Is Shareholder Control Beneficial?

I perused a recent paper about the optimality of shareholder control, and though it didn't generate any interesting conclusions, it raised a good question. The recent issue with St. Joe Company comes to mind. The institutional shareholders are making a move to take control of the board and to steer the company in a completely different direction.


The board and the management of the company have only themselves to blame for being in the cross hairs of savvy institutional investors like Fairholme Fund and Greenlight Capital. They made a huge bet on development in the Florida Panhandle, centered around the binary event of whether or not a new airport would be built. The airport is built, but it turns out to be only a very small piece of the puzzle, and the board and management took an expensive and unhedged way to place this bet. Unfortunately for them, Fairholme drank the Kool Aid when they bragged in one of their annual reports about the unrealized value in all the Florida land their investment owned. Now, we'll see what shareholder control does in this case.


The recent case of Sears comes to mind. Much was made, rightly so, of the fact that the management simply couldn't run or merchandise stores very well. Shareholders voted with their feet and sold the stock. The story then became the value of the underlying prime real estate that Sears owned or controlled. Meanwhile, another terrible cast of executives were busy fiddling while Kmart burned slowly. Enter hedge fund manager Ed Lampert who took control of Sear merged it with Kmart, while confusing both sets of customers, who were distinct segments of consumers. Years later, Sears' repeated experiments with soft goods have failed miserably, but we didn't need to a change of control to know they couldn't execute. The appliance and home and garden segments are still the reason most people enter the store. An iconic brand of American retailing seems on the precipice of going the way of Woolworth, W.T. Grant and Montgomery Ward. Last year ended with Sears comps down 6% for December and 3.8% for the year. The environment in Sears stores is positively funereal. Most of the analysts have downgraded to neutral or under perform, with a few sells. Has shareholder control been beneficial in this case? I don't believe so.

Most institutional shareholders are good at what they do: constructing and managing portfolios, which is a very profitable business where mediocrity is rewarded since most money managers under perform their indices. Running a business, other than money management, is something that seems to be outside of their comparative advantage. St. Joe will be another good data point on the question of benefits of shareholder control.