March 26, 2014 11:24 AM EDT

“Activist” investors are all over the news once again. From Carl Icahn nabbing seats on the board of Herbalife, to Daniel Loeb suing Sotheby’s auction house over its use of a “poison pill” to defend against Loeb, who wants to buy up more stock and put his own people on the board, investor activism is at record highs. According to FactSet Research, activist investors have targeted more than 20% of industrial companies in the S&P 500 over the last five years. There are plenty of reasons for this, as I explained in my cover story about the granddaddy of all activists, Carl Icahn, last year. But the main reason is the most obvious one: Companies are holding more cash than ever on their balance sheets, and activists want them to give it back to shareholders.

The question is and has always been whether this is a good thing. People like Icahn would argue yes — according to him, most corporate boards are made up of lackeys to the CEO, people who typically don’t make great investment decisions and shouldn’t be entrusted with spare cash. Others simply argue that if a company has run out of productive places to put investment capital, then, hey, why not give it back to shareholders?

But I think that there are a fair number of companies out there for which neither point holds true. There’s no question that the share buybacks and dividend payments pushed for by activists boost stock prices in the short term. But as many economists have been arguing for the last several years, there’s never been a better time for companies to do big capital investment projects — from building new factories to buying new technology, expanding overseas, or developing new business offshoots — than there has been since the Fed lowered interest rates to record levels after the financial crisis. We’re now coming to the end of that cheap money era. As Fed chair Janet Yellen indicated in her press conference last week, rates may go up as early as mid 2015. The cost of borrowing will rise, and companies may need their spare cash to pay down debt. No wonder a BofA Merrill Lynch survey of fund mangers shows record support for capital spending, and decreasing support for giving back cash to shareholders.

If activists want to succeed in this new era, they’ll have to argue for more than just big money payouts, and come up with real strategic plans to help the companies they are targeting. Otherwise, they are likely to face increasing push back from investors and experts. For more on that, check out this article arguing against shareholder activism, by well known judge Leo Strine, in this month’s Columbia Law review.




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