While shareholder activism has drawn close attention, the activism of managers has been largely overlooked. One way CEOs may engage in activism is through collective action in business groups. This type of activism allows managers to coordinate among themselves and advocate for policies through lawsuits, public statements, and lobbying. The policies promoted may be pro-business and benefit the companies and the sectors of these CEOs. Some examples of such activism are lobbying for open trade and lower corporate taxes. The policies pursued may also be pro-manager and increase the power and private benefits of CEOs. Examples include limits on proxy voting or the ability of shareholders to vote on CEO compensation. Thus, managerial activism can benefit companies or be detrimental to their long-term value. Which result is more common, and what are the effects of managerial activism on the corporate sector?
In a recent study, we examine these issues by looking at a group of CEOs involved in activism through the Business Roundtable for the period 2008-2014. The Business Roundtable is an influential association of CEOs from major U.S. companies with more than 15 million employees and over a quarter of total U.S. stock market capitalization. The companies represented are from diverse industries, and their CEOs can coordinate with other CEOs and pursue policies collectively through the Business Roundtable.
We find that activist CEOs generally create value for their firms, supporting the pro-business role of managerial activism. While pro-manager issues that may be detrimental for firm value are also recognized and penalized in the market on a case by case basis, these effects do not overshadow the positive impact of pro-business managerial activism. We elaborate on these findings in more detail below.
The Business Roundtable is very active in lobbying, with its spending of more than $100 million from 2008-2014 second only to that of the U.S. Chamber of Commerce. In that period, it lobbied primarily on issues of tax, trade, and finance. While the Business Roundtable promoted pro-business bills, more than half the finance and banking bills it lobbied for advocated pro-manager issues related to proxy access, shareholder voting on CEO compensation, and CEO pay ratios.
To understand the net effect of this pro-business and pro-manager activism, we first look at what determines CEO involvement in activism and then examine corporate governance, CEO compensation, and firm performance.
CEOs that are engaged in activism at the Business Roundtable are mainly from large firms that lobby themselves. When firms are already politically active, they may be more likely to support their CEOs’ activism. Large firms also have more resources to allocate for activism. Activist CEOs are powerful in their companies, serving in both CEO and chairman of the board positions. These activist CEOs, however, have on average shorter tenures than other CEOs.
When managerial activism pursues primarily pro-manager objectives, that could be reflected in the manager-friendly structures of the firms that employ activist CEOs. We do not find evidence of such arrangements. In the firms of activist CEOs, corporate governance provisions on classified boards, limits on shareholder amendments to bylaws, poison pills, golden parachutes, and supermajority requirements for mergers and charter amendments are comparable to other firms (measured by the E-Index of Bebchuk, Cohen, Ferrell (2009)). Also, institutional investors hold similar amounts of shares in both types of firms, and thus these shareholders have similar monitoring incentives. Corporate board sizes are also similar. The main difference is in the number of independent directors. Firms with activist CEOs have more independent directors on the board, suggesting that internal monitoring of activist managers is stronger. Overall, corporate governance characteristics of firms with activist managers do not indicate major weaknesses in corporate governance that may arise from pro-manager policies that shift power from shareholders to managers. On the contrary, activist managers are likely to be monitored closely by the board, as indicated by the number of independent directors.
CEO compensation of activist managers shows that incentive structures of activist CEOs are mostly aligned in a similar manner to those of other firms. Activist CEOs hold stock and stock options that are comparable to other CEOs. Thus, pro-manager policies promoted by activist CEOs in the Business Roundtable do not manifest themselves in manager friendly incentive structures. However, activist CEOs have higher salaries and bonuses than others. This may be due to the additional effort spent by activist managers on pro-business issues and the additional value added to the firm as a result. It may, however, also indicate that the compensation structure is manager-friendly in that it increases the private benefits of activist CEOs. Nevertheless, there are no significant weaknesses in executive compensation of activist CEOs that point to incentive structures that shift power from shareholders to managers.
So long as activist managers add value to their firms by pursuing pro-business policies, their firm performance should improve. If the benefits of activism are shared across the overall sector, then all firms should have comparable levels of performance. Thus, performance of firms with activist CEOs should either be better or similar to other firms as long as these CEOs advocate for pro-business policies. On the other hand, CEOs involved in activism may act to increase their private benefits and control rather than the long -term firm value, which would be manifested as deteriorating firm performance. We find that when CEOs are involved in managerial activism, their firms perform better than others. Hence, activist CEOs add value to their firms, which supports the pro-business role of managerial activism.
Which companies benefit more from managerial activism? Firms that are more dependent on governments for business or have more differentiated products and intangible assets. When a firm is less transparent because it must protect intangible assets or unique products, it is particularly important to convey information about the firm to policy makers and CEOs of other companies so as to influence policies that take into account the position of these firms. Also, when the fortunes of a company are more closely tied to the government, it is imperative to convey information to policy makers and the government to allow increased information exchange. Thus, managerial activism is particularly valuable when there is more firm-specific information that may not be readily available from other public sources and when a firm is more dependent on the government.
In cases of pro-manager activism where activist managers shift power from shareholders to themselves, which may be detrimental to firm value, the market responds unfavorably. For example, the Business Roundtable together with the U.S. Chamber of Commerce sued the SEC regarding a proxy access rule aimed at making it easier for shareholders to nominate their own candidates for directorships on August 25, 2010. The U.S. Court of Appeals in Washington, D.C. vacated the rule on July 22, 2011. This was an unexpected victory for the Business Roundtable and increased the power of managers in relation to shareholders. Stock market returns for these firms fell by 0.3 percent on the day of this event. As indicated in this example, the market recognizes pro-manager activism that potentially reduces firm value on a case by case basis and responds adversely.
Business Roundtable executive committee announcements provide another way to examine how markets perceive managerial activism. When it is announced that a CEO has joined the Business Roundtable executive committee, the stock price of that CEO’s firm rises. While being a member of the Business Roundtable is useful in coordinating with other CEOs and following policies through collective action, being a member of the executive committee gives even further influence to a CEO in shaping the policies of the organization. Thus, the positive market reaction to executive committee announcements indicates that managerial activism is deemed to increase firm value.
All things considered, managerial activism is valuable for the corporate sector. Managerial activism results in better operating performance, which is particularly apparent for firms with more unique products and intangible assets or closer ties to governments. While the market penalizes specific cases of pro-manager activism that shifts power from shareholders to managers, corporate governance and executive compensation structures do not indicate that agency problems arise from pro-manager policies. Overall, the pro-business role of managerial activism surpasses the potential adverse effects of pro-manager activism in the business sector.
 Testimony of John Engler, President of the Business Roundtable, before the U.S. Senate Finance Committee on “Jobs and a Healthy Economy” January 22, 2015. For details, see https://www.finance.senate.gov/imo/media/doc/BRT%20John%20Engler%20Senate%20Finance%20Committee%20Testimony%201-22-15%20Hearing.pdf.
 Bebchuk, L., A. Cohen, A. Ferrell. 2009, “What Matters in Corporate Governance” The Review of Financial Studies Vol. 22, No. 2, pp. 783-827.
This post comes to us from professors Senay Agca at George Washington University and Asli Togan Egrican at Kadir Has University in Istanbul, Turkey. It is based on their recent article, “Managerial Activism,” available here.