Società Italiana di Diritto ed Economia, SIDE - ISLE 2015 - 11TH ANNUAL CONFERENCE

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Exit, Voice and Loyalty from the Perspective of Shareholder Activism in Corporate Governance
Alessio M. Pacces

Last modified: 2015-12-15


This article discusses the policy response to hedge funds activism in corporate governance based on Hirschman’s classic: Exit, Voice and Loyalty. From that perspective, the article argues that hedge funds do not create concerns of loyalty because the arbiters of their activism are typically institutional investors that cannot exit strategically. Nevertheless, the voice activated by hedge funds can be excessive for a particular company.
Although the empirical evidence does not support the claim that the gains from hedge funds activism are short lived, the short-termism debate cannot shed much light on the desirability of shareholder activism. Neither theory nor empirical analyses can tell us whether the existence of hedge funds activism leads to some sort of short-termism and whether this is efficient for corporate governance. The real issue with activism is a conflict between entrepreneurships, namely between the opposing views of the activists and the incumbent management regarding how the target company should look like in the future. Leaving the choice between these views to institutional investors is not efficient for any companies at every point in time.
Consequently, this article argues that regulation should enable individual companies to limit the impact of activism when this is efficient for them, while refraining from curbing the power of activists across the board. As revealed by the recent European experience, loyalty shares operate as dual class shares in disguise. This outcome could be improved by allowing dual class recapitalizations explicitly, but subject to a majority of minority vote. This ‘sticky default’ solution would screen for the companies for which limiting the influence of activists is efficient and induce these companies to negotiate time-bound restrictions with institutional investors.

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