The State of Corporate Governance for 2015

Financial Activism

” Over the past three years, the number and intensity of financial activism initiatives has increased. The ongoing debate on the wealth effects of hedge fund activism is worth following and is well-covered on Harvard’s corporate governance blog (blogs.law.harvard.edu/corpgov). Although financial activism may return immediate wealth to some shareholders through the sale of assets, payment of special dividends or share buybacks, evidence is mounting that this may be at the expense of the longer term corporate and societal interests. For example, a July 2014 paper by Yuan Allaire and Francois Dauphin, “Activist” Hedge Funds: Creators of Lasting Wealth? (available at www.igopp.org), concludes that “the most generous conclusion one may reach” is that activist funds “create some short-term wealth for some shareholders” because investors tend to jump into the stock of targeted companies upon the announcement of activist activity.

“In a minority of cases, activist hedge funds may bring some lasting value for shareholders but largely at the expense of workers and bond holders; thus the impact of activist hedge funds appears to take the form of wealth transfer rather than wealth creation.”

The research further notes that hedge funds tend to be focused on the short term, with half of interventions not lasting nine months. In addition, a growing number of commentators, including senior representatives of some institutional investors, have expressed concern about the impact of hedge fund activism, and associated increased debt and cuts in capital spending, on long-term corporate health, innovation, job creation and GDP growth.” Read more