Further Recognition of
the Adverse Effects of Activist Hedge Funds
Posted by Martin Lipton, Wachtell,
Lipton, Rosen & Katz, on Saturday, April 11, 2015
|
Editor’s Note:
Martin Lipton is a founding partner of Wachtell, Lipton, Rosen
& Katz, specializing in mergers and acquisitions and matters
affecting corporate policy and strategy. This post is based on a
Wachtell Lipton memorandum by Mr. Lipton. Earlier posts by Mr.
Lipton on hedge fund activism are available
here,
here, here,
and
here. Recent work from the Program on Corporate Governance
about hedge fund activism includes The
Long-Term Effects of Hedge Fund Activism by Lucian Bebchuk,
Alon Brav, and Wei Jiang (discussed on the Forum here)
and The
Myth that Insulating Boards Serves Long-Term Value by Lucian
Bebchuk (discussed on the Forum here).
For five posts by Mr. Lipton criticizing the Bebchuk-Brav-Jiang
paper, and for three posts by the authors replying to Mr. Lipton’s
criticism, see
here. |
Despite the continued support of attacks
by activist hedge funds by the Chair of the SEC, and many “Chicago
school” academics who continue to rely on discredited statistics,
there is growing recognition by institutional investors and prominent
“new school” economists of the threat to corporations and their
shareholders and to the economy of these attacks and the concomitant
short-termism they create.
In a “must read,” March 31, 2015
letter to the CEOs of public companies, Laurence Fink, Chairman of
BlackRock and one of the earliest to recognize the danger from attacks
by activist hedge funds, wrote:
|
It is critical, however, to
understand that corporate leaders’ duty of care and loyalty is
not to every investor or trader who owns their companies’ shares
at any moment in time, but to the company and its long-term
owners. Successfully fulfilling that duty requires that
corporate leaders engage with a company’s long-term providers of
capital; that they resist the pressure of short-term
shareholders to extract value from the company if it would
compromise value creation for long-term owners; and, most
importantly, that they clearly and effectively articulate their
strategy for sustainable long-term growth. Corporate leaders and
their companies who follow this model can expect our support. |
In an April 1, 2015 empirical
study, Dr. Yvan Allaire of the Institute for Governance of Public
and Private Corporations concluded:
-
Hedge fund activists are not really that
great at finance or strategy or operations, as some seem to believe
(and as they relentlessly promote);
-
Their recipes are shop-worn and
predictable, and (almost) never include any growth initiatives;
-
Their success mostly comes from the sale
of the targeted firm (or from “spin-offs”); their performance
otherwise barely matches the performance of the S&P 500 and that of
a random sample of firms;
-
The strong support they receive from
institutional investors is rather surprising and quite unfortunate;
-
The form of “good” governance imposed on
companies since Sarbanes-Oxley as well as the “soft” activism of
institutional funds have proved a boon for the activist funds.
|
Harvard Law School Forum
on Corporate Governance and Financial Regulation
All copyright and trademarks in content on this site are owned by
their respective owners. Other content © 2015 The President and
Fellows of Harvard College. |
|
