Governing Corporations with Concentrated Ownership Structure: Can Hedge Funds Activism Play Any Role in Italy?

Abstract

In the last three years several corporate studies have pointed out the multiple facets of the hedge funds activism by describing what characteristics this phenomenon has, what differences hedge funds have compared to traditional institutional investors and what might be the reasons of their success. Hence, this paper aims to understand whether this theoretical pattern describing hedge funds and asserting that their activism can have positive effects on the governance (and, thus, the efficiency) of corporations may apply outside the U.S. system. More precisely, the purpose of this research is primarily to understand if and how the same phenomenon may occur in different legal and economic systems where corporations have a rather concentrated ownership structure (and, thus, it should be more difficult for a hedge fund to credibly threaten the management), and particularly in Italy where the largest majority of listed companies are controlled by a single shareholder or a stable group of shareholders. Despite the intuitive conclusion that hedge funds should have little or no interest in acquiring a participation in a corporation whose control cannot be challenged and therefore the threat of a take-over is less plausible, this research shows that activist hedge funds are already operating in Italy since 2007; even more interestingly, through the elaboration of publicly available data to obtain a comprehensive data base of activist hedge funds operating in Italy as well as by tracking their investments and tactics through the analysis of public documents and market data, this paper shows that hedge funds' strategies towards companies with concentrated ownership are in many ways different than those followed in the U.S. system. On the one hand, activist hedge funds adapt their tactics in a way to take advantage of several voice powers among those provided to minority shareholders by the Italian corporate law and, above all, of the right to get a minority member elected in both the board of directors and the board of internal auditors of listed companies. On the other hand, however, this research shows that a large part of the activist hedge funds operating in Italy - all of them with a significant amount of money invested in major long-term shareholdings - have actually been quite either by failing to exercise the voting rights connected to their positions and thus to exert any influence on managers, or by supporting with their votes the controlling shareholder/s. In particular, some activists seem to be in a way to form strategic diplomatic alliances rather than to pursue more aggressive tactics, which supports the idea that a number of hedge funds are following an opportunistic acting passive strategy that may actually conceal a form of bad relational investing as a mean to obtain higher gains. Hence, if these early empirical evidences were confirmed by the investment strategies hedge funds will make in the future, their activism in Italian listed companies could hardly be deemed to benefit non-control shareholders generally.