Activist Hedge Funds Fight for Spots on Corporate Boards. Research Shows It Doesn’t Make a Difference.

A study found “scant” evidence that activist directors boost operating performance or investment returns.

SeongJoon Cho/Bloomberg

SeongJoon Cho/Bloomberg

Activist hedge funds and their target companies have been known to wage long, expensive proxy battles over board seats. But the directors nominated by activist investors may not actually have much of an impact, according to a study from researchers at Iona College and Sacred Heart University.

In an analysis of 1,874 activist directors serving on public company boards between 1994 and 2017, researchers Thomas Kushner and Khawaja Mamun found “scant statistically significant evidence” that directors nominated by activist hedge funds “generate long-term value for shareholders in the form of superior operating performance and outsized monthly returns during their board tenure.”

The study included 870 companies that were targeted by activist hedge funds, and focused on directors appointed in consultation with activist investors, as well as those who won board seats through proxy contests. The latter path, the researchers noted, can be “extensive and expensive,” like the high-profile proxy battle between hedge fund Trian Partners and Procter & Gamble Co. in 2017.

“Trian spent as much as $25 million on their proxy campaign to obtain a board seat while P&G is believed to have spent over $100 million to keep them out of their boardroom,” Iona’s Kushner and Sacred Heart’s Mamun wrote in their paper on the study.

On average, they said activist campaigns ending in a proxy vote cost $10.71 million, citing a 2012 study in the Journal of Financial Economics.

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“Previous research confirms activist hedge fund investments deliver statistically significant positive operating and market returns over specific time-periods,” the authors wrote. “We do not find these returns in our data sample of activist director tenure.”

Instead, Kushner — whose LinkedIn profile shows he also serves as managing director in the global institutional client group at Wells Fargo & Co. — and his co-author Mamun, whose LinkedIn bio says he is an associate dean at Sacred Heart, suggested that hedge funds may have other motivations for winning board seats.

They said the very public board appointments are used to signal skill in activist investing, which can help hedge funds win over investors.

“Hedge fund activism presents potential investors with a good story, and stories seem to be a necessary part of raising money from investors,” they concluded.