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Bernard Sharfman

Sharfman, Bernard S., Activist Hedge Funds in a World of Board Independence: Creators or Destroyers of Long-Term Value?

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Peter Burgess

Purpose of the Corporation 358 members Member Information and settingsShare group DiscussionsPromotionsJobsMembers Search Bernard Sharfman Follow Bernard Activist Hedge Funds in a World of Board Independence: Creators or Destroyers of Long-Term Value? Bernard Sharfman Member, Editorial Advisory Board, Journal of Corporation Law I am extremely pleased to announce that my manuscript, Activist Hedge Funds in a World of Board Independence: Creators or Destroyers of Long-Term Value?,” will be published in the Columbia Business Law Review. Also, a revised version of the article has been posted. In the Introduction I now attempt to explain why a number of leaders in the field of corporate law have difficulty accepting the results of the numerous empirical studies that show hedge fund activism to be wealth enhancing. This reluctance has puzzled me for a long time and was one of the reasons why I started writing the paper. Activist Hedge Funds in a World of Board Independence: Creators or Destroyers of Long-Term... papers.ssrn.com Numerous empirical studies have shown that hedge fund activism has led to enhanced returns to investors and increased firm performance. Nevertheless, leading f Like Comment (2) Unfollow Reply Privately14 days ago Comments 2 comments Bernard Sharfman Bernard Bernard Sharfman Member, Editorial Advisory Board, Journal of Corporation Law Over at the Business Law Prof Blog, http://lawprofessors.typepad.com/business_law/2015/04/are-proxy-season-fights-a-good-thing.html, Joshua Fershee uses my new article, 'Activist Hedge Funds in a World of Board Independence: Creators or Destroyers of Long-Term Value?' (forthcoming, Columbia Business Law Review), as authority in making the argument that activist hedge funds can create long-term value, even when their recommendations are rejected, if the board of directors can evaluate these recommendations with 'focus and independence.' Like Reply privately Flag as inappropriate 12 hours ago

Activist Hedge Funds in a World of Board Independence: Creators or Destroyers of Long-Term Value? Bernard S. Sharfman Independent April 14, 2015 Columbia Business Law Review, Forthcoming Abstract: Numerous empirical studies have shown that hedge fund activism has led to enhanced returns to investors and increased firm performance. Nevertheless, leading figures in the corporate governance world have taken issue with these studies and have argued that hedge fund activism leads to long-term value destruction. In this article, it is argued that an activist hedge fund creates long-term value by sending affirming signals to the board of directors (Board) that its executive management team may be making inefficient decisions and providing recommendations on how the company should proceed in light of these inefficiencies. These recommendations require the Board to review and question the direction executive management is taking the company and then choosing which path the company should take, the one recommended by executive management, the one recommended by the activist hedge fund or a combination of both. Critical to this argument is the existence of a Board that can act as an independent arbitrator in deciding whose recommendations should be followed. In addition, an explanation is given for why activist hedge funds do not provide recommendations that involve long-term investment. There are two reasons for this. First, the cognitive limitations and skill sets of those individuals who participate as activist hedge funds. Second, and most importantly, the stock market signals provided by value investors voting with their feet are telling the rest of the stock market that a particular public company is poorly managed and that it either needs to be replaced or given less assets to manage. These are the kind of signals and information that activist hedge funds are responding to when buying significant amounts of company stock and then making their recommendations for change. Therefore, it is not surprising that the recommendations of activist hedge funds will focus on trying to reduce the amount of assets under current management. Number of Pages in PDF File: 34 Keywords: hedge funds, activism, corporate governance, corporate law, independence, board of directors Download This Paper Date posted: March 11, 2015 ; Last revised: April 15, 2015 Suggested Citation Sharfman, Bernard S., Activist Hedge Funds in a World of Board Independence: Creators or Destroyers of Long-Term Value? (April 14, 2015). Columbia Business Law Review, Forthcoming. Available at SSRN: http://ssrn.com/abstract=2576408 or http://dx.doi.org/10.2139/ssrn.2576408 Contact Information

Peter Burgess Peter Burgess Founder/CEO at TrueValueMetrics developing Multi Dimension Impact Accounting Bernard ... I would love to debate you at length. I am intensely in disagreement with your conclusions and have to smile at your assertion about some leaders in the field of corporate law having difficulty in accepting the results of a number of empirical studies that show hedge funds activism can create long-term value ... etc. I am not a leader in corporate law, but I do have some understanding of the numbers of business. Worse, I learned numbering as an engineer, not as an economist. History seems to show that the activities of a hedge fund can be beneficial or can be dangerously damaging. It depends on many factors which in total are complex and not easy to use to establish broad generalizations. Back in the 1960s I was associated with Management Analysis Center, a Cambridge based consulting firm that advised corporations on critical management issues. Later on a similar firm emerged ... Bain and Company. These were consulting firms that were in the business of transferring management know-how to the clients so that the clients would have better results. I consider these were value adding initiatives with clients getting benefit. And then there was Bain Capital which took the same intellectual power and made it work so that the investors in Bain Capital would have better results. What happened to everyone else became less important. Many 'clients' were big losers, while Bain Capital investors were almost always big winners. I can cite examples of hedge funds helping to 'wake up' moribund management teams that were asleep at the wheel ... and I am all for that. But there are also examples of hedge funds, especially activist hedge funds, mining the assets of the target company for the benefit of their investors, and the consequences of this have been problematic to say the least. But the problem is bigger than this. Most of the analysis of business performance is about profit and it is organization centric. I argue that this is not enough in the 21st century where social issues and environmental issues should also be take into consideration. The Triple Bottom Line (TBL) is a manifestation of this ... but even this does not go far enough. The numbers being used to measure progress and performance of both investments and the economy should have an architecture that enables the data to be looked at from multiple perspectives ... in aggregate and in detail ... and over time, past, present and future. The future is particularly interesting. Everyone that does analysis based on money rules tends to discount the future, so mistakes made today tend to seem to diminish into the future. This does not apply to issues around society and the environment. These do not diminish into the future but compound in dangerous ways. My impression is that activist hedge funds divert management's attention from the big picture that incorporates everything to a very short term money focus performance that will never be able to make the strategic decisions that are vital for a flourishing economy. On balance ... I think the data shows that activist hedge funds have done little more than serve to concentrate wealth in the hands of hedge fund operators and their investors at a big cost to society in general. Peter Burgess TrueValueMetrics.org .... Multi Dimension Impact Accounting Delete 2 seconds ago