OECD says hedge funds can play a positive role in corporate governance
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- Activist hedge funds may improve corporate governance
- Separate hedge fund code not necessary
- But shortcomings remain in areas such as integrity of voting systems, transparency and conflicts of interest
- OECD favors greater transparency and disclosure of shareholdings
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A recently published OECD report says that activist hedge funds may be a spur to better corporate governance. In an 82 page report “The Implications of Alternative Investment Vehicles for Corporate Governance” the OECD Steering Group on Corporate Governance argues that in some cases activist hedge funds can help strengthen corporate governance by encouraging more investors to make active use of their shareholder rights.
For example, the report notes that institutional investors often adopt passive investment strategies and are limited in the amount of equity held in a particular company. In contrast, hedge funds, which are not constrained in their shareholding levels and have a strong incentive to exercise shareholder rights “could improve the overall efficiency of capital markets.”
As a result, the OECD rejects the idea for a separate corporate governance code for hedge funds as it says they can be accommodated within existing OECD corporate governance principles.
However, the OECD Steering Group does have concerns about the integrity of shareholder voting systems when activist hedge funds are involved. One area of concern is “empty voting” — when a hedge fund in effect sells its economic interest in a share so that the voting right is all that remains. This can create conflicts of interest when funds have an interest in both an acquiring and a target company, and may favour an acquisition even if the target is overvalued.
But rather than prohibiting these practices, the OECD favors increasing transparency and disclosure requirements. In some jurisdictions, it says, concerns remain that existing requirements area either fail to take account of voting interests that can be created through derivative transactions or are not set at high enough thresholds.
It also notes that opportunities for market abuse and insider training are a “significant” concern when hedge funds are concerned “given the powerful incentive structures for hedge fund managers,” and stresses the need for “appropriate regulatory frameworks” and “effective oversight.
To read the full report, click here: OECD: The Implications of Alternative Investment Vehicles for Corporate Governance.
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