Shareholder activism of fund managers works, also in the long term

The recent increase in hedge-fund activism aimed at producing changes in business strategy or leadership—including at large companies such as Apple, Hess, Procter & Gamble and, as announced last week, Air Products—has met intense opposition from public companies and their advisers. Opponents, such as prominent corporate adviser Martin Lipton, argue that such activism is detrimental to the long-term interests of companies and their shareholders: It may pump up short-term stock prices and benefit the activists—who don't stick around to eat their own cooking—but it harms shareholders in the long term.

This "myopic activism" claim has become the key argument for limiting the rights and involvement of public company shareholders. Furthermore, this claim has been successful in influencing the views of Securities and Exchange Commission officials, Delaware judges, and even institutional investors.

But is the claim true? In a comprehensive empirical study, "The Long-Term Effects of Hedge Fund Activism," completed last month and available on the Social Science Research Network, Duke University's Alon Brav, Columbia University's Wei Jiang and I found that it is not.


The above text is from an article in the "The Wall Street Journal", written by Lucian Bebchuk, one of the authors of  the scientific paper "The Long-Term Effects of Hedge Fund Activism", which can be found here.

The article in The Wall Street Journal continues:


"...we undertook a comprehensive empirical investigation of the long-term consequences of activist interventions. Our study uses a data set consisting of the full universe of approximately 2,000 interventions by activist hedge funds from 1994–2007. We identify for each activist effort the "intervention month" in which the activist initiative was first publicly disclosed, and we follow the company for the subsequent five years.

The evidence indicates that activist interventions tend to target underperforming companies, not well-performing ones. During the three years preceding the intervention month, the operating performance of companies targeted by hedge fund activists significantly trails industry peers, and the companies' stock returns are abnormally negative. This slide tends to reverse following activists' interventions.

During the five-year period following the intervention month, operating performance relative to peers improves consistently. On average, the companies targeted by activists close two-thirds of their gap with peers in terms of return-on-assets and two-fifths of this gap in terms of "Tobin's q," a standard measure of how effectively companies turn book value into shareholder wealth."


Fund managers in Malaysia (especially from government linked funds) have been very passive over the last twenty years or so. I have often lambasted that, for instance here.

The above observation regarding hedge fund managers surely also applies to normal fund managers, not only to hedge fund managers. An article written by James Saft on the Reuters website seems to agree with that, some snippets:


"The data is good enough, and the idea compelling enough, that the technique of holding managements' feet to the fire by investors may turn out to be the great hope of the besieged actively managed investment industry. In other words the take-away may not be for all of us to pile into activist hedge funds but instead to push our existing pension and mutual funds to adopt the same tactics."

"I am uncomfortable recommending investing in activist hedge funds for a variety of reasons. Costs are high and the best ones, like Carl Icahn, probably won't take your money anyway.

But why should shareholder activism have to be the special preserve of hedge funds anyway? It doesn't. California Public Employees' Retirement System (CalPERS) has been doing this for decades, and has pushed for more cooperative pressure with other pension funds."

"Too many actively managed funds are closet indexers with high costs, trying to beat the index by picking stocks. If, as some predict, we are in an extended period of structurally low returns in financial markets, the small gains wrung from shareholder activism will prove all the more valuable.

And remember, a pension or endowment might be able to take a different attitude towards activism, pushing for better treatment of shareholders with a long-term view, rather than seeking to unlock value and move on.

Paying for activist management of company management, as opposed to active fund management which simply votes with its feet by buying and selling, might be a long-term trend with big scope for growth."