Shareholder activism is now a global phenomenon. Activists commonly seek to shake up the board of a target company in hopes of instilling change and increasing shareholder value. The impact on target companies can be both disruptive and enduring – often resulting in turnover among top management and in particular chief executive officers (CEOs). A recent study by Lazard found that since 2013, the average annual turnover rate of CEOs at target companies was 23 percent, compared to 12 percent at non-target companies.
It should not come as a surprise that successful activists who secure board seats may have greater influence in locating and retaining management candidates that align with their interests and objectives. A recent study by FTI Consulting of over 300 activist campaigns reveals that within a year following an activist campaign where the activist secured board seats, CEOs were three times as likely to be replaced.
Interestingly, however, CEOs were still twice as likely to be replaced within a year after an activist campaign even where activists do not secure board seats. There are of course many variables involved in considering change of management. One possible explanation is that an activist attack signals to the target company the need for change. Alternatively, the turnover could be a result of the manner in which management handled the activist attack.
All in all, CEOs and other top management alike should consider themselves warned – activist attacks require prompt and effective action to respond to the threat and, if appropriate, address the underlying issues identified by the activists. Their jobs could be on the line.
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The author would like to thank Samantha Sarkozi, articling student, for her assistance in preparing this legal update.
