A Long-Term Perspective on Activists

Leadership StrategiesLeadershipBoard Composition and SuccessionBoard and CEO AdvisoryLegal, Risk, and Compliance OfficersBoard Effectiveness
min Interview
December 12, 2018
8 min
Leadership StrategiesLeadershipBoard Composition and SuccessionBoard and CEO AdvisoryLegal, Risk, and Compliance OfficersBoard Effectiveness
Shareholder activism is on the rise, but what it means for CEOs and boards is changing.


We talked to Columbia Business School professor Wei Jiang, who has tracked activists for the past decade, about activists' new strategies and how executives and directors should respond.  

2018 was an intense year for activist investors. With Elliott Management, Starboard Value and GAMCO Investors leading the way, activist investors had targeted 174 companies and secured 130 board seats by the end of the third quarter, easily surpassing 2017’s full-year tallies and on track to break records from previous years, according to research compiled by Lazard.1 

For CEOs and board members, this unsettling reality raises new questions about how best to react – and even prepare in advance for – activist overtures. Boards can often create a defense strategy before activists knock at their door by proactively assessing themselves with the five filters activists typically look at to determine their targets (see Russell Reynolds Associates’ paper on this topic, Clear Eyes Provide Boards with Better Vision).2 

In the big picture, however, activists are increasingly speaking for other large investors, and winning concessions through persuasion rather than force, according to Wei Jiang, the Arthur F. Burns Professor of Free and Competitive Enterprise at Columbia Business School. Professor Jiang first began studying activist investors in 2003, back when just a handful of firms qualified for the label, and when the prime venue for the activity was to open up deeply discounted closed-end funds. With co-authors Alon Brav, Randall S. Thomas and Frank Partnoy, she published a landmark study in 2008 documenting the strategies of activist firms and what they meant for companies in the firms’ cross-hairs. As shareholder activism has taken off in the years since, Jiang has continued to track how activists affect CEOs, boards, company performance, and corporate controls via either takeovers or proxy contests. 

We spoke with Professor Jiang to learn more about how what drives today’s activist investors and what options CEOs and boards have when it comes to working with them. 

What makes a company a ripe target for an activist - and how has that changed over the time you've studied this topic?  

One of the biggest changes is in company size. Before the financial crisis, very large cap companies were usually not targeted. The model was that an activist would hold 5 to 10 percent of medium-sized companies. Now, no range of market cap will make you immune from becoming a target of activists. Investors including Icahn, Trian Capital and Elliott will hold just 2 or 3 percent and are able to have a big voice in a giant corporation. 

There is also much more activism around M&A, or control changes, which is relatively new. In these cases, activists often want to redraw the boundaries of the firm. 

Some of the other factors have not changed, however. The stock return, relative to peers, is still probably the strongest predictor of being a target. If one company significantly lags industry peers for two years, they are a very obvious target. Another is when management repeatedly misses forecasts or doesn’t deliver what they promised investors. One other clear factor in this operational category is when a company has assets in different segments with disparate growth potentials and profit margins but without clear synergies. 

Besides operational issues, a second class of issues that attract activists are driven by financial policies, such as holding too much cash. The third category of activist activity involves governance issues, usually related to board members with extraordinarily long tenures who may be too “friendly” with the managers. 

What typically happens to the CEO and the board after an activist intervention? 

When any activist campaign starts, CEO turnover about doubles. Normal CEO turnover is about 12 percent per year; if an activist knocks on your door, about one-quarter of the CEOs will experience turnover in the coming year, and turnover will remain higher than normal for another two years. 

When it comes to board seats, on average there will be one to two new people added to the board, but it’s not necessarily “My people replace your people.” If you look at the whole sample, it’s a net addition of one director. 

The challenge to the whole board is how to internalize that new addition. They’re clearly coming from a different camp, but now they’re one board and share the same fiduciary duties, and answer to the same shareholders. That is the main challenge they face. And most of those board members, particularly those who come through settlement, do win support in future years, so these are not just two- or three- year board members. 

Your research shows that about half of the announced proxy contest went into settlements during the last 10 years, and that number seems to be rising, based on recent years. Looking at these trends, do you think CEO's and Boards are making the right choices for their companies?  

Many times, it’s not really a choice. We have a new work that looks at how institutional investors vote in proxy contests and how firms and activists (and their advisors) can potentially calibrate support levels: You look at who your shareholders are and how they voted on past similar contests, and estimate how they are likely to vote in yours. We find settlements are more likely when anticipated support for the activist is higher. It’s analogous to settling a lawsuit vs going to trial. If management feels the other side has a decent probability of winning, and they have more to lose, settlement is the wise thing to do. 

Also, the law is asymmetric. If the company goes to proxy battle and loses, the CEO and some directors will almost certainly lose their jobs. If the activist loses, though a serious dent, they still manage their funds and they go for their next target. And sometimes they still get what they want. Dupont won the proxy context against Trian, for example, but in the end they did most of what Trian asked them to do. 

So how should CEO's and boards handle an activist critique of their company? 

Often times there is a contest because there are different visions – but the first step is for the management to acknowledge that everyone at the table wishes the firm well. Building a basic sentiment of alignment is important. The arguments you hear all the time – that one vision is short-termist and one vision is long – do not go well today. 

Management has to realize that even though activists might hold 5 percent of the firm, they’re not just talking about their 5 percent, which wouldn’t carry the vote in any case. They are presenting these alternative versions for the firm’s future because they feel they have the large institutional investors – the Fidelitys and Black Rocks of the world – behind them. When [an activist] comes to this stage, they have done their homework as to what extent these large institutional investors will support them. BlackRock is the epitome of long term investment, but in our sample of votes over the last 10 years or so, Black Rock supported dissidents in proxy contests over 40% of the time. 

The CEO needs to realize the pivotal voters are the large institutional voters and you need to convince them. If company truly feels the activists are wrong, they have to better communicate their vision. But everyone at the table wants the valuation to go up, so don’t focus on the motive issue. 

Your research has documented some surprisingly positive effects for companies when activists get involved. What exactly happens to stock prices when activists get involved? 

Overall, we discovered a 5 to 6 percent announcement-period stock price pop. Afterwards, in the longer term, it becomes a random walk, which means markets neither under-react or over-react. My co-authors and I have a couple of papers that show a very coherent message in that value appreciation usually comes from asset reallocation: the companies trim down non-productive projects, stop bad acquisitions, and sell off underperforming assets. When we look at the technology space, if they have a portfolio of patents, we find after the campaign they really focus on their key technology class and sell off some peripheral segments. 

To some extent, the firms retreat to their core competencies. The other thing is that in any firm that has multiple segments, you tend to have good ones subsidize bad ones. When that is stopped, the healthiest parts of the firm can grow without encumbrance, and the weaker ones can be rematched to more suitable owners. 

Are there any examples of an activism in the news this year that you think are particularly interesting, or illustrative of the trends you find in your research?  

I have to say, I was so struck by how slim the winning margin in some recent contests. In Dupont, the winning margin was between 2 and 3 percent, for P&G, it was .02 percent – which meant about 1000 investors could have been pivotal. To some extent, it shows in most cases, people figure out who has the better version of the company and avoid going into the contests. When both sides stick to their guns and go to proxy battle, it means both sides really have merits. 

For management, the challenge is for them to articulate better why what they have in mind is better for the firm and how – in a very targeted way -- investors’ concerns could be addressed in their version. They can’t just accuse the activists of being short-termists because it is not obvious how anyone can pull out a short-term gain by tanking the long-term perspective. 

1 Lazard’s Review of Shareholder Activism - Q3 2018

2 Jack “Rusty” O’Kelley III, Clear Eyes Provide Boards With Better Vision