20.09.2019

Activist investors are making corporate boards whiter and more male

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Activist investor funds are shaking up public companies by pushing them to cut costs, hive off under-performing units, and be smarter about strategy. They’re also slowing their progress toward diversifying corporate boards.

When activists force companies to add board members, the companies are more far more likely to appoint white men, versus companies adding board members in the normal course of business. That’s the finding of a study of directors added to the largest public companies at the behest of activists over the past four years. The trend held when the new members were nominated by the activists, or by the company as a defensive measure in the face of the attack. The findings were shared in August by the Investor Responsibility Research Center and Institutional Shareholder Services.

Perhaps more significantly, anxiety about becoming a target of activists is pushing all boards to become more conservative in how they operate, including who they nominate to vacancies, says Barrett Stephens, the CEO of RSR Partners, a global executive search firm.

Diversifying board memberships had become a priority for most corporate boards, Stephens says, but they’re frequently challenged in finding women and minority candidates who also meet the search committee requirements for seniority and industry expertise. Boards that once might have been willing to take a chance on a candidate with less experience or on someone from another sector are now more likely to pick more obvious candidates, which inevitably means more white men, he said.

“Boards are thinking much more proactively about warding off activists, and not giving them any excuse,” Stephens said.

Defending their corporations from activists is a major board concern. More than half of all mid-to-large public companies have a plan in place to fight off activists, according to a survey of board members conducted by the National Association of Corporate Directors.

Activist investors accumulate positions in a company, then try to influence its strategy and direction, either through persuasion or (if that doesn’t work) threatening to take over the board and ousting current management. They’ve been around for decades, but in recent years their power and influence has grown, in part because they’ve been able to produce market-beating returns when other investing strategies have failed. A record 758 companies received activist demands in 2016, and targets have included such giants of commerce as DuPont, General Electric, Procter & Gamble, and even Apple.

When activists challenge large, public corporations, board diversity suffers. Companies are less likely to have at least one women (87% vs. 83%) and at least one minority director (56% vs. 52%) after an activist campaign than before, according to the study by IRRC and ISS.

Before activist pressure 87% 56%
After activist pressure 83% 52%

Of the 1,500 largest public companies, 380 board members were added to companies targeted by activist campaigns between 2013 and 2016, either pushed onto boards by activists, or added by the incumbent board members, the study found. Just 8.4% of the new directors were women, compared to 17% of board directors among all 1,500 companies, and 4.6% were people of color, compared to 10% for all companies.

And those figures actually understate the discrepancy between companies challenged by activists and the broader corporate world, because companies not under attack are more likely to diversify as they replace board members. Among directors appointed in 2015, for example, almost a quarter were women.

While most big corporations are convinced of the value of a diverse board—either for the sake of appearances, or because it’s better for business—activist investor funds don’t care, Stephens said. “They don’t have to worry about it,” he said. “All they care about is the bottom line.”

There’s one exception, he said. Activists will go after any weakness—if they happen to go after a board made up of white men, then they’ll attack the company’s lack of diversity.

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