H Hedge Fund Activism in Corporate Governance Alessio M. Pacces Erasmus School of Law, Rotterdam Institute of Law and Economics, Erasmus University Rotterdam, Rotterdam, The Netherlands Definition Hedge fund activism is an important disciplinary mechanism in corporate governance. It consists in actions aimed to change the way a company is managed, without trying to gain control. Because hedge funds aim to profit from these actions, this is called entrepreneurial shareholder activism. A hedge fund campaign can only succeed if a majority of institutional shareholders supports it. The question whether hedge fund activism leads to inefficient short termism in corporate governance can only be answered by looking at which investors are decisive on such campaigns. Although the empirical evidence on this is still unclear, index funds seem to be decisive in most instances. Because of their incentives, index fund man- agers cannot be trusted to make an informed deci- sion about whether the company should be managed for the short term or the long term. It turns out that the optimal choice in this respect varies with the individual companies and with time. As a result, companies should be enabled to opt out of hedge fund activism by way of dual- class or at least loyalty shares, if a majority of institutional investors agrees to this solution ex-ante. Introduction Some ten years ago, a prominent law and econom- ics commentator defined hedge funds (and private equity funds) “the newest big thing in corporate governance” (Macey 2008: 241). Activist hedge funds are definitely the big thing in corporate governance today. They intervene in corporate governance with the goal to make changes hap- pen. So do private equity funds, but there are two differences. For one, hedge funds are supposed to unlock existing value, whereas private equity pur- ports to create new value. Secondly, hedge funds confront the management of public companies, whereas private equity makes friendly deal with them to take the company private. This entry focuses on hedge fund activism as a disciplinary mechanism in the governance of public companies. Although hedge fund activism has emerged as an US phenomenon, it has now become interna- tional (Becht et al. 2016). Hedge fund activism is increasingly prominent in Europe, for instance, in the UK. Moreover, hedge funds are active in con- centrated ownership structures, too. Somewhat surprisingly, activist hedge funds have succeeded in extracting concessions also in the presence of # Springer Science+Business Media LLC 2018 A. Marciano, G.B. Ramello (eds.), Encyclopedia of Law and Economics, https://doi.org/10.1007/978-1-4614-7883-6_716-1