Exit, Voice and Loyalty from the Perspective of Hedge Funds Activism in Corporate Governance

18 Pages Posted: 26 Jan 2017

See all articles by Alessio M. Pacces

Alessio M. Pacces

Amsterdam Law School / Amsterdam Business School; European Corporate Governance Institute

Multiple version iconThere are 2 versions of this paper

Date Written: December 31, 2016

Abstract

This article discusses hedge funds activism based on Hirschman’s classic. It is argued that hedge funds do not create the loyalty concerns underlying the usual short-termism critique of their activism, because the arbiters of such activism are typically indexed funds, which cannot choose short-term exit. Nevertheless, the voice activated by hedge funds can be excessive for a particular company. Furthermore, this article claims that the short-termism debate cannot shed light on the desirability of hedge funds activism. Neither theory nor empirical evidence can tell whether hedge funds activism leads to short-termism or long-termism. The real issue with activism is a conflict of entrepreneurship, namely a conflict between the opposing views of the activists and the incumbent management regarding in how long an individual company should be profitable. Leaving the choice between these views to institutional investors is not efficient for every company at every point in time. Consequently, this article argues that regulation should enable individual companies to choose whether to curb hedge funds activism depending on what is efficient for them. The recent European experience reveals that loyalty shares enable such choice, even in the midstream, operating as dual-class shares in disguise. However, loyalty shares can often be introduced without institutional investors’ consent. This outcome could be improved by allowing dual-class recapitalisations, instead of loyalty shares, but only with a majority of minority vote. This solution would screen for the companies for which temporarily curbing activism is efficient, and induce these companies to negotiate sunset clauses with institutional investors.

Keywords: uncertainty, entrepreneurship, agency costs, loyalty shares, institutional investors

Suggested Citation

Pacces, Alessio Maria, Exit, Voice and Loyalty from the Perspective of Hedge Funds Activism in Corporate Governance (December 31, 2016). Erasmus Law Review, Vol. 9, No. 4, 2016, Available at SSRN: https://ssrn.com/abstract=2906245

Alessio Maria Pacces (Contact Author)

Amsterdam Law School / Amsterdam Business School ( email )

Roetersstraat 11
Amsterdam, 1018 WB
Netherlands

HOME PAGE: http://www.uva.nl/profiel/p/a/a.m.pacces/a.m.pacces.html

European Corporate Governance Institute ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
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Belgium

HOME PAGE: http://https://ecgi.global/users/alessio-pacces

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