American CEOs were targeted by fund managers and activist investors more than ever last year, though disputes were increasingly settled through negotiations, and management teams often gained the upper hand.
The influence of activist investors such as Elliot Management and Starboard Value has been growing since the global financial crisis, as shareholders became frustrated with meager returns and conservative management decisions. Even though share markets have since bounced back, continuing economic and political uncertainty have made CEOs reluctant to spend large sums of money, leading to a large build up of cash on many corporate balance sheets that some shareholders think could be better spent.
Fund managers not traditionally associated with activism are also more readily targeting boards over the size of executive pay packets or sustainability issues, as public trust in business and government diminishes due to rising income inequality.
Activists and other investors asked for board seats at 212 U.S. companies in 2016, up 14% from 186 a year earlier, according to analysis by research group Activist Insight. The rise continues a steady increase from the 154 companies targeted in 2014 and 113 targeted in 2013.
CEOs and directors, however, appear to have developed more sophisticated defence mechanisms as their experience of activism grows. Similarly, activist investors are now more aware of their limitations, creating a willingness between warring parties to find common ground. Last year, 63% of requests for board seats ended in a settlement, up from 59% in 2015 and 55% in 2014.
Chris Teets, a partner at Red Mountain Capital Partners, said settlements are increasing because at least some activists are gaining more respect from management, who may be concerned about the rising financial cost of drawn out disputes. “There is certainly a heightened willingness to settle between shareholders and management teams, and it tends to be the most egregious cases when you tend to see the fights,” Teets said.
Settlements could arise when CEOs agree with activists’ viewpoints around capital management or visa-versa, preventing the need for boardroom succession. Indeed, the data shows that although requests for board seats have risen, the number of actual board seats won fell last year to 1.5 per company, down from 1.7 in 2015 and over two seats in 2013 and 2014.
One high-profile example occurred at Yahoo, which only gave four board seats to Starboard after it aimed for a management clean sweep.