The Conference Board Governance Center Blog

Aug
07
2014

Wealth Transfer Versus Wealth Creation

By Donna Dabney, Executive Director, Governance Center, The Conference Board

A recently published article by Dr. Yvan Allaire and François Dauphine of the Institute for Governance of Private and Public Organizations (igopp) is well worth reading.  It expresses common sense thinking about empirical studies, activist hedge funds, and long term sustainable value."Activist” hedge funds: creators of lasting wealth? What do the empirical studies really say?

The specific issue the authors address is the long standing debate whether activist shareholder interventions result in long term benefits to corporations, which we have been following closely at The Conference Board Governance Center. This article analyzes a widely publicized empirical study of the impact of activist hedge fund intervention on financial performance, which concluded that activist hedge fund interventions were beneficial to corporate shareholders over the long term (five years). Allaire and Dauphine refute this conclusion by analyzing the design of the study in detail, noting among other things, that a large number of the companies in the study did not survive for five years after an activist intervention.

Allaire and Dauphine acknowledge that activist hedge funds create short term wealth for some shareholders as a result of traders who jump into a stock when an activist invests in that stock. However, in a majority of cases that effect does not last. They also conclude that in a minority of cases, activists may bring some lasting value for shareholders, but largely at the expense of workers and bond holders resulting in an impact that takes the form of wealth transfer rather than wealth creation.

Wealth transfer rather than wealth creation is a real concern for public companies. The Conference Board Governance Center Task Force on Corporate/Investor Engagement concluded that long term sustainable shareholder value can only be achieved by focusing on those who create corporate value:  the employees, creditors, suppliers, customers, communities, and the environment in which the company operates. A sole focus on shareholder wealth maximization at the expense of those who create corporate value will not be sustainable in the long term.

About the Blogger:

Donna Dabney, Executive Director, The Conference Board Governance Center

Donna Dabney, Executive Director, The Conference Board Governance Center

Donna Dabney joined The Conference Board as Executive Director, Governance Center, in August, 2012. In her current position, Donna leads The Conference Board’s efforts in the areas of corporate governance and sustainable value creation. Prior to joining The Conference Board, Donna was Vice President, Corporate Secretary and Corporate Governance Counsel of Alcoa Inc. and she participated for over 15 years in board and committee meetings of Alcoa and Reynolds Metals Company. As part of her work with the Alcoa Board of Directors, she gained experience with sustainable development in the Amazon region of Brazil. Donna is a member of the board of directors of American Forests, the oldest national conservation organization in the U.S., the New York Advisory Board of the Society of Corporate Secretaries and Governance Professionals and previously served on the board of a public/private consortium promoting development in Richmond, Virgina.



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3 Responses to “Wealth Transfer Versus Wealth Creation”

  1. […] As recognized by The Conference Board’s Task Force on Corporate and Investor Engagement—and many others—over the long-term, creation of sustainable shareholder value requires significant focus on the interests of—employees, creditors, suppliers, customers, communities and the environment in which the company operates (available athttp://tcbblogs.org/governance/2014/08/07/wealth-transfer-versus-wealth-creation/#more-3496). […]

  2. Donna Dabney says:

    Jim, thanks for the comment. We follow Lynn and Margaret’s work and think highly of it.

  3. Great to see the emphasis here on the real creators of wealth. People should take a look back at the work of Margaret Blair and Lynn Stout concerning firm-specific human capital. It isn’t only investors who create wealth.

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