The Effectiveness of Being Invisible: Hedge Funds, Hidden Ownership and Corporate Governance

Abstract

The dissociation of a share into voting and economic rights has made hidden ownership possible. This article underscores the benefits of hidden ownership and examines its impact on corporate governance. It then examines hedge fund activism as a means of revitalizing corporate governance and shows how hidden ownership incentivizes activism by rewarding expensive investments in developing private information. The article argues that mandatory disclosure of economic only ownership can have a deleterious effect on the financial markets as it will diminish the incentives to search for information which is a socially beneficial activity. Hidden ownership thus contributes to more efficient markets, better markets for corporate influence and corporate control and is an effective check on managerial rent seeking. It examines the existing disclosure regime and argues that the benefits of hidden ownership outweigh the costs and regulators ought to appreciate the political economy of the jurisdiction before mandating further disclosure. Hidden ownership is an effective check on errant managers, especially in regimes where the allocation of powers is skewed in favour of the directors. Finally, it posits that hedge fund activism has been beneficial and hidden ownership too has many positives, most of which are overlooked and in conjunction, it can be an effective check on managerial rent seeking and allow for greater shareholder oversight by incentivizing monitoring.

Keywords: corporate governance, empty voting, hedge funds, hidden ownership, Williams Act

JEL Classification: K22, L51