Supply Chain Matters has on multiple occasions, in our blog commentaries and in our annual industry predictions, provided our readers perspectives on activist investors’ efforts in driving manufacturers, retailers and technology providers toward more short-term results.  We have done so because of our belief that such growing activities influencing firms toward investing more in stock buybacks, shorter-term shareholder dividends and accelerated cost control efforts have a negative effect on longer-term global competitiveness and supply chain capabilities.  The effects literally cascade horizontally and vertically among industry supply chains and the effects are showing.

Review some of our past commentaries reflecting on consumer product goods supply chains and you will hopefully sense such long-term impacts. Once more, activist investors have now spread their influence across many different industry sectors as well as among multiple supply tiers of industry supply chains.  It seems as though senior management’s sole concern of late has been either fending-off such efforts or positioning their firms to avoid an activist thrust.

The growing concerns related to this topic were brought forward today by The Wall Street Journal in two separate articles, a front page article, As Activism Rises, U.S. Firms Spend More on Buybacks Than Factories and a Business & Tech section article, Tech Firms Seek Ways to Fend Off Activist Investors. (both require either paid subscription or free metered view)

The WSJ describes the ongoing trend as a fundamental shift in the way firms are deploying capital and raises similar concerns to the effect of longer-term competitiveness. Billions of dollars that were once invested in product R&D, innovation or new plant & equipment are instead channeled into strategies directed at shorter-term shareholder value. Boosting a firm’s stock price trumps needed investments in longer-term innovation, talent and capability. Once more, even Silicon Valley companies, known as the hotbed of technology innovation, are increasingly under attack. Moody’s Investors Services is cited by the WSJ as indicating that tech companies accounted for 20 percent of firms that activists targeted, while retailers accounted for 13 percent. There is literally no industry not consumed by this trend.

Once more, there is quantification of the scope of such change. The WSJ commissioned an analysis conducted by S&P Capital IQ indicating:

that companies in the S&P 500 index sharply increased their spending on dividends and buybacks to a median 36% of operating cash flow in 2013, from 18% in 2003. Over that same decade, those companies cut spending on plants and equipment to 29% of operating cash flow, from 33% in 2003.”

At S&P 500 companies targeted by activists, the spending cuts were more dramatic. Targeted companies reduced capital expenditures in the five years after activist bought their shares to 29% of operating cash flow, from 42% the year before, the Capital IQ analysis shows.  Those companies boosted spending on dividends and buybacks to 37% of operating cash flow in the first year after being approached, from 22% in the year before.

The WSJ provides other profound statistics pointing to the broad extent of the current trend.

Of course, statistics and trends are subject to debate and interpretation, and such debate rages on.  The continued availability of cheap money adds to the debate since in the past, a dramatically lower cost of capital would have motivated longer-term investments in products, processes and productivity needs. We are sure our global Supply Chain Matters audience will have mixed views as well.

The bottom line for product development, procurement, cross-functional supply chain and their associated supplier teams is the added pressures for accomplishing more with less, while demonstrating abilities to respond or take advantage of constant market change.  Product innovation has become the key ingredient to sustained competitiveness yet suppliers more often experience continued demands from their customers for reduced costs as well as leading-edge innovation. We believe both goals are becoming more difficult to jointly attain.

The activist investor trend is multi-faceted and industry supply chain teams continue to be caught in the middle or held hostage to events that they cannot influence. Operations, supply chain and S&OP leaders must now, more than ever, provide the leadership to navigate these troubled waters while providing existing teams the motivations and incentives to continue to make a difference in delivering expected business outcomes.

Now let’s hear from our community of readers- do you believe that the activist investor trend is helping or hurting your supply chain organization’s efforts in supporting expected business outcomes? Share your perspectives in the Comments section associated with this posting.

Bob Ferrari