Michael O. Johnson, chairman and CEO of Herbalife, wrote this column in the Gazette about the rise of a new version activist investing, targeting companies such as Herbalife.
About 220 years ago, two dozen stockbrokers and merchants sat beneath a buttonwood tree on Wall Street and signed the famous Buttonwood Agreement forming the New York Stock and Exchange Board. This exchange, and the others that followed, ushered in a new era of free market capitalism and changed world history.
Through history, we have occasionally seen folks try to take advantage of the freedom this marketplace provides. Thankfully, the system of checks and balances has, for the most part, successfully identified and restrained these excesses to help insulate and safeguard the market.
Yet today, in the never-ending pursuit of an edge, some investors are using techniques and tactics that go too far. I'm talking about a new version of activist investing.
To be sure, some activist investing has been, and will be, good for the marketplace. Activist investors can, and often do, increase shareholder value and improve the health of the economy by unlocking value through improved corporate management and new business practices. These investors play a critical role in preserving and strengthening companies they target while making our nation's economy stronger and more dynamic.
Unfortunately, a small cadre of these investors have emerged and their approach is threatening this delicate balance. These investors are attacking strong, healthy companies with misguided and destructive campaigns that often are based on falsehoods, deceptive practices and intimidation all created to manipulate the stock price for the activist's enrichment.
Yes, taken too far, and in the hands of an irresponsible investor who is willing to bet everything to avoid being perceived as having made a mistake, activist investing can do untold damage to families, companies and our economy.
I know about these campaigns because I have seen them firsthand. My company, Herbalife, has been under an unprecedented, three-year and $1 billion public short campaign by Bill Ackman. His staff told The New York Times in March 2014 that this reckless initiative was simply about making an enormous return. The staff's brutally honest explanation tells the whole story; his crusade is about nothing more and nothing less.
Ackman's initial investment proposition was that Herbalife would collapse, and he engaged in a massive pubic relations and lobbying campaign to see his dream come true. Yet, when investors such as Carl Icahn and George Soros examined Ackman's research, they came to a different conclusion and instead became significant shareholders in Herbalife. Undeterred, Ackman changed his thesis and now believes that the company will collapse because of poor earnings. Yet, the company has exceeded expectations, and the stock is now trading higher than when Ackman began his public campaign. All told, Ackman admits that he has spent hundreds of millions of dollars just so he can win this billion-dollar bet.
During this epic battle, we have been the target of an insidious attack that at times has become personal. Fortune magazine recently engaged in an exhaustive and intensive six-month investigation of Herbalife and Ackman and stated that Herbalife's executives, employees, and distributors have all been villainized, if not defamed. Editor Alan Murray called Ackman's antics disturbing and indicated that they probably had gone a step too far. Murray also asked: In his all-out fight against Herbalife, is the activist investor assuming the role of judge, jury, and executioner? That rhetorical question puts this whole controversy in perspective. Our nation does not think it a good idea to aggregate the power of lawmaking, prosecuting the offense and determining the punishment in the same person, so why would we allow an investor to do the same?
These self-serving campaigns by carnival- barkers like Bill Ackman do not benefit the larger system – they corrupt it. What was once healthy activist pressure has transformed into a dangerous game of manipulation and deception, with no regard for the collateral damage that can include the lives and careers of ordinary Americans and the investing public.
Additionally, Ackman ignores the fact that our millions of members in 93 countries around the world buy and use our nutrition products because they help people lead healthier lives. Moreover, our direct-selling distribution model means we provide people with the opportunity to earn additional income, in a flexible environment and on their terms, similar to Avon, Tupperware and Pampered Chef.
What is happening to Herbalife is wrong, and it is reassuring to know that recent articles in The Wall Street Journal, The New York Times, Fortune and Forbes, as well as dozens of other publications, have raised serious questions about Ackman's behavior.
The Department of Justice and the FBI are also concerned about Ackman's campaign, and as The Wall Street Journal reported, they have opened a criminal investigation.
Experts, such as former SEC Chair Harvey Pitt, are additionally calling Ackman's actions into question with many asking Congress to investigate the way Ackman is manipulating the government regulatory process for his personal financial gain.
In Herbalife's case, we will prevail. Our products and market fundamentals are too strong and too well established. We have been around for 35 years, and we will be here stronger than ever in another 35.
But this attack against my company is larger than one man's reckless campaign, because if left unchecked and without accountability, Ackman's activities portend a troubling future for the carefully balanced system designed more than two centuries ago. As Ackman's campaign passes its third anniversary, some investors are waiting to see how this game shakes out to see if they too can replicate and advance his model. Yet our members, employees and shareholders are not mere pieces to be shuffled on some dime-store game board. No, this is about people's lives and livelihoods.
Two centuries ago, the Buttonwood Agreement set the stage for a powerful new American economy to flourish, and ever since our economic model has been rooted in the idea of building equity and lifting all boats. To preserve that system, we must not allow a few to undermine its long-term stability in pursuit of short-term profits.
Get more information, facts and figures about Herbalife, click here for the Herbalife overview.