CEOs Are More Vulnerable Than Ever as Shareholder Activism Rises

Since shareholder activism emerged as a distinct asset class more than a decade ago, shareholder activists have helped identify and criticize underperforming companies for failing to create value for shareholders.

Serving this function, which has added a ring of checks and balances around public company governance, shareholder activists have sought accountability from boards and management teams, often attributing most of a company’s woes to an ineffective, recalcitrant, and/or exorbitantly paid CEO.

CEOs have always been subject to heightened scrutiny by activists—and for good reason. As the principal executive officer, a CEO is the face of the company and typically wields significant power to influence the organization’s strategic direction, operations, share price performance, and ESG profile. The CEO can further consolidate this power if they also serve as chairman of the board.

As a result, activists typically hold CEOs directly accountable for many of the company’s missteps, failures, and shortcomings. However, during the earlier days of activism, the degree to which activists held CEOs’ feet to the fire varied.

Only sporadic instances of self-inflicted quagmires led to a CEO’s demise in the face of an activist campaign, such as Scott Thompson’s resignation as the CEO of Yahoo Inc. in 2012 after Dan Loeb called him out for an embarrassing discrepancy in his resume.

After the Yahoo situation, the frequency of high-profile activist campaigns against members of senior management ebbed and flowed until a pivotal 2017 proxy season that will always be remembered for a spike in CEO-targeted activism.

This featured Elliott Management’s election contest against Arconic that led to CEO Klaus Kleinfeld’s <-bsp-article-citation state="{"cms.site.owner":{"_ref":"00000166-e5a9-d785-a767-fffdcac50000","_type":"00000151-acf5-d1ce-a159-bff728d6001e"},"cms.content.publishDate":1695832295933,"cms.content.publishUser":{"_ref":"00000187-fbf2-daa7-ade7-fbfb01e60000","_type":"00000151-acf5-d1ce-a159-bff728d8001b"},"cms.content.updateDate":1695832295933,"cms.content.updateUser":{"_ref":"00000187-fbf2-daa7-ade7-fbfb01e60000","_type":"00000151-acf5-d1ce-a159-bff728d8001b"},"articleCitation":{"linkArticle":{"_ref":"0000015d-8f52-d5a5-afdd-afda10d70000","_type":"00000151-acf5-d1ce-a159-bff728d50010"},"_id":"0000018a-d77b-d10a-abeb-dffb27730000","_type":"00000160-bca2-df03-a1ef-bcef37330000"},"_id":"0000018a-d77b-d10a-abeb-dffb276e0000","_type":"00000160-bca2-df03-a1ef-bcef37350000"}">departure, Marcato Capital’s proxy contest against Buffalo Wild Wings during which CEO Sally Smith announced her <-bsp-article-citation state="{"cms.site.owner":{"_ref":"00000166-e5a9-d785-a767-fffdcac50000","_type":"00000151-acf5-d1ce-a159-bff728d6001e"},"cms.content.publishDate":1695832317289,"cms.content.publishUser":{"_ref":"00000187-fbf2-daa7-ade7-fbfb01e60000","_type":"00000151-acf5-d1ce-a159-bff728d8001b"},"cms.content.updateDate":1695832317289,"cms.content.updateUser":{"_ref":"00000187-fbf2-daa7-ade7-fbfb01e60000","_type":"00000151-acf5-d1ce-a159-bff728d8001b"},"articleCitation":{"linkArticle":{"_ref":"0000015c-6aa0-d490-adde-fbf67df00000","_type":"00000151-acf5-d1ce-a159-bff728d50010"},"_id":"0000018a-d77b-d805-a7ab-f77f796b0000","_type":"00000160-bca2-df03-a1ef-bcef37330000"},"_id":"0000018a-d77b-d805-a7ab-f77f79660000","_type":"00000160-bca2-df03-a1ef-bcef37350000"}">resignation at the annual meeting, and Mantle Ridge’s campaign against CSX Transportation Inc. that resulted in the <-bsp-article-citation state="{"cms.site.owner":{"_ref":"00000166-e5a9-d785-a767-fffdcac50000","_type":"00000151-acf5-d1ce-a159-bff728d6001e"},"cms.content.publishDate":1695832340082,"cms.content.publishUser":{"_ref":"00000187-fbf2-daa7-ade7-fbfb01e60000","_type":"00000151-acf5-d1ce-a159-bff728d8001b"},"cms.content.updateDate":1695832340082,"cms.content.updateUser":{"_ref":"00000187-fbf2-daa7-ade7-fbfb01e60000","_type":"00000151-acf5-d1ce-a159-bff728d8001b"},"articleCitation":{"linkArticle":{"_ref":"0000015a-a5f6-df57-ad5f-adf694700000","_type":"00000151-acf5-d1ce-a159-bff728d50010"},"_id":"0000018a-d77b-d805-a7ab-f77fbe770000","_type":"00000160-bca2-df03-a1ef-bcef37330000"},"_id":"0000018a-d77b-d805-a7ab-f77fbe720000","_type":"00000160-bca2-df03-a1ef-bcef37350000"}">appointment of Hunter Harrison as the new CEO.

This CEO activism spawned by the 2017 proxy season coincided with the emergence of the #MeToo movement that same year. This made CEOs even more vulnerable to shareholder scrutiny for sexual misconduct, ethics violations, and other bad behavior.

Because shareholder activists generally operate based on public information, they rarely can uncover this type of misbehavior. However, once exposed through media reports or social media, it enables activists to argue that the misconduct represents toxicity and dysfunction at the management level, and that any attempt by the board to sweep the CEO’s misdeeds under the rug would be problematic from a corporate governance standpoint.

Today, management-related activism is a widespread strategy. During the 2023 proxy season, activists waged over 30 campaigns to remove officers and achieved a nearly 25% success rate, according to FactSet data. In many of these cases, the activist sought to replace CEO directors who were up for election, demanded a refreshment of the CEO position, or openly criticized the CEO for receiving excessive compensation while failing to address the company’s problems.

For example, Carl Icahn’s recent campaign at Illumina Inc. seeking board seats, including that of CEO Francis deSouza, focused on the company’s acquisition of GRAIL without first obtaining regulatory approval.

Icahn accused deSouza of assembling a largely handpicked board, which made the “highly reckless decision” to push through the GRAIL deal that according to Icahn destroyed $50 billion of shareholder value. Although deSouza survived the proxy vote, he resigned from the board shortly after the annual meeting.

Despite the pervasiveness of activist campaigns targeting management, seeking to replace a CEO director at a shareholder’s meeting is still considered a relatively aggressive strategy. Attempting to remove the principal executive officer of a company may not sit well with other institutional investors or the proxy advisory firms, depending on the facts and circumstances.

That said, in today’s world of shareholder activism, CEOs who behave badly should expect to find themselves in the crosshairs of an activist seeking to protect shareholder value.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Andrew Freedman is the co-managing partner of Olshan Frome Wolosky and chair of the firm’s shareholder activism practice.

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