When will “hedge fund activism” cease to be the three little words that company executives do not want to hear? As one hedge fund activist states in the roundtable discussion on page 134, the mention of the word “activist” on one hedge fund’s website led to such a flood of complaints that the strategy was renamed “ownership investing”.
Outcries from lawyers such as Marty Lipton that deem all hedge fund activists to be out for short-term gains have been blown out of all proportion. And now there is empirical evidence to prove this is so in the shape of research by Thomas Briggs, a US corporate lawyer with a different take on the hedge fund sector.
Of the thousands of US public companies, he found only 50 during the period that had become the subject of a significant hedge fund campaign. And in those 50 campaigns he found little evidence to suggest that any of the hedge fund activists had employed trading strategies that might encourage them to destroy corporate value rather than create it. There were just six possibly questionable situations, he says. Nor was there evidence that these hedge fund activists were doing anything underhand, such as diverting corporate monies to themselves. And there were no substantive cases of other shareholders disagreeing with the hedge fund activists because they felt that the activists were employing a short-term approach.
Shareholder activism by hedge funds is not a fad. With returns falling, hedge funds are indeed more likely to turn to using activism as a means of extracting value and increasing performance. The CEOs that are concerned about interest from activists are those very managements that probably need to review their basic business strategies. If the mere threat of having a hedge fund activist knock on the door forces some companies to shape up, then, in the words of Briggs: “Corporate governance has unquestionably been improved”.
