Prof B is skeptical about Icahn’s move on Blockbuster. He says that hedge fund activism is an uphill battle and a bid for greenmail which may or may not benefit the shareholders. He adds: “If hedge funds succeed at becoming something more than annoyance, one can expect the business lobby (such as the Business Roundtable, NAM, and the Chamber of Commerce) to provide critical support for such efforts.” And he concludes: “In sum, the basic precept of corporate law and governance is separation of ownership and control. Hedge fund activism is unlikely to put them back together again.”
There are several problems with this reasoning. Icahn rallied a 77% vote against incumbent management. It’s obvious Icahn, whatever his motives and whatever the clarity of his vision for the company, has struck a nerve of shareholder dissatisfaction, and therefore is likely to have some disciplinary effect.
The risk of regulation hedge funds face if they’re successful is precisely the issue I raised in my last post.
Finally, the separation of ownership and control is not a “basic precept” in the sense of a governing principle that is challenged by shareholder activism. Rather, it simply describes the structure of the publicly held firm. So, of course, hedge funds won’t “put them back together.” The issue is whether hedge funds can minimize the "agency costs" that result from this separation, which technically include both managerial misconduct and the costs of minimizing this misconduct.
There may be reasons for regulating hedge funds, but the fact that they might address the agency costs of separating ownership and control is not one of them.
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