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Activist directors: determinants and consequences

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Abstract

This paper examines determinants and consequences of hedge fund activism, focusing on activist directors, i.e., directors appointed in response to activist demands. Using a sample of 3,259 activism events from 2004 to 2016, we identify 1,623 activist directors. Compared to other newly appointed directors, these activist directors tend to be younger, more likely to have finance and accounting skills, and less likely to be female. We find that the likelihood of acquiring board representation is associated with weaker market performance or lower payout ratios. Following the appointment of an activist director, we find evidence of increased divestiture, decreased acquisition activity, higher CEO turnover, increased leverage, higher payouts, and reduced investment. Our analysis of data on activists’ stated demands also shows that activist directors are effective in helping activists achieve their goals, consistent with the notion that board representation is an important mechanism for activists to bring about desired changes. Finally, we find positive abnormal returns of 1% when an activist director is appointed and a 3.2%-point increase in return on assets over the subsequent five years with an activist-affiliated director.

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Notes

  1. More traditional activism has often been initiated by pension funds and individual activists (sometimes called “gadflies”) with relatively weaker incentives to generate higher returns by influencing the management of a firm.

  2. Coffee et al. (2019) suggest that one benefit of board representation is access to insider information that can be traded on, though such trading would be illegal in many circumstances.

  3. We additionally require that the target firm be matched to CRSP, not be an investment trust or mutual fund, and that the event not be a control contest involving another corporation.

  4. Gow et al. (2019) show that activism is often associated with the departure of incumbent directors.

  5. As discussed in Section 5, pension funds have a typical duration of two years, and investor relations professionals consider a horizon of more than 2.8 years to be long-term.

  6. Material in this subsection draws primarily from synopses provided by SharkWatch.

  7. https://www.sec.gov/answers/sched13.htm, last updated 2012-12-05.

  8. https://www.sec.gov/divisions/corpfin/guidance/reg13d-interp.htm, last updated 2016-07-14. Also, see SEC Rule 13d-1(c)(1).

  9. deHaan et al. (2019) find neither positive nor negative long-term returns from hedge fund activism.

  10. We calculate 634 using data reported in Table 5 of Bebchuk et al. (2020): \(634 = (0.65 + 0.94) \times 399\), where 399 is the number of activism events implied by the values in the first two columns (e.g., \(399 = 335 \div 83.96\%\)).

  11. See www.whalewisdom.com.

  12. Equilar is an executive compensation and corporate governance data firm.

  13. SEC rules require a company to disclose whether it has at least one “audit committee financial expert” serving on its audit committee, and, if so, to disclose the name of the expert and whether that person is independent of management. See http://www.sec.gov/rules/final/33-8177.htm.

  14. Proxy filings are the primary source for Equilar’s data.

  15. While it would have been better to examine whether activist directors bring unique skills to the board, we could not collect data on the skills of non-activist directors, due to the high cost of data collection. Instead we used skills reported by Adams et al. (2018) as a basis for comparison.

  16. In an untabulated analysis, we also examined differences in skills between unaffiliated and other directors and found that unaffiliated directors have fewer skills overall, compared to other directors.

  17. ISS policies explicitly reflect the preferences of institutional investor clients, so ISS recommendations are plausibly co-determined with the vote outcomes. As such, the inclusion of the ISS indicator may provide a conservative estimate of shareholder support for activist directors.

  18. We also present an analysis of the career consequences of activist directors, examining their directorships in other companies. See Table IA.5 in the online appendix.

  19. We define the entry date as the record date of the first continuous date of the 13F filing in which the stock is part of the activist’s portfolio. We define the exit date as the record date of the first 13F filing in which the stock is no longer part of the activist’s portfolio.

  20. This is consistent with the shorter period from entry to the announcement of activism for Affiliated director cases.

  21. This may be associated with the higher likelihood of the target firm being acquired in Unaffiliated director cases; see Table 10.

  22. We further examined whether activists’ achievement of their goals is associated with their holding period (untabulated) and did not find a statistically significant difference between cases where the demands were met and those where they were not.

  23. The results from logistic regressions with dependent variables as indicators for activism are consistent with prior literature. The results are presented as Table IA.1 in the online appendix. We find that higher analyst following, higher institutional holding, poorer performance, smaller size, and higher book-to-market ratios are associated with a higher likelihood of being targeted for activism. We control for these variables throughout our analyses. See Table 1 for the definition of these variables.

  24. These demands were collected and classified by the SharkWatch database.

  25. Though we cannot identify the related demands based using SharkWatch, we also study two more variables, namely capex and R &D, as they are of interest for many activism events.

  26. This analysis does not exploit the precise timing of, say, activist director appointments, relative to divestitures/acquisitions. For example, a divestiture that occurs during years \(t+1\) and \(t+2\) is coded the same whether it occurs before an activist director appointment or afterward. To account for the timing of outcomes relative to activist director appointments or announcements of activism, we conduct an alternative analysis in which we start the two-year window with the first appointment of activist directors (for Activist director events) or the first announcement of activism (for Other activism events) instead. The results are mostly consistent. See Table IA.3 in the online appendix.

  27. We combined the Affiliated director and Unaffiliated director indicators for this analysis, due to a limited number of observations with demands such as Block merger.

  28. There is no separate main effect for the demands because demands are only present when there is some form of activism.

  29. The difference between the coefficients on Activist director and Other activism is statistically significant at the \(1\%\) level (reported as Table IA.2 Panel A in the online appendix).

  30. On the other hand, we find the coefficient on Other activism \(\times \) Block merger is positive, which we interpret as consistent with the Block merger demand being made precisely when a firm being acquired is more likely.

  31. We also examine the cases with multiple activist directors separately from those with a single activist director in the online appendix to investigate the effect of the intensity of the changes in board composition. Our analysis reveals a significant interaction effect between the presence of multiple activist directors and the presence of a payout-related demand on the payout ratio (see Table IA.4 in the online appendix).

  32. Using the date of appointment of activist directors is problematic, as activist directors can be appointed later in activism campaigns, inhibiting distinguishing changes in performance due to activist directors from those due to other actions of the activists.

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Acknowledgements

We thank the Division of Research at Harvard Business School, University of Melbourne, and National University of Singapore for financial support as well as the two anonymous reviewers, seminar/conference participants at Harvard Business School, HBS IMO Conference, Kellogg Accounting Research Conference, University of Miami, and AAA Annual Meeting for helpful comments and suggestions.

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  1. University of Melbourne, Melbourne, Australia

    Ian D. Gow

  2. National University of Singapore, Singapore, Singapore

    Sa-Pyung Sean Shin

  3. Harvard Business School, Boston, MA, USA

    Suraj Srinivasan

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  1. Ian D. Gow
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Correspondence to Sa-Pyung Sean Shin.

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Gow, I.D., Shin, SP.S. & Srinivasan, S. Activist directors: determinants and consequences. Rev Account Stud (2023). https://doi.org/10.1007/s11142-023-09767-8

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