GLOBAL - Activist hedge fund and private equity strategies can improve companies' corporate governance under certain circumstances, the Organisation for Economic Co-operation and Development (OECD) has found.

Experts from the OECD's Steering Group on Corporate Governance have concluded, in a study, activist hedge funds and private equity firms "could help strengthen corporate governance practices by increasing the number of investors that have the incentive to make active and informed use of their shareholder rights".

Among the improvements investors might call for are changes in management, the composition of the board, dividend policies, company strategy, company capital structure and acquisition plans, said the OECD.
 
"Such active and informed ownership is expected to stimulate the search for the best possible use of corporate assets and thereby contribute to better risk and resource allocation in the economy as a whole," the report notes.

However, the Steering Group also noted difficulties can arise from private equity activity in a company with financial troubles.

"The question facing employees might be either to renegotiate the pension or health agreement or force the company into bankruptcy in the hope that claims will be protected. Much evidently depends on the specifics of the jurisdiction including the insolvency regime."

Furthermore, the report frequently mentions the important role pension funds and other institutional investors are playing as main investors in private equity funds.

"Traditional institutional investors are participating as investors in activist hedge funds and private equity vehicles. Any attempt at a clear delineation of 'activist hedge funds' from 'private equity', and both investment vehicles from other classes of investors such as mutual funds, pension funds, investment banks and commercial banks, can be highly misleading," suggests the OECD steering group.

Topics