Hollywood and Hedge Funds

Some pension funds invest in hedge funds. Some hedge funds invest in movie companies. That's why pension fund fiduciaries may be interested in the recent comments made by Hollywood insider George Clooney. According to "George Clooney To Hedge Fund Honcho Daniel Loeb: Stop Spreading Fear At Sony" by Mike Fleming Jr. (Deadline, August 2, 2013), the actor and sometimes director and producer criticized activist hedge fund investor and head of Third Point LLC, Daniel Loeb, for what can be politely described as undue interference. The catalyst seems to be a May 14, 2013 letter written to the president and CEO of Sony, Kazuo Hirai, by Third Point's CEO in which several recommendations are made, including the public sale of a minority stake in Sony Entertainment. Although Sony rejected the IPO, documenting the importance of the entertainment business as "fundamental to Sony's success" in an August 6, 2013 letter to Third Point LLC, the conversations about company ownership and ways to enhance value are instructive.

Some of the numerous comments left on various publication websites refute the notion that a material investor has a right to make suggestions. This sentiment defies logic. For one thing, an investor (large or small) may have legitimate questions and suggestions that can potentially enhance the value of all shareholders. Second, an asset manager has a responsibility to its investors. Remaining silent about concerns could put the activist at risk for fiduciary breach. Third, an activist investor by definition has typically amassed "enough" money to transact. Unless we are talking about a jumbo lottery winner who wants a seat at the table, resources had to have come from somewhere, usually from other parties such as endowments, family offices, pensions and individuals who believe in the activist's strategy. That's not to say that an activist investor is always right or wrong but certainly deserves a hearing without impunity. For those companies that want to avoid short-term actions that they deem unattractive and antithetical to long-term performance, going private is one way to keep naysayers away from the door.

However, there are those who believe that squeaky wheels improve corporate governance and boost stock price. In "Activist investors find allies in mutual, pension funds" (Reuters, April 9, 2013), journalists Jessica Toonkel and Soyoung Kim attribute FactSet for statistics that show an increase in activist campaigns, from 187 in 2009 to 241 in 2012. They quote Hedge Fund Research as asserting that "Over the past three years, activist hedge funds have outperformed more traditional hedge funds." According to "Let's do it my way" (The Economist, May 25, 2013), activists were once given short shrift but that is no longer the case. "Indeed, some American pension funds have even placed money with activists to keep companies on their toes."

An added twist exists when activist investors gain exposure indirectly versus buying shares for cash. In "CSX Battles Hedge Funds - A Cautionary Tale for Pensions?" by Susan Mangiero (July 5, 2008), I wrote about a legal challenge to The Children's Investment Management (UK) LLP by CSX Corporation over the hedge fund's then prevailing cash-settled swap position as a way to gain equity exposure and a path to control. (The court ultimately decided not to opine on whether a total return swap holder is a beneficial owner. Click to access the July 18, 2011 CSX Corp. v. The Children's Inv. Fund Mgmt. opinion issued by the United States Court of Appeals For the Second Circuit.") According to "Sony Holdings Blurred by Third Point Swaps, Goldman Bonds" (Bloomberg, June 11, 2013), Mariko Yasu and Takako Taniguchi suggest that Third Point's direct equity stake could be less than five percent since it "doesn't show up in regulatory filings" and "[s]hareholdings of more than 5 percent of a company have to be reported to Japan's Ministry of Finance." Its "exposure" to an estimated 64 million Sony shares could be "clouded" due to its "use of cash-settled swaps and convertible bonds." A key question for investors in Third Point LLC and other activist hedge funds that use equity swaps is whether voting rights will be enhanced or impeded when derivatives are used.

Whatever you think about George Clooney or Daniel Loeb, the role of activists and the way they finance their positions is critically important to understand.

Unemployment at the Movies

If you haven't yet seen "The Company Men" with Ben Affleck, Tommy Lee Jones, Chris Cooper and Kevin Costner and don't need a lot of laughs, it's a worthwhile flick about the U.S. economic problems of late. The plot centers on a successful sales executive who gets the boot from a Massachusetts conglomerate that started out as a manufacturer of ships. A wholesale layoff of otherwise talented professionals still leaves the company exposed to a hostile takeover so another round or two ensues, with Affleck's boss ultimately getting the pink slip from his lover, played by a glamourous Maria Bello. (Hey, it's the Hollywood version of Corporate America.)

Similar to "Up In The Air" with George Clooney, this film's message seems to be that management is bad, labor is good and that family is what really counts. While I wholeheartedly endorse the message about counting one's blessings in the form of loved ones, friends and colleagues, I'm agnostic about the general "we versus them" theme and prefer to consider one company at a time.

If we've learned anything from the past decade, it's that production is increasingly mobile across borders. Beyond that, C-level leaders in the United States have a legal duty to their shareholders to create wealth (which is not necessarily the same thing as boosting the bottom line but that's a topic for another day). While I am not alone in opining that well-run companies recognize the importance of human capital (employees, clients, vendors) and that is why they can generate healthy returns for their investors, it is also important that individuals retool as often as is necessary to remain competitive.

In 2002, Daniel H. Pink extolled the virtues of independence in his best selling book entitled Free Agent Nation: The Future of Working for Yourself. The numbers speak for themselves with a continued increase in freelancers, temps, affiliated parties and smaller consulting networks that work from home or close by, create their own revenue path and are happy campers. However, for those who desire more stability and structure by working for larger employers, the concept of free agent is still worth pondering. Specifically, if your industry is changing around you, maybe it's time to take stock of how you stack up against others. My dad, now a retired engineer, went through this process about fifteen years ago when he took it upon himself to study computer assisted design at night since younger hires were facile with the newer technology tools and he was not.

As a young banker, I had a boss who urged me to think of myself as a box of raisin bran. Every year, he told me to figure out how to be "new and improved." I would complete a skills inventory checklist and then commit to improve as needed.

"The Company Men" was an enjoyable cinematic outing and a great reminder that dues paying never stops. Learning and career development is a lifetime endeavor, especially now. With longer lifespans and, for millions of people, the need and/or desire to work beyond 65 years of age, it is critical to stay current with requisite skills and experience.