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Activism`s consequences and effects on directors`careers

In this post we will analyse the effects of shareholder activism in a different direction than the one researchers usually target, (effects on firm performance and shareholder value).

The authors, Gow, Sean Shin and Srinivasan, extract the conclusion that directors having faced an activist campaign are twice as likely to leave their job as their fellow directors haven`t been confronted to it. So, apart from other consequences on firm performance and shareholder value, activism has career effects and costs for directors. (1)


It has been argued that proxy contests are an ineffective and inefficient tool for replacing directors, but according to Gow, Sean Shin and Srinivasan, the activists replacement seed grows even if activists don´t even engage in such a proxy fight. The seed grows even stronger when directors having faced a campaign are afterwards given a low approval rate at elections; nevertheless, their reputation does not seem to be affected overall, as they don`t usually lose their other board seats in other firms.


I will try to briefly explain how the authors get to their conclusions, and above all explain their and my view on the reasons why these consequences occur the way they do.


Gow, Sean Shin and Srinivasan base their job on a broad sample of activist campaigns deployed between 2004 and 2012 in the USA.


The data. The authors use diverse data sources to get information about directorships, affairs voted at the firm level, and activism events.


a) Director Turnover discussion. Authors test the hypothesis that Director Departure depends on campaigns not addressed to directors and those addressed to them, (whether they ended in proxy fight or not). They also control for firm, (performance, size, leverage, payout dividend, analyst coverage and institutional ownership) director, (age, tenure, ownership, and commission participation) and activist campaign characteristics, so as to better clarify the relationships with departure. Their main conclusions are:

–         Directors facing activism see how their departure probability increases, even if the campaign is not directed to their substitution.

–        Their departure likelihood rises when the campaign directly targets them.

–         Proxy fights nevertheless do not affect departure.

–         Activism by the big activists raiders, (Icahn and others) has no differential effects.

–         Directors on the compensation or audit committees are less likely to leave the board.

–         Older directors are more likely to leave.

–         Departure uses to take place in the year of the campaign or one year afterwards, and very often before the first year shareholder meeting.

–         There aren`t any differences between independent and insider directors either.


Shareholder activism and performance sensitivity of director turnover. Increased sensitivity is seen in the literature as a sign of beneficial effects of activism. The authors try to verify whether this increase takes place or not. Their study suggests that at least for independent directors, activism in actually increases this sensitivity.


Settlements with activists and director turnover. When the authors analyse cases where some seats were granted to activists without a formal proxy fight having taken place, they conclude that there also exists a relation with increased director turnover, which seems quite intuitive.


b) Voting in director elections. Authors tests whether the against percentage vote is affected by activism, (after firm and director characteristics are controlled) . Their conclusions are the following:


–         Negative votes increase in targeted firms, and the effect is higher when activism is director-related.

–         The impact remains after a number of years.

–         Results are similar for independent and insider directors.


Does this increase in negative voting affect director turnover?. Is this effect strong enough? Prior literature seems to find higher Ceo and director turnover after negative voting, but also lower compensation and other effects. Gow, Sean Shin and Srinivasan conclude though, that even if activism increases turnover in itself, its effect in negative votes for directors is not strong enough to lead by itself to higher turnover.


c) Directorships in other boards. Prior literature remarks that activism affects director`s reputation, thus damaging their capacity to retain their nominations in other boards and obtain new ones. Gow, Sean Shin and Srinivasan don`t find any evidence of that. They even find a positive effect for independents` future and new nominations, as they would probably see their availability increase after losing a job, rather than losing attractiveness.


d) Effects on directors directly targeted. There seems not to be a direct effect for directors being targeted.



This articles contributes and counters the view that negative votes are ineffective in removing directors, (Cai et al, (2)); it also counters Bebchuk (3), who argues that proxy contests are ineffective in replacing directors; it also counters the intuitive Fama and Jensen job in which they argued that director performance affects the market for directorships, (4). The authors outline very sharply that their job has no normative prescription as to whether activism related director turnover is in itself beneficial for the firm or shareholder value, as this was not what they tried to prove. We have avoided to discuss the first part of the article related to prior research on the topics trey try to contribute to, but we strongly recommend readers to dive in those waters.


As a main conclusion, the paper contributes to the idea that activism has a career cost for directors in itself, although some other intuitive ideas are not supported, (particularly regarding individually targeted directors, or regarding the effect of increased negative voting in director turnover). And broadly speaking, directors should take care of all the topics activists pursue in their campaigns and previous research, so as to avoid their actions and increased turnover. If not for the firm-performance, or for the shareholder value, for their own interest!


(1)   Gow, Ian D., Sa-Pyung Sean Shin, and Suraj Srinivasan. “Consequences to Directors of Shareholder Activism.” Harvard Business School Working Paper, No. 14-071, February 2014.

(2)   Cai, J., Garner, J., Walkling, R., 2009. Electing directors. Journal of Finance 64: 2389–2421. http://faculty.lebow.drexel.edu/CaiJ/JF2009.pdf

(3)   Bebchuk, L.A., 2007. The myth of the shareholder franchise. Virginia Law Review 93: 675–732. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=952078

(4)   Fama, Eugene F. and Jensen, Michael C., Separation of Ownership and Control. Michael C. Jensen, FOUNDATIONS OF ORGANIZATIONAL STRATEGY, Harvard University Press, 1998, and Journal of Law and Economics, Vol. 26, June 1983. Available at SSRN: http://ssrn.com/abstract=94034


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