June 21, 2015 11:19 p.m. ET

Shareholder activists have an ally in Charles Penner, a partner and chief legal officer at JANA Partners, an investment firm with $11 billion in assets under management, and a record of supporting activist campaigns. The Wall Street Journal’s Dennis Berman spoke with Mr. Penner about shareholder activism, its successes, and what some might consider its excesses.

Edited excerpts of their conversation follow.

MR. BERMAN: So the letter comes in to the board or the CEO. The CFO is probably immediately brought in. What’s your advice about what they should do when the activist shows up?

MR. PENNER: My advice, and I think most shareholders’ advice, is to engage. If you look at the campaigns where we’ve had an easy time of it, it’s where companies take it for granted that they can stiff-arm us and not engage in debate.

It obviously doesn’t make the analyst and the proxy advisory firms happy. But if you look at it and say, “Look, we’ve got a good argument here and these guys are wrong and we can show them that they’re wrong,” we’re the type of firm that will listen to that and respond.

MR. BERMAN: What percentage of situations would you say that you’ve presented your detailed analysis, the management comes back and you say, “Oh, you know what? They’re right?”

MR. PENNER: It’s statistically insignificant. But it could happen. Look, we don’t throw stuff against the wall and see if it sticks. So by the time we’re sitting down with you, I think that it’s unlikely we’re going to be 100% wrong.

Misuse of assets

MR. BERMAN: If there is a bigger macro criticism, it is that activism is pushing for more shareholder returns largely through dividends or buybacks. The Journal did a recent analysis that showed that U.S. companies are now putting more into buybacks and dividends than into capital spending. Long term, the theory goes, that is dangerous to U.S. competitiveness and corporate- level competitiveness.

MR. PENNER: I don’t think anyone is arguing for irresponsible returns of capital. The Economist also did a study of the 50 biggest activist campaigns in the U.S., the most recent ones. They found that not only did profitability go up and better returns for shareholders, but capital investment [and] R&D went up. So there is a bigger picture here.

But just speaking for us personally, we’ve never in my opinion advocated for an irresponsible return of capital. You have to have a stock that’s undervalued and a clear plan to correct that undervaluation. And you need to have a situation where there’s not any higher and better use of capital.

Companies who have been under pressure to return more capital than they thought was responsible, like Apple and Amgen, had reputations as being responsible toward capital. They weren’t just hoarding cash for no reason. And they were able to fight back. So I see your point. I’m sure that there are irresponsible returns of capital. I think, though, to lay it all at the feet of activists is going a little far.

A rose garden?

MR. BERMAN: It sounds from your point of view as if activism is a rose garden. Obviously it isn’t that simple. If you had to, what sort of letter would you write to the activism community about how they’re doing things wrong?

MR. PENNER: Well, I’m trying to get out of the premise since I don’t agree with it. I mean, I’m going to say two things. One: Shareholder democracy is like every other form of democracy; it’s the worst form of government we have except for all the other ones. It won’t always be perfect. People will have bad ideas. I don’t think bad ideas are the sole provenance of shareholders.

I would say, though, to the activist community, that people are watching. We have a very good track record over the, say, 10 to 15 years since activism has really been going on. If we start proposing things that are irresponsible or if people start pointing to situations we’ve been involved with and saying, “Well, look, there is a company that they took and dragged down,” the BlackRocks and the T. Rowe’s and the Vanguards will quickly withdraw their support. We obviously have to be cognizant.

MR. BERMAN: One can make the argument that shareholder activism is driven mainly by the big institutional money managers who’ve thrown in their lot with you because they are getting pressured from ETFs and need to show some returns.

MR. PENNER: Sort of. We’re basically a market-driven mechanism to address underperformance at certain companies. The mechanism is you take a small stake in a company and bring about the change that used to happen privately. The gatekeepers are the big institutions seeking returns. Without their support, we would shrivel up and die. But it’s a free-market response to a problem, which is that it doesn’t make sense for most shareholders to spend the time and the money and the headline risk to do this.