The Future of Shareholder Activism

Abstract

Activist hedge funds do not hold a sufficiently large number of shares to win proxy battles, and their success in driving corporate change relies on the willingness of institutional investors to support their cause. Against this background, this Article advances three claims about the interaction of activist hedge funds and institutional investors’ stewardship. First, this Article argues that the rise of activist hedge funds and their dramatic impact cannot be reconciled with the claim that institutional investors have systemic conflicts of interest that lead them to favor management. One cannot celebrate the achievements of activist hedge funds and at the same time argue that institutional investors systemically desire to appease managers. Second, this Article explains that the rise of money managers’ power is changing the nature of shareholder activism. Large money managers’ size and influence mean that they need not resort to aggressive tactics to influence companies’ management. In today’s marketplace, management initiates contact with large institutional investors to learn about any concerns that could trigger activist attacks. Finally, this Article argues that even well-incentivized institutional investors are unlikely to pursue some activist interventions specifically, those that require the appointment of activist directors to implement complex business changes. This Article analyzes the role activist directors play and show that it might require changes too dramatic to money managers’ business model and regulatory landscape. Institutional investors are therefore unlikely to displace activist hedge funds.

Keywords: Hedge Funds, Institutional Investors, Shareholder Activism, Activist Directors, Corporate Governance, Passive Investors,

JEL Classification: G34, G38, K22