Diligent Market Intelligence (f/k/a Insightia), October 6, 2023, commentary: "Activism & Voting This Week" [Professional activism viewed as one of reasons for higher rate of CEO change]

Source: Diligent Market Intelligence (f/k/a Insightia), October 6, 2023, commentary

Whether because of burnout, activist pressure or repositioning for a new economic environment, CEOs are on the move.

According to a Diligent Market Intelligence (DMI) article published earlier this year (hat tip to our newswire editor, Antoinette Giblin), 45 S&P 500 CEOs have left their roles in 2023 alone. While 2021 was a “hold the line” year, with a sharp reduction in departures as companies tried to stabilize through the pandemic and beginnings of a supply chain crisis, 2022 and 2023 have seen more changes at the top.

Some of that may be down to activism, according to Antoinette’s article.

After enjoying a period of protection created by the sudden onset of the COVID-19 pandemic and with tightening markets now exposing any lingering performance issues, CEOs who are not seen to be delivering in line with their peers are finding themselves in the crosshairs of activists.

According to DMI data, 16% of all CEOs who left S&P 500 companies so far this year did so after an activist had initiated a campaign at the company within the prior year. This compares to 14% in the 12 months of 2021, and 12% in 2020.

That’s not to suggest that activists are the only reason CEOs will depart at anything above a normal rate. Jeffrey Sonnenfeld, senior associate dean for leadership studies at the Yale School of Management, told me for the piece that other pressures were becoming more pronounced.

“CEOs are growing weary in the job,” he said. “Many of them want to bail out before the 10-year mark. The job has become so wearing, the political scrutiny, the travel, the 24-hour news cycle, it's much different to their predecessors.”

But activism has undoubtedly received significant attention, after some campaigns this year claimed high-profile trophies. To see Carl Icahn calling for a CEO’s head is unsurprising, but Jeff Ubben calling for an external hire is a little more unusual. Clearly, the “leeway” companies had during the pandemic (shallow as it seemed) is at an end.

Activist campaigns designed to oust a CEO are a curious beast. On the one hand, calling for a resignation is cheap and easy to do – many campaigns of this kind can range from a press release to a tweet. At that point, the pressure is on the board to respond.

On the other hand, targeting a CEO raises the stakes of a campaign in a way that can make it harder to win support from other investors for other demands, such as board seats.

“They're going to have to play to the broader shareholder base, and the truth is, index funds own 30% of every company, and they are very long holders so activists have to modulate their message to resonate with the shareholders who aren't necessarily as impatient and are more forgiving, or want to see things play out,” one anonymous advisor told DMI.

The main reason activists concern themselves with CEOs is not necessarily personal, but a means of accelerating other demands such as operational ones. In the absence of favorable circumstances for M&A or balance sheet activism, with financing markets tight and preserving cash a priority, a change of CEO is an all-in gamble on changing the company’s record of execution and priorities. Steven Balet, a partner at Strategic Governance Advisors, explains how activism can drive a wedge between a board and its CEO:

“In the current market where selling the company or buying back shares is not an objective that investors may want or that can be executed well, activists have switched focus to operational changes such as a de-conglomeration, changing its structure, and so on in order to produce yield. These changes are often in conflict with what was the CEO’s prior strategy,” Balet told DMI. “If the CEO doesn't want to pursue the strategy that the board is now switching to, that's probably driving a lot of the change that we're seeing.”

With no apparent return to easy money on the horizon, it’s a fair bet that activists will be looking to oust more CEOs next year. All the better for directors and their executives to get on the same page early.