Care about corporate sustainability? Protect Dutch companies from activist hedge funds!

If policy makers care about corporate sustainability, they should limit the influence of activist hedge funds. Activist hedge funds buy shares of companies to make these companies focus on maximizing shareholder value in the short term. In 2019, activist hedge funds targeted more than 800 firms globally, including several Dutch companies. While research remains inconclusive on whether activist hedge funds make companies more or less efficient, new research shows that activist hedge funds are definitely bad for corporate sustainability.

This new research finds that companies that become targets of activist hedge funds reduce their corporate social responsibility (CSR) activities in subsequent years. To make things worse, a recent study by one of the authors shows that companies with a very strong CSR performance are almost twice as likely to be targeted by activist hedge funds than firms with average CSR performance. The reason for this is that activist hedge funds see CSR activities as a signal of wasteful spending that distracts companies from maximizing shareholder value in the short term. New research thus shows that activist hedge funds target companies that excel in terms of CSR and then create pressure on them to reduce their CSR activities.

This new evidence has important implications for current regulatory debates in the Netherlands. In part motivated by concerns about hedge fund activism, the Dutch government last year introduced a draft bill for a legal cooling-off period. This period would allow boards to limit the rights of shareholders (such as activist hedge funds) that try to interfere with the strategy of the company during 250 days. This period would enable boards to have sufficient “time and rest” in order to consider all relevant stakeholder interests during such events. The bill was adopted by the Second Chamber of the Dutch Parliament on 8 September and is currently being reviewed by the First Chamber.

A key concern of policy makers in this debate is whether hedge fund activism make companies more or less efficient. Yet, as minister Dekker acknowledges in the Memorie van Toelichting, research on this topic remains inconclusive. But maybe the time is right to think about hedge fund activism not in terms of efficiency, but in terms of its effects on corporate sustainability. After all, the Netherlands has a long tradition of societally engaged corporate governance, exemplified by a number of Dutch companies that lead in terms of corporate sustainability. If policy makers want to protect and foster these sustainability efforts, they need to protect Dutch companies from hostile interference by activist hedge funds.