Contesting capital allocation : a sociological perspective on the interaction among hedge fund activists, CEOs, and directors
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Using ninety-nine semi-structured interviews with S&P1500 CEOs, directors, and hedge fund managers, this study examines why and how hedge funds pursue activism with target companies, and why and how firms either acquiesce to or resist these pressures. When including friendly activism together with hostile activism, it finds that the degree of engagement of hedge funds with their targets is substantial. Likewise, the degree of engagement of CEOs with their preferred institutional investors is also nearly constant. Together, this level of interaction strongly suggests that the idea of the separation of ownership and control is an increasingly anachronistic concept describing the current relationship between managers and their shareholders. It also finds that, because hedge funds represent a distilled form of capitalist action, CEOs and boards have little space to engage in symbolic management. Because of the loss of power to institutional shareholders over the past several decades, epitomized by hostile hedge fund activism, the substantially increased engagement of management with their shareholders can be seen as a mechanism for recouping power. Dedicated hostile hedge fund activists derive their power not from exercising social influence over their targeted firms, with whom they have no history of repeated and recurring interactions, but from exercising social influence over other institutional investors by cultivating reputations based on legitimate action. Similarly, dedicated hostile hedge fund activists’ expertise, a second source of power, is also not attained from repeated interactions with their targets but from their greater experiences in capital allocation, from past business experiences, and from hiring analysts and consultants with the necessary expertise. By contrast, friendly hedge fund activists do exercise social influence over their target firms derived from longer-term recurring interactions with them. While this accords them shareholder power, this power is limited by their aversion to exercising coercive tactics. Paradoxically, management can appropriate the shareholder power of friendly activists to the extent that such allies can counter the power of hostile activists. Directors were found to be severely disadvantaged by the paucity of their interactions with shareholders, a circumstance that they are beginning to rectify through increasing their dialogue with them.