Activist Investors Are Mostly Terrible, and I Hope Dominion Diamond Ignores Them

Activists have a dismal track record in the jewelry industry

In the last few weeks, a group of investors, led by Toronto-based K2 & Associates, has grabbed 5.4 percent of Dominion Diamond, becoming the latest activist investor to target a company in our industry.

K2’s public criticism of the Canadian diamond miner’s management seemed to spark a flurry of announcements: K2 portfolio manager Josef Vejvoda joined the board, two directors resigned, and its respected longtime chairman Bob Gannicott stepped down. (Gannicott has had health issues.) The company is also exploring a possible sale, Bloomberg says.

In theory, activist investors would seem to be a positive force. They give the business a pair of fresh eyes. They often target bloated executive salaries and perks.

In reality, their track record is decidedly mixed. After analyzing 70 campaigns, The Wall Street Journal concluded: “Activism often improves a company’s operational results—and nearly as often doesn’t.” Laurence Fink, CEO of asset manager BlackRock, told the Journal that “the typical activist wish list—buybacks, dividends, corporate breakups—sends money to short-term stock lifters while degrading the long-term health of companies.” Another study found that, by decreasing investment, these campaigns not only hurt the long-term prospects for the companies involved but the economy as a whole.

I have certainly seen poor results with the companies in our industry. Consider:

– In 2007, Breeden Capital Management became Zale Corp.’s largest shareholder. Shortly after, its chairman, Richard Breeden, joined the board, and the company instituted a $300 million stock buyback. By 2010, the company was in dire straits and certainly could have used the cash it spent on that buyback, which failed to boost the stock price. Breeden’s losses on his Zale investment led several pension funds to dump his fund.

– In 2012, Pershing Square Capital Managment CEO William Ackman convinced J.C. Penney to hire former Apple stores chief Ron Johnson as CEO. The result: A disaster, which other board members publicly blamed on Ackman.

In 2014, TIG Advisors spent a large amount of money and time trying to get Signet to up its bid for Zale. It failed.

– That same year activists took over the board of Scio Diamond (which, to be fair, had governance issues). The new guard told investors they hoped the diamond grower would break even in six to nine months. A year and a half later, that hasn’t happened; in fact, losses are increasing.

– In May 2014, Third Point CEO Daniel Loeb grabbed three seats on the Sotheby’s board, after a bitter proxy battle that included gripes about longtime CEO William Ruprecht’s salary and use of the company car and airplane. Shortly after, Ruprecht stepped down. His replacement, Tad Smith, came to the job with no auction experience yet is making a larger salary than Ruprecht and, of course, gets to use the company’s car and airplane. Since Loeb and associates joined the board, the auction house’s shares have lost close to half their value.

Perhaps K2 is different. Perhaps it has some good ideas to rejuvenate Dominion. Its letter criticizing the company reads like it was grasping at straws, identifying 10 areas that need improvement without naming possible remedies. Its spokespeople haven’t floated any ideas beyond—not surprisingly—a stock buyback. Company analysts, on the other hand, have expressed confidence in its current strategy. 

K2 can likely claim a few scalps and now has a say in Dominion’s future. Let’s hope that it will leave the miner alone to do its business. These days, that is hard enough.

JCK News Director