A United States Securities and Exchange Commission (SEC) proposal increasing the transparency of swap positions can serve to limit shareholder activism.
write in The Wall Street Journal (April 2, 2022) Alex Edmans, professor of finance at London Business School, has warned that while “wider disclosure of swap positions” might seem like a sensible approach, it could restrict an important mechanism by which shareholders can improve governance, maintain accountability and create lasting value.
“The main obstacle to shareholder activism is that the activist bears the cost, but the benefits are shared by all other shareholders and, in many cases, by society at large – the classic free rider problem” , explained Professor Edmans.
“A militant’s earnings are limited to his participation in the company. And if the activist buys more than 5%, he is required to disclose his position, which moves the market and prevents him 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 a company.”
By allowing shareholders to increase their exposure to a company privately rather than publicly, Professor Edmans said swaps pave the way for greater shareholder activism and cited academic research that such activism creates generally of long-term value for investors and society.
“If the SEC forces investors to disclose these positions, activists may not be able to gain enough exposure to make the engagement worthwhile,” he wrote.
Read Professor Edmans’ full article, ‘How the SEC’s swap proposal could stifle shareholder activism‘ online at The Wall Street Journal.