What Hedge Funds Can Teach Corporate America: A Roadmap for Achieving Institutional Investor Oversight

Hedge funds and other private equity funds are aggressive monitors of corporate America. Their investment strategies are designed to squeeze agency costs and other inefficiencies out of under performing companies. Mutual funds and public pension funds, by contrast, have remained relentlessly passive despite their many resources. Rather than seek to improve the performance of their portfolio companies, they generally prefer to exit any investments that turn sour.

Why the difference? In this Article, I compare the business environments and regulatory regimes affecting different types of institutional investors. I conclude that the primary reason that most institutional investors do not better discipline corporate wrongdoing is that their individual fund managers have little incentive to do so. Were they permitted to adopt the incentive compensation structure of a hedge fund, however, mutual funds and public pension funds would compete to provide the oversight necessary to make corporate managers more accountable.

The result would be a deeper market for good corporate governance.