Dive Brief:

• Two Democrats in the U.S. Senate, Sen. Tammy Baldwin of Wisconsin and Sen. Jeffrey A. Merkley of Oregon, on Thursday introduced a bill that would rein in some activist hedge funds when they attempt to acquire or influence public companies. 

• The legislation would shorten the number of days from 10 to five that activists have to disclose to the Securities and Exchange Commission their acquisition of more than 5% of a company’s shares. It would also shorten from 10 days to two the period when the funds can tip off other investors that they’re moving to acquire shares, which allows other funds to also buy up shares, make money and potentially add influence, a phenomenon known as “wolf packs.”

• Investor activism is on the rise, and often affects retail companies. Activist pressure in recent years and months helped lead to eBay’s spinoff of its PayPal unit, allowed the change-up at J.C. Penney that brought in Ron Johnson (and what many view as his disastrous changes), and is behind the pressure on Macy’s and other retailers with significant real estate holdings to unlock their value.

Dive Insight:

In many (if not most) cases, the aims of an activist investor are parallel to other investors in a company—to ensure that its value is reflected in its stock price. And although activist investors have a reputation for making moves that garner them quick profits at the expense of the company, a study released in 2013 by Duke University’s Fuqua School of Business found that on average, companies’ performance improves after activists make and get their demands. 

More importantly, these investors are often on to something—specifically, that there are issues within an organization that should be addressed by management, like inflated executive compensation or a lagging e-commerce strategy. Boards of directors should be nimble enough to get ahead of any issues that activist investors might seize on.

But other experts disagree with the conclusions of the Duke researchers, and say that the rise of activist investors meddling in companies has robbed management of the ability to think and strategize long-term. That can be especially true for retailers, who must deal with a broad range of market pressures not always understood by investors. Pressure from activist investors can also exacerbate problems that cause retailers to make short-term decisions in favor of sometimes more necessary long-term ones.

Retailers can no longer ignore activist investors as readily as, say, 10 years ago—the game has become too intense. But rather than spending energy and money on fighting them off, a company would be well advised to work to anticipate the kinds of issues such investors might pounce upon. 

“Most activist investors are smart, motivated people who often notice things that boards and managers overlook. It is generally worth listening to their recommendations and implementing the ones that make sense,” writes Bill George, professor of management practice at Harvard Business Review, and Jay W. Lorsch, professor of Human Relations at Harvard Business School, in their report, “How to Outsmart Activist Investors.” 

“In the interest of their corporations," the report states, "CEOs and boards should be preparing for activist interventions rather than complaining about them.”