by Richard Benton
Activist investors have become a prominent fixture in corporate America. Recent commentaries proclaim that activists have “captured the center ring and are directing the main event” and acknowledge that “shareholder activism has rapidly changed how corporate America thinks.” Activist investors are at the vanguard of the shareholder value movement, mounting high-profile campaigns against corporate management and strategy.
Given this flurry of activity, scholars and popular commentators have been pressed to explain activists’ increased effectiveness. In a recent study, I show that an important reason for activists’ success involves corporate leaders’ increased social dislocation and ineffectiveness. In recent years, corporate leaders are less socially interconnected with their peers, having seen their social network ties fracture. As a result, corporate leaders are less able to collaborate and coordinate with their peers, losing their collective ability to buttress their own interests.
For most of the last century, corporate leaders were interconnected through a web of social network ties of overlapping board appointments. When a director sits on the board of multiple companies, this forms a social network tie connecting firms and individuals. Considerable research demonstrates that this network was important for coordinating strategies, sharing information, and building consensus across corporate America. This “old boys’ network” was an important source of power and unity for corporate leaders in domains such as politics and corporate governance.
Well-connected corporate leaders were also more insulated from their shareholders. To test these ideas, I examined the targeting and response outcomes from shareholder-sponsored proxy proposals. Proxy proposals are a key tool in investors’ corporate governance reform agenda. Investors will often submit proposals designed to reform CEO compensation, reform board representation, or repeal takeover defenses. Shareholders then vote on these proposals at the firm’s annual meeting.
Although proxy proposals often involve shareholder friendly reforms, they are only advisory in nature and many firms fail to implement shareholder proposals that pass a vote. When a firm routinely fails to implement a passed proposal, this provides some evidence that management is unresponsive or insulated from investors.
My research shows that during the corporate networks’ height, well-connected firms were much less responsive to activist pressures and were less likely to implement proposals that passed a vote. Although well-networked firms attracted disproportionate scrutiny from activists, the leaders of these firms were able to rely on their shared resources in resisting activist demands. This finding aligns with other evidence that the corporate network helped corporate leaders preserve their autonomy from shareholders.
However, the corporate network has become more fractured in recent years. Following the corporate accounting scandals of the early 2000s, and the Sarbanes-Oxley Act of 2002, firms and directors are increasingly scrutinized for being inter-connected. As a result, corporate leaders are more isolated from their peers than they were only a decade ago.
Researchers are only beginning to understand the consequences of the corporate network’s fracturing. One thing that is clear is that this traditional source of elite coordination has disappeared.
Correspondingly, activists have become increasingly successful at prompting reforms. Activists have successfully unseated CEOs and board chairs and won shareholder-friendly corporate governance reforms. My findings indicate that as the corporate network has fractured, the insulation benefits have also disappeared. While well-connected firms were once able to rely on their networks in rebuffing activist demands, fractured corporate leaders are now more vulnerable.
As the board network has disappeared, the vanguards of the shareholder value movement have become even more effective at winning investor friendly reforms.
For some, this may be good news. Shareholder advocates tell us that an entrenched and insulated corporate elite harm corporate performance and exploit shareholders, feathering their own nests at the expense of investors. However, critics argue that unbridled shareholder primacy may be harmful to workers and communities. When corporate leaders had greater capacity for coordination and autonomy, they had greater freedom to pay attention to diverse corporate stakeholders, invest in their communities, and create good jobs.
The disintegration of the corporate network has tipped the balance in corporate power and promises to reinvigorate long-standing debates about who controls the large corporation. A socially dislocated and disorganized corporate elite promises to further advance the cause of shareholder empowerment.
Richard Benton is Assistant Professor of Labor and Employment Relations at the University of Illinois. This post summarizes findings from “The Decline of Social Entrenchment: Social Network Cohesion and Board Responsiveness to Shareholder Activism” in Organization Science.
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