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Spurned CEOs may become activist shareholders

Few phrases send chills up a CEO's spine like "activist shareholder." In the past year, investment funds such as Elliott Investment Management have successfully pressured companies such as and to overhaul their boards and their operations.

But there's a different species of activist shareholder, says Jonathan Cohn, associate professor of finance at Texas McCombs. He calls them the quasi-insider. They're a former leader, such as CEO, director, or founder, who left the target company for various reasons but still owns an ample amount of stock. They have an intimate knowledge of its inner workings.

In new research, Cohn finds that campaigns by quasi-insiders are both surprisingly common and surprisingly effective.

"" is published in The Review of Corporate Finance Studies.

"These things happen with some degree of regularity," he says. But because many occur out of public view, "we wanted to try to document how common these types of instances are."

With Mitch Towner and Aazam Virani, both from the University of Arizona, Cohn analyzed a trove of third-party data on shareholder activism and federal financial filings. The team found:

• Campaigns are common. Between 1995 and 2021, 327 quasi-insiders took part in some 280 public campaigns.
• Quasi-insiders are high up. Of the 327, about 38% were former CEOs, 30% company founders, and 21% former directors.
• Campaigns often succeed. Of the campaigns, 43% achieved their main objective, such as gaining control of the target company's board of directors. Cohn calls this rate "strikingly high."
• Wall Street approves. Stock prices of the target companies saw short-term boosts, with a mean increase of 3.9% from a day before the campaign announcement to 10 days after.

Longer-term impacts on profitability were too difficult to quantify, Cohn says. But he found no indication the campaigns were financially harmful.

Small companies, large egos

Unlike high-profile investors such as Elliott, the researchers found that quasi-insiders primarily targeted smaller companies that weren't doing well financially.

"Hedge funds may not find it worthwhile financially to target small companies, which creates scope for quasi-insiders to play an activist role," Cohn says. The biggest corporate names on his list include Humana, Hewlett-Packard, and Darden Restaurants.

A more typical target was the internet media company Destiny Media Technologies. After it fired its founder as CEO in 2017, he —along with four others—arguing that he was wrongfully terminated and that current leadership was failing. His effort was unsuccessful.

Although it's not clear from the data, Cohn suspects "these campaigns are more about fights among personalities than they are fights over ideas. CEOs of publicly traded companies often have big egos. So, a lot of times it's more about, 'I think that I can run this company better than you can.'"

Companies might lessen the risks of quasi-insider campaigns by de-personalizing conflicts, he says, and by taking the advice of Michael Corleone in "The Godfather Part II": Keep your friends close but your enemies closer.

Managers should consider keeping people "who were important and influential in the company in the past close at some level," he says. "In principle, the former CEO, the founder of the company, probably has ideas that are at least worth listening to."