Thursday, February 5, 2015

Ben Graham and activism...

From Deep Value:
Graham was a forceful and eloquent advocate for the use of shareholder activism to foment change in deeply undervalued companies. The very first edition of his magnum opus, Security Analysis, published in 1934, devoted an entire chapter to the relationship between shareholders and management, which Graham described as “one of the strangest phenomena of American finance.” “Why is it,” he wondered, “that no matter how poor a corporation’s prospects may seem, its owners permit it to remain in business until its resources are exhausted?” In answering his question, Graham wrote that it was a “notorious fact . . . that the typical American stockholder is the most docile and apathetic animal in captivity:” 
He does what the board of directors tell him to do and rarely thinks of asserting his individual rights as owner of the business and employer of its paid officers. The result is that the effective control of many, perhaps most, large American corporations is exercised not by those who together own a majority of the stock but by a small group known as “the management.”
He saw deep undervaluation as a prod impelling shareholders to “raise the question whether it is in their interest to continue the business,” and “management to take all proper steps to correct the obvious disparity between market quotation and intrinsic value, including a reconsideration of its own policies and a frank justification to the stockholders of its decision to continue the business.”