

Richard Kramer: I mean, I don't think Disney's keen to air its dirty laundry in public. And certainly the most unseemly aspect of these activist situations, is there's a voting mechanism every day in the market. So you can have a vote on how cogent the solutions Nelson Peltz proposes are as opposed to what Disney's own management has laid out, and choose whether you want to stay along for the ride and keep owning the shares or sell up and, and try to buy in at a lower level when he's done trying to fix the company.

Will Page: Keeping with Disney, but switching lanes slightly. If I was at Netflix and I saw myself in competition with Disney, that is questionable. They could be complementary goods, like gin and tonic. But let's say I'm competing with Disney, and I look over the garden fence and see an activist investor raising all hell amongst Disney's management team. Am I either A, you know, warming my hands, thinking, "Aha, my competition's walking with a limp," or B, am I thinking, "It's only a matter of time before they start coming for me?"

Richard Kramer: Well, let me answer that question in two dimensions. First of all, one thing that insulates some companies from activists, is the distribution of voting rights and shares in the company, and how entrenched the management is... How much they own of the business, and so forth.

So in the case of some companies... I don't think Netflix has this, but in the case of a lot of the large tech companies, uh... You know, Mark Zuckerberg has relatively absolute power over the voting rights in Facebook. So an activist can show up and say, "Mark, we think this metaverse folly has destroyed a lot of value." And Mark would shrug his shoulders and say, "Well, thank you for your input. I control-

Will Page: [laughs]

Richard Kramer: ... all the voting rights."

But the second answer, and I don't want to duck the question, is it depends. If Netflix stock is dramatically underperforming the market like Disney has, then they have every right to be worried. If Netflix stock is dramatically outperforming Disney but still underperforming the market slightly, maybe they feel like they're the best house in a bad neighborhood.

So, it's not necessarily a good thing when one of your competitors faces huge disruption. Because you have the wounded animal theory, that they could lash out and do irrational things, which would hurt your business. For example, to go after a giant 500 million user Disney+ subscriber target, they may slash the price of + by 30%. Which would put pressure on Netflix, make its service look extremely expensive.

So, it really depends on the remedies that the company puts in place in response to the activist. And it can be a very dangerous period for competitors, because again, this wounded animal could lash out competitively and try to harm its competitors to prove that it's actually in a better shape than people think it is.

Will Page: All right. So we know that Disney's got it going on right now, and we can follow that in the Financial Times. A friend of the show. But if you had a verbal pen and a verbal white board, and you were to scribble some names up of companies that need this kick up the butt... That need this activist investor pressure to turn things around as the markets continue to spiral down, who would be on that short list? Can you give us two or three companies we can sort of not name and shame, but just say there would be a benefit to some activism happening here?

Richard Kramer: Well, I don't want to go, uh, down a list of names for you, for some fairly obvious reasons. I... You know, we're always finding companies where we think they do need a kick up the rear end, as you say. A major part-

Will Page: A kick up the ba-hookey.

Richard Kramer: ... A major part of my... Tuchas, we would say.

Will Page: [laughs]

Richard Kramer: A major part of my business, is looking... With all due sensitivity to stakeholders and not just slavishly following some Milton Friedman shareholder returns, the only purpose of a company is to make profit and damn all the rest of it. But we always are looking at how companies should be operating. The problem with a lot of my fellow analysts, as sycophants and stenographers, is they're there to praise management. Who's the real client, and not hold them to account on behalf of investors.

And one of the things we come up against, is there are a series of natural behavioral psychology trends that make it very hard for-

Will Page: Mm-hmm.

Richard Kramer: ... these companies to admit that they made mistakes. A confirmation bias, for example. The long-term effect of people in pitching to the senior management, or currying favor with them because they're in a powerful position. These sort of things are corrosive, and they warp the perspective of why these companies do things. And it's frankly why Nelson Peltz claims, rightly or wrongly, that, uh, that Disney has lost it's way. That they succumbed to groupthink, and overpaid a whole codary of executives.

Now some cases work and some cases don't, of these activist investors, but we are always on the lookout for companies that are underperforming and doing something that we feel is an obvious error of judgment that needs to be corrected. There are also many companies we look at, that we feel that they have structural flaws in their business model and really need to behave in a different way. Um, I think there are, there are many examples. You know some of them very well, of companies that just have a structurally unprofitable business model or one that doesn't generate cash. And they seem to be prone to latching on to the next big thing, even before they've taken what they started doing two or three years ago, and turned it into a real business.

There's always the tendency to play armchair quarterback or second-guess what management should be doing, but the bottom line is that you need to have a realistic plan. Now, I'll give you one simple example of that. A lot of analysts that haven't been long in the tooth or don't have a lot of experience of how business really works, might say, "Well, why doesn't management just fire 20% of their workers?" But they don't necessarily think through all the disruption that causes in the business,-

Will Page: Yeah.

Richard Kramer: ... and be equally... When you've invested a lot in a new venture or a new initiative, it's a sunk cost, and you don't want to throw away all that you've done. You want to figure out a way to salvage it.

So, there are many cases of throwing bad money after good. I.e., an idea that seemed like a good idea at the time. Things have changed. Don't keep investing in it. There are also equally examples, where companies were paid for persistence. They stuck with something. They kept investing in it. And the gestation period might've proved longer than expected, but it became good in the end. And I think when you look at something like Meta claiming to invest tens of billion dollars in the metaverse, they are hoping that in the end, what they get out of it was justifying all of the money they poured into it.

Will Page: Yeah. It reminds you of Jeff Bezos saying, "Prepare to be misunderstood for generations." And, uh, nobody's misunderstanding what he achieved now. So I want to get to smoke signals, but if we could... If we're gonna stay with the American football analogy, to by playing armchair quarterback here, what's the defensive playbook for management team? You got an activist investor hitting the press, disrupting, you know, the narrative for the company. What's, what tools does management have to beat these people off? Be the linebacker for second.

Richard Kramer: So I think the first and foremost... And I'll give you a very concrete example. There's a very large tech company, where we wrote a piece of research back in September, saying, "First cut is the deepest. They really do have a bloated cost space. They've increased their costs by 50% in the last seven quarters. They've hired tons of people. They have all these crazy projects. Here are all the areas they should be looking to pair back their cost or limit their scope of activity, so that they can sustain their profitability."

And indeed, very shortly after that, an activist wrote a letter with very much the same sentiment, but a l- much more general. Just a very broad brush. Not the specificity that we did in our note. And apparently, the management of that company called them straight away the day after, and said, "Well, you're right. We do need to take a look at our cost space. We have grown too fast. Give us time, we're working on it." And so, I think that is the right way to do it. You invite your critics into the tent. You hear them out. You address concerns. And you know, as you were supposed to do in-

Will Page: [laughs]

Richard Kramer: ... your previous role as a chief economist, you help management look around the corners. You say, "You know what? I know you think this was gonna be the next big thing, but everything we're hearing right now is that it just might not be. So why don't you figure out a way to still keep your hand in the game, but-

Will Page: It-

Richard Kramer: ... you don't have to-

Will Page: Is-

Richard Kramer: ... invest as much."

Will Page: Is that all that, or just... I don't want to take the piss of your remarks here, but is that all that is? You've better have your enemies inside pissing out, than outside pissing in?

Richard Kramer: Absolutely. And in- indeed, I think the better quality of activist investor usually comes with concrete and fairly constructive suggestions. Not simply, "Sell yourself." Or, "Fire a bunch of people." Or, "Sell off this division and everything will be all right." Those are the guys that you can see just really want to make a quick buck.

Will Page: Got it. All right. Let's get smoking. Now let's assume that our listener base is gonna be following the Disney story, and many others to follow. Give us a couple of smoke signals to wrap up quickly here, which allow us to understand... As this activist investor drama plays out, to understand the motives a bit better.

Richard Kramer: So... Look, every activist is gonna start with the same basic rationale, which is, "Hey, your stock has dramatically underperformed." And leave aside a few of the smaller, noisier activist firms, activists usually have a point about that, and what you want to look for is have they made carefully reasoned arguments. You know, and we know they don't show up when everything's hunky-dory. They only come when things, there is a problem. So they've, in a way, taken a p- the place of those critical analysts, since the big banks are just gonna be cheerleaders.

And you know, there's no real rationale for the criticism of saying hedge funds that short stocks or bet against them, are somehow evil. I mean, the- there's nothing that requires an investor to either own or bet against a stock. No one has a God given right to have everyone be behind them. If you want to raise capital in the public markets, you're putting your results out there for the market to issue a report card literally every day.

So the first smoke signal to look at, is to say... Not just jump and buy the stock the minute an activist gets involved, because you don't know how long it's gonna take or whether they have a good argument. But stop and see, do they have a carefully reasoned argument and solution to the reason why the company got into a position where it underperformed so badly?

Will Page: Yeah. What you don't want... This is making so much more sense now. I'm grateful for you, Richard. What you don't want, is a backseat driver who wants a dog for Christmas. What you want is somebody who's got experience being a front seat driver, who wants that dog for the rest of their life. That is, has practical experience and a long-term vision.

Richard Kramer: Well, and it's clear that... You know, there are many activists that get involved in companies, and say, "Well, the company has too much cash. We think you should just pay- do a buyback or, or, or pay a big dividend. We just want them... Give us the money." It's a smash and grab bank heist. And that isn't really activism, that's just pure financial engineering without any reckoning of the type of industry dynamics the company is facing.

Will Page: Grand stuff. All right. That's smoking number one. Let's take the [inaudible 00:33:28], and roll up a second. And here's your flame. Get smoking on number two.

Richard Kramer: So there is a lot of discussion these days about activism, and I think we're really long overdue for having a podcast on ESG. But it's coming. But you know, yes, there are some pension funds and asset managers getting more active at voting their shares. And, but that's kind of a, once a year at the AGM. There could be a lot more put your mouth where your money is, engagement with companies.

And make it more sustained. Too many times you'll see a large investor have a big stake, but they just make noise once or twice a year and then abrogate all the responsibility to management. And those management need honest feedback. Even if the experts aren't the domain experts in tech development or drug discovery. And companies do regularly sound out their top shareholders for feedback on potential deals, or trying to predict stock market reactions and what they might do.

But really the sad thing to see with activism, is that it shouldn't be a one-off event. When... You've bought your house now. You're now a homeowner, Will Page. You've got to do maintenance. And if you want to be a real owner,-

Will Page: Mm-hmm.

Richard Kramer: ... and you're gonna own that house for the next 20 years... Hey, it may not be fun to clear out the gutters and down spouts, and- or to clear out that old coal cellar in the basement, but you've got to do those things so you don't get damp, and mold, and all that other stuff. And it would be great to see activist managers become more of the norm, where asset managers realize that they have to do maintenance on the investments that the make. And get stuck in not just once a year voting at the AGM, say on pay, for the senior management, but actually taking a role in how the company should position itself for the long term.

Will Page: Your point about houses and maintenance, my mother... A conveniency lawyer for the best part of 20 years, has this great expression, which is, "The problem with buying houses is that they- they've got roofs on them,-

Richard Kramer: [laughs] Yeah.

Will Page: ... and they tend to go wrong." Well, closing this one out... I mean, this has been a good one. And it's one that sets our audience... You know, it gives the audience the tools to follow what's going to be happening at Disney and other companies.

What I just want to reflect on a minute, like which is... Imagine if student activist protestors actually turned our universities into active investors. Bought up the stock of BP, Shell, and Exxon, and actually started making a difference, like that hedge fund you stated at the start of the second half of this podcast.

It'd be fascinating to see how the tables turn from, "Why is Edinboro University owning fossil fuels," to, "We should be owning more fossil fuels, so we get a, more of a voice, so we can have more activist control." It's almost like, you know, turning the ESG ca- campaign on it's head. Or, you're right. We should get ESG on this podcast.

Now the second thing, just to close this one off, is just Disney. It would be kind of ironic if Netflix was to do a, a sort of biopic, docudrama, [laughs] on Nelson Peltz, the activist investor of Disney. You know what? If they did that, I'd renew my subscriptions to both services.

But with that, I want to thank Richard Kramer, Julia Natt, Erik Nuzum, Magnificent Noise, and especially Carol Drickburnen. This has been Bubble Trouble. We'll be back with more of this next week. Thank you so much.

Richard Kramer: If you're new to Bubble Trouble, we hope you'll follow this show wherever you listen to podcasts. Bubble Trouble is produced by Eric Nuzum, Jesse Baker, and Julia Natt, at Magnificent Noise. You can learn more at BubbleTroublePodcast.com. Will Page and I will see you next time.