American Directors are Warming to Activist Investors

The lackluster financial performance of many companies in the wake of the financial crisis and a lingering tendency to hoard cash on balance sheets has sparked a rise in shareholder activism, led by the likes of Carl Icahn and Dan Loeb, who are increasingly winning board seats as they agitate for change.

Recent high-profile targets include Yahoo, which succumbed to demands to run a sale process that culminated in Verizon’s bid for its Internet assets, eBay, and more recently, Samsung.

A new survey of 884 public company directors published by consultancy PwC found that 80% at least somewhat agreed that shareholder activism has compelled them to more effectively evaluate company strategy and capital allocation.

“The board-centric model that took hold in the 1990s due to a number of corporate scandals has continued to transition to an investor-centric model,” PwC’s Paula Loop said. “As a result, investor voices continue to get louder, and boards can no longer ignore them.”

For CEOs, that means investors are having a greater say on a number of issues, including deciding how capital gets allocated. They’re also promoting longer-term strategy horizons, suggesting new directors and influencing executive pay.

For example, when it came to bringing on new blood, the survey found that recommendations from existing directors continued to be the most widely used source for identifying candidates. However, there was an increase in the proportion of directors who said their board uses recommendations from investors, which rose to 18% in 2016, from 11% in 2012.

Almost half of the respondents said their company had increased share buybacks due to actual or potential investors demands, while 38% said their companies initiated or increased dividends.

Despite this apparent openness to investor suggestions, the results of the survey may cause some concerns for CEOs, who often have their plans for a company openly criticized by activists. According to recent research by advisory group FTI Consulting, CEOs are twice as likely to leave their post if an activist investor obtains board seats.

PwC’s survey also found that 35% of directors thought that someone on their board needed to be replaced, chiming with the results of an RHR/NYSE study on director performance.