The Long-Term Efficacy of Activist Directors

266 Pages Posted: 13 Feb 2016 Last revised: 19 Feb 2016

Shane Goodwin, PhD

Harvard Business School; Columbia Law School; Columbia Business School

Date Written: February 11, 2016

Abstract

Over the past two decades, hedge fund activism has emerged as a new mechanism of corporate governance that brings about operational, financial and governance reforms to a corporation. Many prominent business executives and legal scholars are convinced that the entire American economy will suffer unless hedge fund activism with its perceived short-termism agenda is significantly restricted. Shareholder activists and their proponents claim they function as a disciplinary mechanism to monitor management and are instrumental in mitigating the agency conflict between managers and shareholders.

My expansive, hand-collected dataset and unique empirical research design methodology with respect to board representation fills an important void in the literature regarding the long-term efficacy of hedge fund activists serving as a disciplinary mechanism on Target Firms by actively seeking board representation to monitor management and reduce agency cost. Moreover, my findings have important policy implications related to the ongoing debate on corporate governance and the rights and roles of shareholders.

I find statistically meaningful empirical evidence to suggest that hedge fund activism generates 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. Furthermore, contrary to conventional wisdom and extant literature, hedge fund activists that seek board representation are focused on long-term corporate initiatives to increase shareholder value rather than a perceived short-term agenda. It is very common for hedge fund activists to seek replacement of the incumbent management team to accomplish the activist’s strategic plan as opposed to forcing a "sale of the company" ex post the board seat grant date.

Keywords: Corporate governance, shareholder activism, hedge fund activism, proxy fights, short-termism, market efficiency, long-term value, shareholder rights, hedge funds, agency cost

JEL Classification: D21, D22, D81, D82, G12, G23, G32, G34, G35, G38, K22

Suggested Citation

Goodwin, PhD, Shane, The Long-Term Efficacy of Activist Directors (February 11, 2016). Available at SSRN: https://ssrn.com/abstract=2731369 or http://dx.doi.org/10.2139/ssrn.2731369

Shane Goodwin (Contact Author)

Harvard Business School ( email )

Soldiers Field Road
Morgan 270C
Boston, MA 02163
United States
917-405-8430 (Phone)

Columbia Law School ( email )

435 West 116th Street
New York, NY 10009

Columbia Business School ( email )

3022 Broadway
New York, NY 10027
United States

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