August 07, 2008
The Impact of Shareholder Activism on Boards and their Composition
Posted by Lisa Fairfax

I have been doing some research on the impact of shareholder activism on board composition—and in fact was generously given data on shareholder activism from the folks at SharkRepellent.net.  I am in the very early stages of analyzing the data, but thus far have observed a couple of interesting things about the impact of shareholder activism on boards.

1.  It is often the case that when managers and shareholders agree to alter board composition, they expand the board.  This means that instead of replacing directors up for re-election with dissident directors, one or two shareholder-supported directors get added to the existing group.  This raises an issue about whether and to what extent this kind of management/shareholder agreement really has an impact on the board since they only serve to add one or two dissident voices to the “status quo.”  Of course, perhaps the most important thing for shareholders is to obtain a seat, even a lone one, at the table.

2.  Thus far the data suggest that shareholder-supported directors tend to be younger than their management-nominated counterparts.  Indeed, in one proxy contest management specifically emphasized the fact that shareholders had nominated a 28 year old to serve on the board.  To be sure, most nominees are not as young as 28, but they do tend to be younger than members of the existing board or those being nominated by management.  This may be because boards tend to draw from an “older” pool—that is former CEOs, etc—while shareholders (though not all) tend to draw from managers and partners in various funds, who tend to be younger as a group.  Regardless, this “youth” factor leaves shareholders open to criticism regarding the experience of their nominees. 

3.  The data suggest that shareholder activist groups tend to nominate founders/partners/managers of their own group.  To be sure, it is not surprising that shareholders would nominate candidates inside their group—and perhaps it is the same as managements’ decision to nominate members of their management team to serve on boards.  Nevertheless, this practice leads to criticism concerning whether shareholder nominees represent the entire shareholder class or just a few shareholders.

4.  Finally, the data I have reviewed to date suggest that nominees do not tend to be diverse in terms of gender, race or ethnicity.  To be sure, sometimes it is difficult to determine if a board candidate is diverse.  Moreover, sometimes the boards on which shareholder nominees seek to serve are not necessarily diverse either.  And yet, while boards that are the subject of activism tend to have at least one diverse member, this is not usually the case with the slate of shareholder nominees.  This appears to confirm the notion that shareholder activism may be detrimental to the interests of other constituents by suggesting that while corporations are more likely to pay heed to the interests of a variety of different groups (including those that view board diversity as important), shareholders are likely to have a narrower perspective.

Again, I am in the beginning phases of my research and hence these observations could change, but they nevertheless are indicative of some interesting issues that may provide insight into how shareholder activism impacts the board and its composition.

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