Fallacy One: The terms short-term and long-term are used confusingly to mean different things at different points in the discussion.
Frequently, the terms short-term and long-term are used to refer to the period of time activists are reputed to maintain their ownership stake in a company. The implication (and frequently outright assertion) is that because activists are mere short-term holders, they are not entitled to the same voice in a company’s governance as obviously more virtuous and deserving long-term holders.
There are two fatal flaws in this reasoning. First, many studies have demonstrated that, on average, activist investors maintain their position for a matter of years, not months. Second, there is no rational reason to think that long-term shareholders have special insights into or understanding of corporate decisions and strategy. Indeed, if the long-term holder is, as increasingly is the case, an index fund, by hypothesis its investment has nothing to do with a company’s strategy or business decisions, and the investment manager has no basis to claim any knowledge or insights.
Confusingly, critics of activist investors also conflate the putative holding period of the activist with the implementation period for the program advocated by the activist investor. Castigating a corporate strategy as short-term, rather than long-term, simply misses the point. The issue is not the duration of time required for implementation, but rather the value creation potential of the program.
No rational investor, or company manager, would (one would hope) advocate adoption of a longer-term strategy over a shorter one, if the shorter one had a higher value creation opportunity. The confusing use of the terms short-term and long-term lead directly to the second major fallacy of the anti-activist literature.