A hot topic in corporate governance is the so-called short-termism of publicly held companies. In response to actual and anticipated pressure from activist hedge funds, companies are, some say, focusing too much on short-term gains by, for instance, shunning research and development. This behavior undermines long-term value at the expense of shareholders and society, the argument goes. The opposing view is that the pressure to perform is necessary to keep management on its toes. Both camps seem to have a point.
Hedge funds have boosted shareholder activism worldwide. In my recent article, I discuss the policy response to hedge fund activism. I argue that the short-termism debate cannot shed light on the desirability of such activism. Rather, hedge fund activism should be regarded as a conflict of entrepreneurship, namely a conflict about the most efficient horizon to maximize profit. The choice of this horizon, which is uncertain, belongs to the entrepreneur. An engagement by hedge funds reveals that their views about this particular point differ from that of the incumbent management. Because the efficient horizon to maximize profit varies with the … Read more