The intervention of governance activities through challenging board independence, information disclosure, CEO removal, and so forth is one of the possible objectives of activist hedge funds. In the definition of Leblanc, activist means an individual or a group of individuals who use shareholder rights to effect change at a company.2 From the perspective of corporate governance, such an approach to intervention in organizational strategies and culture may be beneficial as it may direct more ethical and accountable behaviors of managers and other important corporate actors in target companies.
Nevertheless, there is an ongoing debate regarding the effects of hedge fund activism among scholars, policymakers, and management practitioners. Some of them consider that activist investors are nothing but short-term opportunists and are detrimental to long-term value creation in corporations. 3 As Babchuk et al. note, this observation is especially relevant to activists with short investment horizons because it is in their interest to encourage the changes associated with short-term profitability objectives while ignoring the long-term needs of firms and shareholders with longer investment horizons.4 At the same time, supporters of hedge funds beli
eve that activist interventions may also be realized in such a way that would benefit organizations in terms of both short- and long-term value creation. 5 Considering this, the present report aims to investigate the potential positive and negative effects of hedge fund activism on companies in the context of the corporate governance framework. It is argued that not only can constructivist hedge funds that focus on collaboration with management improve corporate governance activities in the short run but also lead to an extensive range of prolonged, favorable effects.
Problem Statement and Background
A traditional perspective on the corporate governance system implies that shareholders have a long-term stake in the interests of the firm or, in other words, they own their shares directly, for their benefit, and extended periods. Hedge fund activism inherently poses a significant threat to such a system. As stated by Strine, activists usually have no substantial interest in the target organizations well-being and usually become shareholders merely after a decision to change an unfavorable state of affairs there. 6 At the same time, activist shareholders often tend to be the most vocal members of the board and often aggressively push changes.