On March 10, 2022, presenter Alon Brav gave the lecture “Governance by Persuasion: Hedge fund activism and marker-based shareholder influence”. The lecture was based on a review paper coauthored with Wei Jiang and Rongchen Li in which the authors provide an updated empirical analysis as well as a comprehensive survey of the academic finance research on hedge fund activism. Alon provided a brief review of activists’ objectives, tactics, and the selection of target companies, and then focused on the current state of the literature, emphasizing how hedge fund activism impacts the target company, its shareholders, other stakeholders, and the capital market as a whole.
View the slides from this seminar.
Below you will find the Q&A from the seminar:
 Hedge fund have different strategies, making their activism not homogenous. For example, short-sellers may not be willing to be active because their aim is to see stock prices drop not increase.
That is certainly true and activists in our sample structure their engagements based on their view for how the firm ought to be restructured, the shareholders they need to engage with, and other facets of the target company and industry. Our research does not focus on the impact that short sellers have on firms they target. This research is covered, for example, by Appel and Fos (“Active short selling by hedge funds”) and Molk and Partnoy (“The long-term effects of short selling and negative activism”).
 Can you for a moment talk about activist objective to changing the governance, what are some examples…and has it been studied if certain industries tend to attractive certain type of activists’ objectives over others?
In the governance objective we include demands including, but not limited to, rescinding takeover defenses, ousting the CEO or chairman, challenging board independence and fair representation, demanding information disclosure and questioning potential fraud, and promoting pay-for-performance of executive compensation. There is certainly variation across industries as some activists may have gained some experience and reputation in a subset of industries. Certain objectives might also depend on the competitiveness of the industry and other attributes of the asset market as analyzed, for example, by Hege and Zhang’s paper “Activism pressure and the market for corporate assets”).
 I would [like to] know Dr.Brav’s view about the role that independent directors of targeted companies may play in these activist hedge fund campaigns.
These directors are clearly important as they will observe the information and agenda presented by the activist and then adjudicate as to whether the management’s vision is superior to that of the activist. There are several papers that try to document the turnover on target boards. See, for example, Gow, Shin, and Srivivasan “Consequences to directors of shareholder activism,” Bebchuk, Brav, Jiang, and Keusch, “Dancing with activists,” and Balogh “Finding the right fit: Value creation in activism through human capital.”
[3 follow up] I was meaning about the role actual independent directors may play in driving activist hedge funds’ concerns into the board.
I agree with the suggestion here that suboptimal behavior by independent directors on the incumbent board in monitoring/advising the top management is another reason for why activist may want to push for a representation on the board.
 Is the claim that hedge fund activism sacrifice environmental performance for financial performance valid?
No. These two papers argue that there is an improvement (decline in emissions). Here is the abstract from the Akey and Appel paper: “We study the effect of hedge fund activism on corporate environmental behaviors. Using plant-chemical level data from the EPA, we find that activism campaigns are associated with a 17 percent drop in emissions for chemicals at plants of targeted firms. Campaigns are associated with changes across a wide range of chemicals, including those emitted into the air, water, and ground and those that are harmful to humans. Evidence suggests this change in environmental behavior stems from a drop in production rather than an increase in abatement activities. The net effect on environmental efficiency is positive, with emissions falling by 8 percent per unit of output. Overall, our findings highlight the idea that the benefits of activism are not necessarily confined to shareholders, but may also extend to other stakeholders (e.g., the local community) affected by firms’ emissions.”
 You mention profitability of individual plants. Are these measured FY+1? It would be interesting to see longer term trends to avoid quick profitability fixes by management.
I agree. In our paper we track plants for three years subsequent to the year of the intervention.
 What happen to the shareholder proposal if it gets more than 50% of the shareholder votes?
Hedge fund activists do not make frequent use of shareholder proposals. They do threaten proxy contests and when we observe a proxy context materialize the success rate is essentially 50%.
 ESG activism is gaining traction lately. How could the hedge fund activism literature inform this new area of research?
We discuss this in our survey of the literature. I think that the recent engagement at Exxon borrowed significantly from the typical way activists reach out to the board/management and the broader shareholder base. There is always the potential challenge in maximizing shareholder wealth versus welfare as has been discussed in the literature recently.
 What [fund activism’s] implication for governance?
It is a new form of governance. As we further elaborate in our survey, activist hedge funds occupy an important middle ground between internal monitoring by boards and external monitoring by corporate raiders. Activist hedge funds are more flexible, incentivized, and independent than internal monitors, and they can generate multiple gains from best practices learned from targeting several companies with similar issues. Conversely, activist hedge funds differ from external corporate raiders, because they take smaller stakes, often benefit from cooperation with management, and must rely on support from fellow shareholders. This hybrid internal-external role puts activist hedge funds in a potentially unique position to reduce the agency costs associated with the separation of ownership and control.
Alon Brav is Professor of Finance at the Fuqua School of Business, Duke University. Professor Brav is faculty research associate at the National Bureau of Economic Research (NBER), Corporate Finance Program. He is an associate editor at the Journal of Finance, Research member European Corporate Governance Institute (ECGI), and senior Fellow at the Harvard Law School Program on Corporate Governance.
For further information on the webinar please contact Professor Jun Yang, Director of the Institute for Corporate Governance at email@example.com.