Some are More Equal: The Politics of Shareholder Activism (original) (raw)

The Future of Shareholder Activism

Corporate Governance: Actors & Players eJournal, 2019

Activist hedge funds do not hold a sufficiently large number of shares to win proxy battles, and their success in driving corporate change relies on the willingness of institutional investors to support their cause. Against this background, this Article advances three claims about the interaction of activist hedge funds and institutional investors’ stewardship. First, this Article argues that the rise of activist hedge funds and their dramatic impact cannot be reconciled with the claim that institutional investors have systemic conflicts of interest that lead them to favor management. One cannot celebrate the achievements of activist hedge funds and at the same time argue that institutional investors systemically desire to appease managers. Second, this Article explains that the rise of money managers’ power is changing the nature of shareholder activism. Large money managers’ size and influence mean that they need not resort to aggressive tactics to influence companies’ management....

Shareholder Activism as a Corrective Mechanism in Corporate Governance

Under an Arrowian framework, centralized authority and management provides for optimal decision making in large organizations. However, Kenneth Arrow also recognized that other elements within the organization, beyond the central authority, occasionally may have superior information or decision-making skills. In such cases, such elements may act as a corrective mechanism within the organization. In the context of public companies, this article finds that such a corrective mechanism comes in the form of hedge fund activism, or, more accurately, offensive shareholder activism. Offensive shareholder activism operates in the market for corporate influence, not control. Consistent with a theoretical framework that protects the value of centralized authority and a legal framework that rests fiduciary responsibility with the board, authority is not shifted to influential, yet unaccountable, shareholders. Governance entrepreneurs in the market for corporate influence must first identify those instances in which authority-sharing may result in value-enhancing policy decisions, and then persuade the board and/or other shareholders of the wisdom of their policies, before they will be permitted to share the authority necessary to implement the policy. Thus, boards often reward offensive shareholder activists that prove to have superior information and/or strategies by at least temporarily sharing authority with the activists by either providing them seats in the board or simply allowing them to directly influence corporate policy. This article thus reframes the ongoing debate on shareholder activism by showing how offensive shareholder activism can co-exist with — and indeed, is supported by — Kenneth Arrow’s theory of management centralization, which undergirds the traditional authority model of corporate governance. This article also provides a much-needed bridge between the traditional authority model of corporate law and governance as utilized by Professors Steven Bainbridge and Michael Dooley and those who have done empirical studies on hedge fund activism, including Lucian Bebchuk. The bridge helps to identify when shareholder activism may be a positive influence on corporate governance.

The Rise and Fall (?) of Shareholder Activism by Hedge Funds

SSRN Electronic Journal, 2000

Shareholder activism by hedge funds has over the past few years become a major corporate governance phenomenon. This paper puts the trend into context. The paper begins by distinguishing the "offensive" form of activism hedge funds engage in from "defensive" interventions "mainstream" institutional investors (e.g. pension funds or mutual funds) undertake. Variables infl uencing the prevalence of offensive shareholder activism are then identifi ed using a heuristic device we call "the market for corporate infl uence". The rise of hedge funds as practitioners of offensive shareholder activism is traced by reference to the "supply" and "demand" sides of this market, with the basic chronology being that, while there were direct antecedents of hedge fund activists as far back as the 1980s, hedge funds did not move to the activism forefront until the 2000s. The paper brings matters up-to-date by discussing the impact of the recent fi nancial crisis on hedge fund-driven shareholder activism and draws upon the market for corporate infl uence heuristic to predict future trends.

Myopic Investor Myth Debunked: The Long-Term Efficacy of Shareholder Advocacy in the Boardroom

SSRN Electronic Journal, 2014

Over the past two decades, hedge fund activism has emerged as new form of corporate governance mechanism that brings about operational, financial and governance reforms to a corporation. Many prominent business executives and legal scholars are convinced that the entire American economy will suffer unless hedge fund activism with its perceived short-termism agenda is significantly restricted. Shareholder activists and their proponents claim they function as a disciplinary mechanism to monitor management and are instrumental in mitigating the agency conflict between managers and shareholders. We find statistically meaningful empirical evidence to reject the anecdotal conventional wisdom that hedge fund activism is detrimental to the long term interests of companies and their long term shareholders. Moreover, our findings suggest that hedge funds generate substantial long term value for target firms and its long term shareholders when they function as a shareholder advocate to monitor management through active board engagement.

Shareholder Activism: A Multidisciplinary Review

Journal of Management, 2014

Shareholder activism has become a dynamic institutional force, and its associated, rapidly increasing body of scholarly literature affects numerous disciplines within the organization sci- ence academy. In addition to equivocal results concerning the impact of shareholder activism on corporate outcomes, the separation of prior research into financial and social activism has left unanswered questions critical for both the scholarly discourse on shareholder activism and the normative debate on shareholder empowerment. The heterogeneity of factors in shareholder activism, such as the firm, activist, and environmental characteristics that promote or inhibit activism, along with the breadth of activism’s issues, methods, and processes, provide a plethora of theoretical and methodological opportunities and challenges for activism researchers. Our multidisciplinary review incorporates the financial and social activism streams and explores shareholder activism heterogeneity and controversy, seeking to provide an impetus for more cohesive conceptual and empirical work in the field.

Hedge Fund Activism in Corporate Governance

A. Marciano & G.B. Ramello (eds.), Encyclopedia of Law & Economics, Springer, 2017

Hedge fund activism is an important disciplinary mechanism in corporate governance. It consists in actions aimed to change the way a company is managed, without trying to gain control. Because hedge funds aim to profit from these actions, this is called entrepreneurial shareholder activism.

On the different styles of large shareholders' activism

2010

This paper extends Noe's (Rev Financial Studies 15:289-317, 2002) model of large shareholder activism in two directions. First, it considers a framework in which large shareholders can choose not only when to monitor, but also how intensively they want to monitor the firm. Second, it considers the impact of laws and regulations by introducing a governance quality parameter that makes monitoring more cost effective. The model yields a new and rich characterization of activism. We find that share wealth (ownership concentration) induces monitoring for higher firm value through more frequent monitoring with unchanged intensity. Cash wealth motivates activism for trading gains, not higher firm value, through less frequent monitoring coupled with higher intensity. We also find that better governance leads to higher firm value through more frequent but less intense activism. When asymmetries within the group of large shareholders exist, the model predicts that the larger/wealthier/more efficient shareholders are more active. These results are broadly consistent with the empirical evidence.

Activist Investors as Brokers of Corporate Control

Social Science Research Network, 2015

We compare hedge fund activism and hostile tender offers in a unified framework where any investor who acquires an equity stake to improve firm value faces a dual free-rider problem: Neither do dispersed shareholders sell their shares unless the price fully reflects the anticipated value improvement nor do those who retain their shares participate in the costs. We show that activism and tender offers are polar approaches to this problem, and in terms of profitability, react contrarily to changes in the marginal return to effort. Activists can hence contribute to a more efficient control allocation by brokering takeovers, along the extensive margin (takeover activity) as well as the intensive margin (ownership concentration), partially obviating tender offers. We also show that pre-campaign coordination between bidders and activists reduces holdup problems, and that allowing activists to disentangle votes and cash flow rights improves their incentives and ultimately serves to unify both sets of rights in the hands of bidders.

Myths and Realities of Hedge Fund Activism: Some Empirical Evidence

Forthcoming in Virginia Law & Business Review, 2012

The brand of shareholder activism associated with hedge funds is a highly topical, yet equally controversial issue. In this article, I provide a synthesis of the key issues surrounding the hedge fund activism phenomenon, many of which are unresolved or have become popularized notions. I focus on activist hedge fund campaigns outside the Unites States, about which little is still known. The empirical core of the study comprises a hand-collected dataset from press reports which contains 432 activist campaigns launched by 129 unique activist hedge funds across 17 countries between January 1, 2000 and December 31, 2010. This article casts doubt upon four aspects of the perceived dark side of hedge fund activism. Activist hedge funds are not short-term in focus, as some critics have claimed. Activist hedge funds do not often use equity decoupling techniques. They seldom seek control and despite all the press and attention lavished on hedge fund activism and its supposed evils in most cases are not mainly hostile to incumbent management.