Activists That Seek Board Seats Generate Value

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By Yin Wilczek

Aug. 21 — Over the long term, hedge fund activists that seek board seats are generating substantial value for the target companies, a new study suggests.

The study, “Corporate Governance and Hedge Fund Activism,” reviewed a comprehensive data set of activist events, including 5,728 interventions from 1984 to 2014, according to the study's author, Shane Goodwin, an adjunct finance professor and visiting research scholar at the University of Texas at Dallas.

“I find statistically meaningful empirical evidence to reject the anecdotal conventional wisdom that hedge fund activism is detrimental to the long term interests of companies and their long term shareholders,” Goodwin said in the preface to his study. “Moreover, my findings suggest that hedge funds generate substantial long term value for target firms and its long term shareholders when they function as a shareholder advocate to monitor management through active board engagement to reduce agency cost.”

Former Investment Banker

What's striking is that Goodwin—a former investment banker at major Wall Street firms such as Wells Fargo Securities, Goldman, Sachs & Co. and Citigroup Corporate & Investment Banking—spent part of his career defending companies from shareholder activists.

The study “goes to the narrative of the opponents of shareholder activism, who basically say it's short term in focus and really only helps the activist” at the expense of the company, Goodwin told Bloomberg BNA in an Aug. 20 interview.

“I wanted to look at the data and see if that's what it really shows,” Goodwin said. “Quite interestingly, the data doesn't support the narrative when the activists' focus is on board representation.”

Stock Performance

Goodwin's study found that companies targeted for board representation by hedge fund activists demonstrated a boost in their short-term stock performance.

The study also found that over the longer term, targeted companies showed a dramatic improvement after the intervention, for up to five years after a hedge fund activist obtains at least one board seat. “These results indicate that Hedge Fund Activism has been successful in improving operating performance, increasing payouts, and reducing agency costs of Target Firms,” the study stated.

Goodwin told BBNA that he expended a lot of effort in trying to isolate the different types of hedge fund activists. “The real question is whether they have the true intent in trying to make a real change to the company,” he said. “If they are, they're ultimately trying to seek board representation” after unsuccessful discussions with the company.

The study was posted Aug. 19 to the Social Science Research Network.

Robust Activity

The study comes at a time when activist campaigns have surged. Activist Insight found that in the first half of 2015, 216 U.S. companies were targeted by activists.

Separately, a Gibson Dunn & Crutcher LLP survey found that the top activist goals this year are:

• board composition;

• mergers and acquisitions; and

• return of capital.

 

Among the more high-profile proxy fights this season was veteran activist investor Nelson Peltz's campaign for a seat on DuPont Co.'s board and to split up the 212-year-old chemical company. The bid was rejected by shareholders in May.

Different Types

Meanwhile, John Olson, a Washington-based partner at Gibson Dunn, agreed that not all hedge funds are cut from the same cloth. The funds that have a beneficial impact on companies are those with investment horizons in multiples of years that seek to influence, and sometimes join, boards to sharpen the company's medium- to long-term focus, he told BBNA in an Aug. 21 e-mail.

On the other hand, some funds are driven by a “short-term quick return strategy which may result in pressured decisions that are not in the interests of the sustainability of the business or of long-term investors,” he said.

Olson also suggested that many boards are handling their activists well. “Using appropriate defensive strategies and informed deliberation,” these boards “seem to me to be doing a good job of engaging and involving the funds that share a commitment to the interests of all investors and defending against those that seek a quick buck at the expense of long-term investors,” he said.

To contact the reporter on this story: Yin Wilczek in Washington at ywilczek@bna.com

To contact the editor responsible for this story: Seth Stern at sstern@bna.com

The study is available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2646293.