Activists Are Targeting Diverse Boards — And Succeeding

According to one activist, when a board is like a “good old boys’ system,” it’s easier as a CEO to “corral your guys around.”


Illustration by II

Activist hedge funds are paying attention to board diversity — and are using that information to decide on their next targets.

New research shows that activist investors are more likely to succeed when boards are less united and slower to act — two characteristics that are common among diverse boards, where members come from different backgrounds and tend to bring different perspectives. The study found that hedge funds exploit differences of opinion among board members, as well as their more deliberate decision-making processes, to sway shareholder votes in their favor.

According to Mark DesJardine, a professor at Dartmouth’s Tuck School of Business, a “big tactic” for activist hedge funds “is to force companies up against a wall where decisions have to be made quickly and maybe not in the most ideal way and setting. Timing is important.”

“It’s very clear that there are a lot of benefits of diverse teams, but there are also hurdles to overcome,” DesJardine added. “They take longer to come to a consensus. They face more communication issues. It takes more time to understand.”

DesJardine, along with Wei Shi from the University of Miami and Emilio Marti at Erasmus University, authored the research, which was recently published in the Journal of Organization Science.

They used compensation data from ExecuComp, activist investor data from Insightia, financial and accounting data from S&P’s Compustat database, data on directors from BoardEx and Institutional Shareholder Services Directors, and data from Thomson Reuters on 13Fs and foreign sales. They also interviewed activist investors.


Their work involved testing whether activist investors target boards because of their make-up — and determining whether that was motivated by the slower decision-making process. The paper noted that there’s already a significant body of research showing that diverse boards tend to make decisions more slowly.

The paper also noted that activist investors attempt to catch boards off guard when they launch a campaign. The researchers referenced a few of their interviews in presenting this point.

“A portfolio manager at an activist hedge fund acknowledged that, ‘We try to catch them off guard, because that allows for a faster, easier campaign to get what we want,’” the paper said. Another told the researchers that when a board is more like a “good old boys’ system,” it’s easier as a CEO to “corral your guys around.”

The numbers bear this out. The researchers found that the likelihood of an activist investor targeting a board more than triples — from 1.3 percent to 5.1 percent, when a board’s demographic diversity is high.

While a knee-jerk reaction to this research may be to say that board diversity is bad for corporations, DesJardine believes this is not the case. “The data doesn’t show anything about this,” he said. “It’s not anti-diversity, and I wouldn’t want it to come across this way.”

Instead, he added, this research offers insights for diverse boards, especially at corporations that are underperforming: They could become an activist hedge fund’s next target.

DesJardine said that diverse boards can use this information to prepare for a shareholder attack. This may involve talking to shareholders, making sure that directors attend every board meeting, and working to ensure that the board members can work well together to come to decisions.

“When you have a board that’s diverse, then you make sure that you’re being very proactive and disciplined in that pre-activism defense,” he said.