Hedge Funds and Governance Targets

William W. Bratton
Georgetown University Law Center and EC

Abstract
Corporate governance interventions by hedge fund shareholders are triggering debates
between advocates of management empowerment and advocates of aggressive monitoring
by actors in the capital markets. This Article intervenes with an empirical question: What,
based on the record so far, have the hedge funds actually done to their targets? Information
has been collected on 130 domestic fi rms identifi ed in the business press since 2002 as
targets of activist hedge funds, including the funds’ demands, their tactics, and the results
of their interventions for the targets’ governance and fi nance. The survey results show
that the hedge funds have an enviable record success in getting targets to accede to their
demands, using the proxy system with remarkable, perhaps unprecedented, success. If the
pattern of intervention persists in time, expands its reach, and maintains the present high
level of governance success, then the separation of ownership and control becomes a less
acute problem for corporate law. But such a change will occur only to the extent that clear
cut fi nancial incentives encourage an expanded fi eld of intervention. To get a sense of
the sample’s bearing on the question as to such incentives’ existence, returns from hedge
fund engagement with the sample fi rms are compared to returns from market indices. The
results are mixed. The answer to the question whether the activists have beaten the market
depends on the assumptions one brings to the comparison. But it at least can be argued
that the hedge funds have not beaten the market respecting the targets in the sample. A
question accordingly arises respecting the depth and durability of any shift in the balance
of corporate power stemming from hedge fund activism. Meanwhile, the fi nancial results
also show that hedge fund activism is a more benign phenomenon than its critics would
have us believe. Hedge fund interventions neither amount to nearterm hold ups nor revive
the 1980s leveraged restructuring. Short term investments are rare. Large cash payouts
have been made by only a minority of the fi rms surveyed, and borrowing has been the
mode of fi nance in only a minority of the payout cases.