Warren Buffett, the billionaire chief executive officer of Berkshire Hathaway, said corporate executives who are seeking to fend off activist investors should return to the basics and consider skipping strategies pitched by Wall Street.
“The best way to keep activists away is to perform reasonably well in your business and also to communicate well with your shareholders,” Buffett said Tuesday at Fortune’s Most Powerful Women Summit in Washington. “You’ve got a bunch of owners out there and, on balance, they’re going to be on your side. After all, they’ve got their money with you.”
The rising influence of money managers who amass stakes in companies and push for changes has spurred an industry of bankers and lawyers peddling expensive advice to companies, Buffett said. Goldman Sachs Group and Morgan Stanley, the No. 1 and 2 takeover advisers this year, are among firms that have been hiring in their activism defense groups.
“It’s in Wall Street’s interest to scare managements about activists,” Buffett said. “They’re not dying to have an activist knock on your door, but it doesn’t cause them to break out in tears either because you take them on and they get all involved in your strategy. And it’s their job, to some extent, to make you worry even more than you probably should.”
Buffett, 85, has long been a critic of Wall Street excesses, panning bankers and their outsize pay in his annual letters to shareholders. He and Berkshire vice chairman Charles Munger have become increasingly outspoken in recent years about the popularity of activist investing, saying the money managers who pursue the strategy are often looking for short-term gains.
The trend has gotten so much momentum that now even decently run companies are being targeted, Buffett said, without citing examples.
“They’re like sharks: They’ve got to keep swimming,” Buffett said of activists, adding that some get fees tied to how much money they manage. “They stretch for targets, and you’re seeing that. But there is a place for them in America. All American businesses are not being run in the interest of their shareholders with really capable management. When that happens, change is needed.”
Two of the biggest practitioners of activism — Bill Ackman and Carl Icahn — have disputed Buffett and Munger’s characterization of the approach, saying they’re invested for the long haul. They have argued that their efforts have led to improvements at companies such as General Growth Properties and Apple.