Activism

Hedge funds can promote good governance

“Activist” hedge funds and private equity firms can help strengthen corporate governance by increasing the number of investors that have an incentive to make active and informed use of their shareholder rights, a Organisation for Economic Co-operation and Development (OECD) panel has reported.

Capital markets around the world, reported the panel, are increasingly dominated by institutional investors that often adopt passive investment strategies. Side-effects of prudential regulation also limit the share of equity that can be held in a company by some institutional investors, therefore creating a problem as regards collective action.

In this situation, said the panel, activist hedge funds that are not constrained in their shareholding levels and have strong incentives to exercise their shareholder rights could in fact underpin good corporate governance, as well as improving the overall efficiency of the capital markets.

The OECD panel also addressed the accusation that hedge funds promote short-termism as opposed to long-term investment by “real owners”. Research, reported the panel, suggests that it is in fact the lack of a credible long-term strategy that makes a company a target for activist investors in the first place.

August 2007