Activist investors have shown that they are no longer satisfied with board seats and buybacks. Impatient with costly restructuring plans, activists have increasingly targeted companies’ leaders at the start of aggressive campaigns.
This year, chief executive officers (CEOs) at major corporations including insurance provider American International Group Inc. (AIG), railroad CSX Corp. (CSX) and aerospace company Arconic Inc. (ARNC) have scrapped their leaders under pressure from activists. Currently, CEOs at companies such as Buffalo Wild Wings Inc. (BWLD) and Avon Products Inc. (AVP) are seeing their jobs at risk.
New Campaigns Reach Fastest Pace on Record
Activist investors buy a large stake in a company and pressure management to make changes they hope will advance shareholder value. Whether in the form of a private equity group, a hedge fund or a wealthy individual, activists can often be a headache for CEOs of target companies that they see as mismanaged, running excessive costs or with the potential to become more profitable and add value.
As these groups become bolder with their actions and call for faster change within a target company, public campaigns to remove CEOs are often at the head of the agenda. In 2017, activists have already launched nine campaigns targeting top management, marking the fastest pace on record, according to FactSet. While after the financial crisis, activists were becoming more aggressive with a greater share of board seats which allowed them to push for quick returns like buybacks and breakups, such moves are no longer raking in the returns they once did.
Who Doesn't Understand?
In refocusing on operations, activists have become more involved, calling for direct changes in management. Critics say activists don’t understand the business and demand too much power given the relatively small size of their stakes. Others say they should leave it up to the board to determine a company’s leader.
In general, not only does the new trend put management structure at risk, but it may also provide an incentive for well-funded startups to stay on the private market.
“Why would you want to go public if you can lose control of your company that easily because somebody makes a public statement and the stock goes up,’ said Jeffery Ubben, founder of activist ValueAct Capital Management LP. (See also: 3G Capital Strategy a Wake-Up Call for Industry.)