Shareholder activism

Companies with women CEOs face higher risk of shareholder activism

New research shows female CEOs of listed companies face a greater threat of shareholder activism than their male peers – an important finding that suggests activism is influenced by CEO characteristics, such as gender, not only firm performance.

The finding is at odds with traditional thinking on CEO gender and activism. It is thought that activists, such as hedge funds, are interested only in firm performance and thus agnostic to CEO gender. Also, that female CEOs of large listed companies, often having overcome barriers to get the top job, are viewed more favourably by activist investors.

United States academics, Vishal Gupta, Sandra Mortal and Daniel Turban, hypothesised that activist investors are susceptible to gender bias when choosing companies to target, and may succumb to gender stereotypes when assessing companies in uncertain situations.

“CEO gender may be a crucial, yet neglected, aspect of shareholder activism,” they wrote for the Harvard Law Forum on Corporate Governance and Financial Regulation.

Their study examined more than 3,000 US firms, of which half had an activist filing, between 1996 and 2013. Women occupy almost 5 per cent of CEO positions among Fortune 500 firms, so there was a sufficient sample to determine the effect of gender on activism.

The researchers found women CEOs have an almost 50 per cent higher probability than a male CEO of becoming a target of shareholder activism. Moreover, women CEOs had a 60 per cent higher probability of coming under attack from groups of activist investors, the so-called “wolf packs” that band together to force corporate change, usually in high-profile disputes.

The probability of a Fortune 500 company being targeted by an activist, currently 6 per cent, rises to 9.4 per cent if a woman is CEO.

The researchers wrote: “Our results suggest that female (compared to male) CEOs have to deal with additional challenges imposed by activist investors and are more vulnerable to activists’ efforts towards wielding power in the firm. Such results support the proposition that women executives receive more scrutiny and face more challenges than men in similar positions.”

The researchers said these activist challenges can escalate for women CEOs over time, distracting and undermining their leadership efforts.

They added: “Our results suggest that gender stereotypes are alive, well, and busy producing workplace discrimination even at the highest level in the firm. Furthermore, because the CEO position is high-profile and public, our finding that women CEOs receive more scrutiny and interference from external constituents is also troubling for women who occupy other C-level positions. It is possible that women in these C-level positions also may be more likely than their male counterparts to receive unwanted direction from external constituents (shareholder activists) who want to tell them how to do their job.”

Does activism work?

Much has been made of the boom in shareholder activism worldwide. Less considered is the frequency and success of activists across countries and regions - trends that offer insights for Australian boardrooms battling shareholder activists.

European researchers have produced one the largest global studies of shareholder activism, analysing 1,740 activist engagements across 23 countries in Asia, Europe and North America, over 10 years. Their paper was published in The Review of Financial Studies journal.

Co-authors Marco Becht, Julian Franks, Jeremey Grant and Hannes Wagner, found the United States, United Kingdom and Japan are easily the largest markets for investor activism.

They found activist investors, on average, held 11 per cent of the target company’s stock. As such, activists require support from other investors, such as superannuation funds. Activist investors working together on campaigns are associated with almost a quarter of engagements and achieve some of the highest returns, estimate the authors.

This an important finding for Australian boards. More institutional investors are expected to team up on activism campaigns, creating stronger opposition for targetted companies. Boards will have to understand their shareholder base, and how key investors might form alliances over governance or firm-performance issues, like never before.

On activist performance, the study found the probability of an activist being successful in achieving at least one engagement outcome is 53 per cent. Success varies widely across regions: US activists have a 61 per cent chance of achieving at least one outcome, European activists have a 50 per cent chance and Japanese have only an 18 per cent chance.

The authors found activist campaigns that drive executive/board change exhibit positive and significant abnormal returns for the entire activist program. There was a noticeably large difference in returns from successful and unsuccessful activist campaigns.

Moreover, the study found the most profitable activist campaigns are takeovers preceded by governance change, such board restructuring. “They signal that the outcome is a consequence of action taken by the activist and may not occur without engagement,” wrote the authors.

Another key finding was that foreign institutions, particularly those from the US, play a more important role in activism campaigns than domestic investors. The rise of US hedge-fund activism, which is spreading to more countries, including Australia, is an issue for boards.

US activists tend to achieve higher outcomes and returns from their campaigns, a reason why they are attracting capital and focusing on more companies in more markets.

  • Becht., M, Franks, J., Grant, J., Wagner, H., “, “Returns to Hedge Fund Activism: An International Study,” The Review of Financial Studies, September 2017.

Understanding how activists use social media in proxy campaigns

US President Donald Trump’s use of Twitter to make major policy pronouncement and share his views on global affairs is a sign of the times. In business, several activist investors have embraced social media to criticise companies to the widest possible audience.

Boards must understand the effect of social media on corporate reputation. They should know how activists use social media to undermine companies, executives and directors; have appropriate social-media monitoring processes in place; and have communication strategies and internal/external investor-relations support should activists strike.

New York law firm, Olshan Frome Wolosky, ranked the top US law firm for advising on activist campaigns, says activists view social media as an increasingly important channel to get their message to shareholders. Its partners wrote in the Harvard Law School Forum on Corporate Governance and Financial Regulation: “More activists will use multiple online platforms as part of comprehensive digital and social-media strategies for their campaigns.”

Olshan says shareholder activists see social media as a cost-effective, impactful and targeted way to reach investors groups. When combined with search-engaging marketing, activists can better research a defined audience and give their message higher priority.

Moreover, effective use of social media helps activists maintain contact with investors and include links to campaign websites that have detailed information and a stronger call to action. That maximises investor engagement and boosts the campaign’s “story-telling” ability.

Data analytics that accompany social media allow activists to measure interest in their message, and refine and optimise it in real-time, similar to how political parties use social media in election campaigns. This is powerful information in highly contested activist campaigns.

The authors note several US rules governing communications that may constitute the solicitation of shareholder proxies. But growing use of social media by activists, such as US investor Carl Icahn (a noted Twitter user) and Elliot Management, suggest companies have found ways to use social media in campaigns and meet their regulatory obligations.

The implication for Australian boards is clear: directors who govern listed companies that are targeted by activists need to understand social media’s potential to influence investors in proxy battles – and how to fight back.

  • Freedman, A., Mantel, K., Berenblat., R., Wolosky, S., “Social Media and Proxy Contests,”, Harvard Law School Forum on Corporate Governance and Financial Regulation. November 2017.