Nowadays, it’s impossible for CEOs to get away with doing as they please. The next generation of investors and shareholders greatly value authenticity and sustainability, an assertion that is backed by the fact that environmental, social, and governance fund assets reached $2.5 trillion at the end of 2022.
ESG standards are gaining greater popularity with each passing year, primarily because Gen Z cares about the environment, social justice, and the treatment of employees, having vowed to keep CEOs accountable to those same values. While many initially assumed these attitudes were nothing more than a passing fad, shareholder activism has only strengthened over the last decade.
In some sense, activists have always been calling out the actions of CEOs, and that is not necessarily a bad thing. It’s important for both the public at large and shareholders to say something when CEOs are being paid too much and not doing enough to provide the value they promise.
However, the shareholder activism of today takes the concept to a new level. It’s no longer simply about public outcry; now, information that a CEO may have once thought was private can be held against them, with shareholders complaining that a failure to address a CEO’s misdeeds can actually be seen as a failure on the part of corporate governance.
In recent years, these campaigns have become much more strategic and targeted in nature, being used as a way for particular investors to force the change they want to see in some cases. As such, CEOs must always be prepared to respond and negotiate to hold on to their top spot.
With the rise of social media has come the proliferation of increasingly public shareholder activism battles. The past decade alone has undoubtedly produced some memorable incidents between shareholders and CEOs, such as:
Known to the public as “Resumegate,” the 2012 incident involved hedge fund investor Dan Loeb specifically targeting Yahoo’s then-CEO, Scott Thompson, regarding a discrepancy on his resume. Thompson claimed he had a computer science degree from Stonehill College, but as it turns out, it was an accounting degree. Amid Loeb’s efforts to improve governance at the company, Thompson resigned from Yahoo later that same year.
Specialty metals manufacturer Arconic went head to head with 13.2% stakeholder Elliott Management (EM) in 2017 over missing performance targets and constantly lagging behind industry peers. The battle eventually resulted in the departure of Arconic CEO Klaus Kleinfeld after the executive sent a threatening letter to EM’s founder for criticizing his leadership skills.
In another of 2017’s many “Activist vs. CEO” campaigns, hedge fund Marcato Capital successfully ousted Buffalo Wild Wings CEO Sally Smith by winning a proxy contest that put three of its own on the company’s board of directors.
As the restaurant chain struggled to raise its market value, Marcato believed new leadership was needed to steer it in a new direction. After two-thirds of shareholders voted for Marcato’s nominees, Smith made the tough decision to retire.
With a 4.9% stake in CSX Transportation, special purpose vehicle Mantle Ridge pressured the company to make veteran railroad executive Hunter Harrison its new CEO. After a months-long public battle between the two entities, Mantle Ridge eventually won on their terms, securing a four-year deal for Harrison and multiple seats on the CSX board for its own nominees.
Billionaire activist and investor Carl Icahn recently sued the board of genetic analysis company Illumina, Inc. for alleged breaches of their fiduciary duties, claiming that Illumina acquired cancer diagnostic testing company GRAIL without regulatory approval.
Icahn also launched a proxy battle in which he claimed the GRAIL deal reduced shareholder value by $50 million, and he then requested the departure of then-CEO Francis deSouza and several other board members. While deSouza did win enough votes to stay, he still ended up resigning from the company after the annual shareholder meeting.
CEOs generally have a lot of power over the companies they run. Not only do they decide the company’s strategic objectives, but they also exercise control over operations, finances, performance, and environmental or social initiatives. Additionally, they provide a face and a voice to the company, representing the entire enterprise to the public.
Still, the effectiveness of shareholders in holding CEOs accountable has varied, and such activism has not always unseated CEOs at a predictable clip. It was the 2017 proxy season that changed a lot, with the phenomenon remaining quite rare until then, barring situations in which an executive’s blatant misrepresentation or questionable behavior led to an uproar and their subsequent departure.
Though trying to replace a CEO at a shareholder meeting isn’t the norm, it’s important that CEOs are aware that it can very well be done. As such, executives should avoid behaviors that can be interpreted as wrongdoing, including clearing up anything in their backgrounds that can make them seem unqualified for the job or as if there is a compensation mismatch.
However, it also means that they need to communicate to shareholders that they are doing everything in their own power to create success in strategic execution and financial performance. When shareholders truly believe that a CEO is actively creating value for them, they may be more likely to work with instead of against them.
At the core of the activism of today’s shareholders is a desire for CEOs to value the same things they do. Not only do they expect those at the top to act with integrity at all times, but they also want to ensure that those higher-ups have plans through which they will take their businesses to the next level and maintain that upward trajectory.
It’s not only critical for CEOs to have the business acumen to make that happen but also to continually communicate their plans so that shareholders know how they expect to achieve growth. Without these elements, top executives may find themselves embattled with those who demand better.
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