Member countries of the Organisation for Economic Co-operation and Development have agreed that the corporate governance practices of private equity firms and hedge funds are best addressed within the framework of the existing OECD principles of corporate governance, rejecting the idea of a separate code for alternative investment managers.
The OECD says it is essential to take into account existing voluntary codes and industry guidelines when addressing issues that have attracted public concern, such as conflicts of interest, the efficiency of the market for takeovers, transparency around major shareholdings and the robustness of voting systems.
'A close dialogue with the hedge fund and private equity industry on corporate governance is essential,' says Marcello Bianchi, who chairs the OECD steering group on corporate governance. 'We will therefore compare all the voluntary standards that are already out there and look for ways to develop a dialogue with representatives from the industry about key corporate governance issues.'
The steering group's conclusions are based on a new OECD report entitled The Implications of Activist Hedge Funds and Private Equity Firms in Corporate Governance, which argues that they can play a positive role in corporate governance of publicly held companies, because they often act as informed owners and take a more active role in monitoring the performance of companies and their management than other institutional investors.
Last November, the OECD steering group launched a study of the role of privately organised pools of capital in corporate governance, focused on those private equity firms and hedge funds that pursue investment strategies explicitly aimed at increasing the value of their capital through active engagement with publicly-held companies. The inquiry did not cover other policy aspects, such as financial stability or the participation of retail investors in private pools of capital.
While private equity firms and activist hedge funds have been operating for some time in both the UK and the US, they are comparatively new in many other jurisdictions where they have been subject to increased attention, partly due to differences in corporate governance frameworks and company structures.
With a rapid increase in the size of transactions and investments, there has been a growing public interest also in the US and the UK. The steering group agreed that the distinct corporate governance aspects that emerge in these discussions required special attention based on the OECD principles of corporate governance.
On the basis of available evidence, the steering group concluded that 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, including demands for changes in management, the composition of the board, dividend policies, company strategy, company capital structure and acquisition plans.
The group argues that 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. Promoting efficient outcomes for actions taken by active and informed ownership is therefore likely to remain an important policy objective for the years to come.
The group discussed the potential implications for some areas of the OECD principles, including the efficiency of the market for corporate control (including takeover regulation), transparency requirements, the reliability of voting systems and the monitoring/management of conflicts of interest through the exercise of fiduciary duties by management and boards.
It was agreed that, from a corporate governance perspective, there was no need to promote a special set of principles for private equity firms and activist hedge funds, but that the opportunities and challenges that follow from their ownership strategies should instead be analysed within the general framework of the OECD principles, taking into account existing voluntary standards established and promoted by the industry.