Activist hedge funds target companies with low cash returns and higher executive pay

Conference Board director calls on companies to study activists’ tactics

Companies are more likely to suffer campaigns orchestrated by activist hedge funds if they fail to establish a clear corporate strategy, delay in replacing a CEO, provide insufficient cash returns to investors or don’t seek alternatives for non-core assets.

Activist hedge funds also tend to target companies with lower dividend payouts than similar companies, lower market value relative to book value, higher executive pay and more takeover defenses than average, according to Matteo Tonello, managing director of corporate leadership at the Conference Board.

‘Activist hedge funds merit the attention of corporate directors, as the value of the assets under management increases and activist funds’ targets expand well beyond small-cap companies,’ Tonello writes in a post on the Harvard Law School Forum on Corporate Governance and Financial Regulation.

‘It is increasingly important for directors to become knowledgeable about the tactics activists use to advance investor arguments for changes at target companies. Directors should consider maintaining detailed profiles of hedge funds with material investments in the company’s securities.’

Hedge funds accounted for 24 of the 35 contests at Russell 3000 companies last year – and 19 of the contests waged by hedge funds succeeded, making them far more effective opponents than most, Tonello’s post notes. Most of the contests focused on asset divestiture, capital distributions, the election of dissidents’ director nominees and the removal of board members.

Hedge funds were also the most likely to seek board representation, accounting for 14 of the 22 proxy contests last year motivated by the election of a dissident board member, Tonello says. Meanwhile, about 55 percent of activist proposals last year sought changes not related to the board of directors while 45 percent directly sought corporate governance changes.

The post, citing several studies, states that assets under management by activist hedge funds has risen more than seven-fold to $166 bn today from $23 bn in 2002, with new investments by the top 10 funds surpassing $30 bn in 2013 alone.

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