Activist investors tend to ignore a winning investment strategy — women

Myles Udland
Markets Reporter


When activist investors target a company for a shakeup, they most often want one of two things — a return of capital to shareholders or representation on the company’s board.

new report from Bloomberg published Thursday reveals, however, that when activists do shakeup the boards of companies these boards end up more white and more male.

Bloomberg cites a study from ISS, which found that from 2011-2015, 25% of new directors at S&P 1500 companies were women, but just 8.4% of new directors were women at companies that had been shaken up by activist investors.

GM CEO Mary Barra

This same study found that people of color accounted for 13% of new directors at these companies but less than 5% of new directors at activist-impacted boards (which includes boards where activists nominated new directors or companies shook up their director slate following activist pressure).

These findings, however, run counter to a growing body of research that shows companies where more women are represented on the board outperform peers.

Last September, Yahoo Finance’s Nicole Sinclair reported that companies that had at least one woman on their board outperformed those with all-male boards by 3.5% per year since 2005.

Additionally, a study from investment research firm MSCI published last December found that from 2011-2016, U.S . companies which started the period with at least three women on their board saw median earnings per share (EPS) growth of 37% over that period while companies that sported all-male boards at the outset of the period had median EPS growth of -8%.

MSCI also founds that companies that saw female representation on their board increase over the period had better median EPS growth than those companies which saw female representation on their board fall.

Companies with three or more women on their board have seen faster earnings growth than those zero or declining female representation. (Source: MSCI)

Activism’s mixed record

Activist shareholders tend to garner headlines because, well, public knowledge of their campaign to make changes to a company’s management are often an integral part of their strategy.

But how do these investments perform?

A report from research firm FactSet published in August 2016 found that start to finish, 57% of activist campaigns saw the stock of the target company rise in value. But only 44% of campaigns led to the company outperforming the S&P 500 and only 47% of campaigns led to stock outperformance relative to peers.

The length of activist campaigns, however, can vary from just a few months to more than a year.

After activist campaigns end, 71% of stocks were higher over the next year but only 43% of target companies beat the S&P 500 in the year after activist campaigns. Though if activist campaigns led to outperformance relative to the S&P 500 much in excess of 50% over time, you’d expect campaigns to be far more popular.

The success of some campaigns, like Carl Icahn’s bet on Netflix (NFLX) in 2012 which yielded a return of $2 billion, for instance, will keep investors coming back to this strategy.

Billionaire activist-investor Carl Icahn made one of the best trades in the last decade going long Netflix in 2012.

And ultimately, the results are about as idiosyncratic as each activist campaign. “It is difficult to identify any clear and consistent trend in the stock performance of companies targeted by activists,” the firm wrote.

“A logical conclusion may be that the details of each activist campaign and targeted company must be considered on an individual basis.”

The future of investing decisions

That activist investors appear, at least on some level, to overlook the clear outperformance enjoyed by more diverse boardrooms, is not a problem unique to this subset of investors.

In a paper published back in January, Morgan Housel, a partner at Collaborative Fund, argued that as the investor class itself becomes more diverse as millennials both move into their peak earnings years and inherit wealth from the Baby Boomer parents, so too will their investment preferences change.

And in Housel’s formulation, two themes are likely to emerge — a desire for transparency from companies and a preference for companies that take care of all stakeholders.

On the transparency side, companies will now contend with an investor class that is not as ignorant as prior generations. The studies cited in this article are not behind paywalls and not hard for anyone in our information-savvy world to easily obtain.

Sooner rather than later, then, no company will be able to fend off questions about any heavily-male executive ranks or board membership with mealy-mouthed defenses like, “These were the best qualified candidates for the job.” The contrasting data are easily available.

Additionally, the dominant ethos in the business community right now that the goal of a corporation is to maximize profits seems likely to change.

Ostensibly, a profit maximization drive also benefits shareholders. But in its current formulation “shareholders” are often used a proxy for the rent-seeking, Wall Street investor class that is only invested in a company’s success in so far as it can be returned profits that will improve its own investment portfolio, the success of which will attract additional investors, and so on.

“Over the last 30 years, we’ve swung back to a system where, on average, the sole mission of many businesses is profit maximization, even if it comes at the expense of other stakeholders,” Housel wrote.

“That’s pushed income inequality back to heights not seen since the 1920s. As the world opens up and everyone becomes more aware of how everyone else is doing, there is a newfound push toward businesses that actively take care of every stakeholder in their organization.”

In Housel’s view, companies that continue to optimize for profit at the expense of taking care of all stakeholders — investors, employees, customers, society — aren’t likely to be rewarded by the next generation of investors. And this isn’t about millennials being good and Baby Boomers being bad or any pitting of generations against one another — it is simply the march of time.

“When you claim the younger generation has marginally higher expectations of transparency, inclusion, and empathy, you’re not claiming they’re morally superior,” Housel writes.

“You’re just pointing out the normal progress of what happens when a generation grows up with wider access to information, slightly better living standards, and a little more bandwidth to think about how other people go about their day.”

Myles Udland is a writer at Yahoo Finance. Follow him on Twitter @MylesUdland

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