Do women on boards deter activist investors?

Governance is increasingly on the activist agenda.

by Malcolm McKenzie and Paul Kinrade
Last Updated: 20 Sep 2018

Investor activism is growing in force across Europe, with the UK consistently coming top of the target list. The most recent A&M Activist Alert (AAA) statistical study suggests that this growth is set to continue, as wolf packs of like-minded investors pool their strength to force change.

The foremost items on an activist’s menu are well known: prolonged underperformance of a fundamentally strong business which gives rise to declining shareholder returns and perceived poor management practices.

Yet there is a sense amongst activist watchers that board composition, including the diversity of a board, is becoming an increasingly important factor when lining up potential targets. We put this to the test, and the AAA indeed found that companies with a higher makeup of women on the board are less likely to be targeted by activists.

It’s dangerous to extrapolate with any certainty given the relatively small sample size involved. But in our view, there are three key reasons which help to explain why female Board members are helping to keep the wolves at bay. 

1. Leading by example

The importance and prominence of directors and their activities has never been higher and is continuing to grow. The days of boards being largely anonymous outside their own inner circles are long gone, and board composition can say a lot about the culture and practice within a company. For current and potential employees, customers, suppliers and competitors, the make-up of a board can send powerful messages about how the company really works. What does a board with low levels of gender diversity say about the role diversity plays in the corporate’s broader management practices and strategic direction? Such perceptions, or indeed realities, can and should no longer be overlooked. Strong corporate culture around diversity, put in action at the executive level can help drive value and ward off activists who, as we shall see, are taking such matters more and more seriously.

2. Improving corporate governance

Take Elliott Management, which earlier this year called for a board overhaul and operational changes at software firm, Commvault Systems. What stood out in Elliott’s letter to the board was its lack of gender diversity being highlighted as an example of the company’s 'absence of accountability'.

This demand came within the context of wider corporate governance criticisms. But it was interesting that gender was specified alongside more traditional concerns such as the length of director tenure. And for Elliott, 'lagging corporate governance standards often reflect a failure to prioritize best practices throughout the organization'. For this reason, we expect other activists to follow Elliott’s lead.

3. Creating greater resilience

This year, BlackRock put its weight behind the belief that diverse boards ultimately drive greater resilience when it called for companies in its portfolio to have at least two female directors on boards.

A variety of experience, it said: 'creates a constructive debate of competing views and opinions in the boardroom'. As the business environment becomes ever more disruptive and the average life of a company shortens, robust debates informed by different views and perspectives will increase the likelihood of boards being able to respond and adapt to market changes. 

This demonstrates the value of diversity of thinking in the boardroom. Beyond gender, diversity in a wider sense needs to become a greater focus if boards want to safeguard themselves from activist threats.

While more balanced, diverse groups of directors typically boost a company’s agility and performance, a board composed of just one type of person can find itself in a materially weaker position either in terms of adapting to new market opportunities or weathering storms ahead.

Given the above, it’s perhaps no surprise that Credit Suisse’s research into 3,000 of the world’s largest companies showed that those with a higher share of women in decision-making roles generated higher returns on equity. Even more interestingly, it found that where women account for the majority of top management, the companies also showed better sales growth, high cash flow returns on investments and lower leverage.

It would appear that activist investors have reached a similar conclusion; that it pays to take diversity seriously.

Malcolm McKenzie is managing director and Paul Kinrade senior advisor at Alvarez & Marsal.

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