KEEP UP TO DATE WITH ALL THE IMPORTANT COVID-19 INFORMATIONCOVID-19 RESOURCE PORTAL
FANews
FANews
RELATED CATEGORIES
Category Investments

Activist Hedge Funds Undermining Corporate Social Responsibility, Research Finds

02 July 2020 HEC Paris

Activist hedge funds are almost twice as likely to target socially responsible companies as others, according to new study by Professors Mark DesJardine (Pennsylvania State University), Emilio Marti (Erasmus University Rotterdam), and Rodolphe Durand (HEC Paris). Findings add to mounting evidence that activist funds play a problematic role for corporate social responsibility, which they interpret as a signal that companies do not maximise short-term shareholder value.

Hedge fund activism could be playing a serious role in undermining corporate social responsibility. This is the core discovery in a new study by Mark DesJardine, Professor of Strategy and Sustainability at Pennsylvania State University’s Smeal College of Business, Emilio Marti, professor of business-society management at the Rotterdam School of Management, Erasmus University, and Rodolphe Durand, Professor of Strategy at HEC Paris and academic director of the school’s Society & Organizations Center.

Drawing on data covering US-based activist hedge fund campaigns between 2000 and 2016, the study finds that activist hedge funds are significantly more likely to target companies with strong performance in corporate social responsibility (CSR). For these companies, the likelihood of being targeted nearly doubles—from 3% to 5%—when CSR scores increase by two standard deviations above the industry average. What’s more, the findings suggest that those companies that place greater emphasis on CSR in industries not inclined toward these issues are even more likely to be targeted.

To establish why this is the case, the authors interviewed a range of hedge fund managers. The authors conclude that activist hedge funds see CSR activities as a signal of wasteful spending that distracts companies from maximising shareholder value in the short term. Companies perceived to be wasting resources are ideal targets for activists whose business model is to generate significant profit by reorienting such companies towards maximizing short-term shareholder value. Interestingly, companies that communicate clearly their operational and financial strategies are less targeted even if their CSR is strong.

The study suggests that activist hedge funds play a problematic role for CSR. While prior research has shown that being targeted by an activist hedge fund leads companies to curtail their CSR activities, the new study shows that CSR also makes companies more likely to become targeted by an activist hedge fund in the first place.

This insight is particularly relevant because activist hedge funds have gained traction in recent years. According to data from Activist Insight, 839 companies were targeted by at least one activist hedge fund in 2019. According to the bank J.P. Morgan (2015), “No recent development has influenced firms’ strategic and financial decision-making as profoundly as the surge in shareholder activism by hedge funds following the global financial crisis.”

The new study has practical implications for policy-makers, publicly-traded companies and investors who care about sustainability.

• For policy-makers: the study suggests that protecting companies from hedge funds attacks may support companies’ CSR efforts. In the Netherlands, for instance, policy makers are currently discussing whether companies should have the right to initiate a “cooling-off” period that would allow them to rethink their strategy and buy them time when they become targeted by an activist hedge fund. In France, policy-makers are looking at whether the mandatory reporting threshold for activists should be lowered from 5% to 3%.

• For publicly-traded companies: Executives contemplating investments in CSR need to be aware that standing out from their industry attracts activists especially when the value creation strategy is unclear. For this reason, executives should clearly communicate their CSR strategy to existing shareholders to ensure they have their backing when allocating capital to CSR activities.

• For investors: Many individuals and organizations are invested in activist hedge funds today through pension funds and endowments, which have been a major driver of growth for activist hedge funds since 2009. Investors looking to prioritise sustainability would do well to ensure their capital is not supporting institutional investors that undermine CSR.

Reference of the new study

Mark R. DesJardine, Emilio Marti, & Rodolphe Durand. 2020. Why activist hedge funds target socially responsible firms: The reaction costs of signaling corporate social responsibility. Academy of Management Journal: forthcoming. Access via: https://tinyurl.com/yd2v6tey

Click here to read more...

Quick Polls

QUESTION

Many legacy RAs allow an insurer to take up to 30% of the accumulated capital upon early exit. “This is just one of countless examples of shocking product design that is 100% engineered by insurers to extract punitive fees from clients...".

ANSWER

Agree
Disagree
fanews magazine
FAnews June 2020 Get the latest issue of FAnews

This month's headlines

The crisis is not over
Ethics of lockdown - What value is attached to a human life?
Pandemic redefines the commercial and legal risk landscape
New partnerships needed to create an epidemic and pandemic risk programme
Credible statistics create much needed certainty
SA fixed income: Searching for value in a sea of pandemic risk
Subscribe now