More transparency may curtail shareholder activism

Writing in The Wall Street Journal, Professor Alex Edmans breaks down why the US Securities and Exchange Commission’s swap position proposal could have negative consequences

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A US Securities and Exchange Commission (SEC) proposal to increase the transparency of swap positions may serve to constrain shareholder activism.

Writing in The Wall Street Journal (2 April 2022) London Business School Professor of Finance Alex Edmans warned that, while the wider “disclosure of swap positions” might appear a sensible approach, it could curtail an important mechanism through which shareholders can improve governance, hold to account management and create sustainable value.

“The main barrier to shareholder activism is that the activist bears the cost, but the benefits are shared by all other shareholders and in many cases wider society - the classic free-rider problem,” Professor Edmans explained.

“An activist’s gains are limited to its stake in the company. And if the activist buys more than 5%, it is required to disclose its position, which moves the market and hinders it from buying more.

“A 5% stake, however, is often insufficient to make activism worthwhile, given that it typically takes six to 12 months of research before an activist investor even meets with a company.”

By allowing shareholders to increase their exposure to a company privately rather than publicly, Professor Edmans said that swaps create an avenue for greater shareholder activism, and cited academic research that such activism generally creates long-term value for both investors and society.

“If the SEC forces investors to reveal those positions, activists might not be able to obtain enough exposure to make engagement worthwhile,” he wrote.

Read Professor Edmans’ full piece, ‘How the SEC’s Swaps Proposal Could Choke Off Shareholder Activism’ online on The Wall Street Journal.