A chief executive officer facing an activist investor should be nervous about keeping the position -- and if a hedge fund wrangles some board seats, CEO job security gets even more sketchy.
Activist hedge funds settled for, or won, board seats in 46 percent of the more than 300 contests monitored from 2011 to 2015, according to advisory firm FTI Consulting.
“When activists attain board seats, we found that CEOs leave their posts at twice the normal rate,” Steve Balet, head of corporate governance and activist engagement at FTI, said by phone.
Activist investors typically buy a minority stake in a targeted public company and agitate the board and management for changes they believe will boost shareholder returns.
Average CEO turnover was 16.6 percent within a year for a firm without such an investor, and 30.9 percent over two years, FTI said, using a set of 2,500 companies, and data provided by S&P Capital IQ and PriceWaterHouseCoopers.
When an activist gained board seats, CEOs left their firms 34.1 percent and 55.1 percent of the time in those respective periods, according to the study.
Even if the activist didn’t gain board seats, their presence in a company had an effect: 28.5 percent of the CEO positions showed turnover within 12 months, and 45.6 percent departed within two years.
“It seems natural that there would be an increased rate of CEO turnover, but activists generally don’t publicly target the CEO for replacement,” Balet said. “Even in cases where activists do not gain board seats, CEOs leave their post 71 percent greater than the normal rate.”