Consequences to Directors of Shareholder Activism
Executive Summary — Activism by hedge fund and other investors to improve governance and performance of companies has become a significant phenomenon in recent years. In this paper the authors examine a number of career consequences for directors when firms are subject to activist shareholder interventions. Examining 1,868 activism events—all publicly disclosed shareholder activism from 2004 to 2012 conducted by hedge funds or other major shareholders—the authors find that directors exit the board at a higher rate when their firms are targeted by activists. Even directors not specifically targeted by dissident shareholders are also likely to leave the board, as are directors at firms targeted by activism with no board-related demands, let alone a formal proxy fight. Overall, whether departure is voluntary, optimal, or otherwise, the evidence suggests that activism is associated with career consequences for directors. Key concepts include:
- Shareholder activism imposes career costs on directors.
- Shareholder activism in companies results in career consequences for directors even if the activism is not directed explicitly at board representation.
- Directors that receive a greater negative vote percentage in the year of shareholder activism are less likely to remain on the board in the year after activism.
- Directors are more likely to leave following poor performance when there is shareholder activism targeted at the company.
- However, there is no evidence of an impact of activism on director reputation as reflected in directorships on other boards. Even directly targeted directors experience no loss in other directorship.
We examine how shareholder activist campaigns affect the careers of directors of the targeted firms. Using a comprehensive sample of shareholder activism between 2004 and 2011, we find that directors are almost twice as likely to leave over a two-year period if the firm is the subject of a shareholder activist campaign. While it has been argued that proxy contests are an ineffective mechanism for replacing directors, as they rarely succeed in getting a majority of shareholder support, our results suggest that director turnover takes place following shareholder activism even without shareholder activists engaging in, let alone winning, proxy contests. Performance sensitivity of director turnover is also higher in the presence of shareholder activism. We also find that director election results matter for director retention: directors are more likely to leave in the year following activism when they receive lower shareholder support. Contrary to consequences on the targeted firm's board, we find no evidence that directors lose seats on other boards, a proxy for reputational consequences, as a result of shareholder activism. Keywords: Shareholder Activism; Hedge Funds; Independent Directors; Director Reputation; Accountability; Shareholder Voting