Hedge Funds in Corporate Governance and Corporate Control
Files
Description
Hedge funds have become critical players in both corporate governance and corporate control. Recently, hedge funds have pressured McDonald’s to spin off major assets in an IPO; asked Time Warner to change its business strategy; threatened or commenced proxy contests at H. J. Heinz, Massey Energy, KT&G, InfoUSA, Sitel, and GenCorp; made a bid to acquire Houston Exploration; pushed for a merger between Euronext and Deutsche Börse (DB); pushed for ‘changes in management and strategy’ at Nabi Biopharmaceuticals; opposed acquisitions by Novartis of the remaining 58% stake in Chiron, by Sears Holdings of the 46% minority interest in Sears Canada, by Micron of Lexar Media, and by a group of private equity firms of VNU; threatened litigation against Delphi; and pushed for litigation against Calpine that led to the ousting of its top two executives. Even though most hedge funds are not activist, the ones that are have captured attention. Martin Lipton, the renowned advisor to corporate boards and veteran of the takeover wars of the 1980s, lists ‘attacks by activist hedge funds’ as the number one key issue for directors. The Wall Street Journal, the newspaper of record for executives, bankers, and investment professionals, calls hedge funds the ‘new leader’ on the ‘list of bogeymen haunting the corporate boardroom’. The Economist has run a special report on shareholder democracy focusing on activism by hedge funds, and several European governments are considering regulations designed to curb hedge fund activism. What should we make of this spate of shareholder activism by hedge funds? Are hedge funds the ‘Holy Grail’ of corporate governance—the long sought-after shareholder champion with the incentives and expertise to protect shareholder interests in publicly held firms? Or do they represent darker forces, in search of quick profit opportunities at the expense of other shareholders and the long-term health of the economy? In this chapter, we analyse and evaluate the implications of the rise of hedge funds for corporate governance and corporate control. In Section 5.2, we examine and categorize a variety of presumptively ‘happy stories’—that is, examples of different kinds of activism where hedge funds have no apparent conflict of interest. We argue that this hedge fund activism differs, quantitatively and qualitatively, from the more moderate forms of activism that traditional institutional investors engage in. In Section 5.3, we analyse why hedge funds are so much more active than other institutional investors. We show that hedge funds have better incentives, are subject to fewer regulatory impediments, and face fewer conflicts of interest than traditional institutions, such as mutual funds and pension funds, which have never lived up to the hopes of their partisans. But the activism of hedge funds may also be due to the fact that many follow a different business strategy than traditional institutions. This strategy involves taking high stakes in portfolio companies in order to become activist, rather than diversifying and becoming involved (if at all) only ex post when companies are underperforming, thus blurring the lines between betting on and determining the outcome of contests. In Section 5.4, we turn to potential problems generated by hedge fund activism. We first examine the ‘dark side’ of activism—instances where the interests of activist hedge funds conflict with those of their fellow shareholders—to see whether regulatory intervention is warranted. We then discuss other problems that arise from the stress that hedge funds put on the governance system. In Section 5.5, we turn to the most severe attack levelled against hedge funds: that hedge fund activism increases the pressure for short-term results over more valuable long-term benefits. We accept that short-termism by hedge funds can aggravate short-termism in the executive suite. But we nevertheless conclude that, at this point, no regulatory intervention is warranted because: it is unclear to what extent hedge fund activism is driven by excessive short-termism; hedge funds usually need the support of other, less short-term oriented constituents to affect corporate policy; and, to the extent short-termism generates a problem, adaptive devices adopted by corporations are a better way to address it than regulation.23 Section 5.6 concludes.
Source Publication
Institutional Investor Activism: Hedge Funds and Private Equity, Economics and Regulation
Source Editors/Authors
William W. Bratton, Joseph A. McCahery
Publication Date
2015
Recommended Citation
Kahan, Marcel and Rock, Edward B., "Hedge Funds in Corporate Governance and Corporate Control" (2015). Faculty Chapters. 948.
https://gretchen.law.nyu.edu/fac-chapt/948
