Financial Market Pressures and Business Sustainability: A Look at Activist Hedge Funds

The short-term interests of some financial actors can conflict with the long-term objectives of companies. In this presentation we explore the world of activist hedge funds. Results from a series of studies show that activist hedge funds unequivocally detract from the pursuit of business sustainability. Activist hedge funds tend to target more socially responsible companies, including those with more demographically diverse boards. After being targeted, companies experience higher financial performance while cutting back expenditures on long-term investments, including those in environmental and social projects, which then lead to reversals in earlier performance gains. The effects of hedge fund activism on driving home short-term outcomes is amplified when activists gain seats on companies’ boards as directorships provide activists with direct oversight of corporate decision-making. These findings highlight the intertemporal tension inherent in the pursuit of business sustainability.