Do Investors Prefer Women CEOs at Firms Targeted by Activists?

Shareholder activism is playing a larger role than ever in companies’ decisions about their operations and reporting, with over 4,600 firms targeted worldwide from 2013 to 2018. Shareholder activists can have several motives for going after a company, from trying to improve its corporate governance by increasing efficiencies and dropping unprofitable segments to trying to improve the company’s reputation by making its practices more ethical and ecologically sound. Recent trends show that investment funds are making it easier for more investors to become involved in activism, which has led to regulatory concerns about the power of these activists and their impact on financial markets, corporate governance, and regulation.

A particularly notable aspect of activism, though, is that companies with female CEOs are being targeted more often than companies with male CEOs. We explore this phenomenon by examining whether investors other than activists are more or less willing to invest in companies that are targets of certain types of activism and have women at the helm.

Activists magnify their influence on management in various ways, relying on extensive financial-media coverage and their influence as large institutional investors. In addition, activists’ demands (as well as management’s responses) typically appear within the company-released proxy statement, which is filed in advance of the annual shareholders meeting. Thus, the indirect influence of shareholder activism on other players in the financial market, namely other retail investors, has the potential to affect investment decisions. This effect of activism on retail investors may be especially pronounced given that the methods that shareholder activists use to pressure management are often the same as those through which these investors gather much of their information about potential investments (e.g., company disclosures, financial news media). Thus, while shareholder activists typically target company leadership (and not other investors), any residual effect on other investors’ judgments represents an indirect effect of shareholder activism, which is the setting for our study.

Sustainability-focused activism has become successful at garnering majority shareholder support in recent years. Starting in 2017, large asset managers (e.g., BlackRock, Vanguard, Fidelity, and American Funds) have started voting for climate-related shareholder proposals, contributing to increased levels of support among other shareholders. For the years 2017-2019, most of the shareholder proposals filed were focused on sustainability, outpacing those related to governance and compensation. While many activism campaigns may lead to improved financial performance, not all activist-enacted changes are successful, and some can even cause companies to fail. This leads to a high level of uncertainty surrounding shareholder activism and its effect on company performance.

The uncertainty surrounding the effects of shareholder activism leads investors to evaluate characteristics of the CEO and how he or she responds to the activism. Further, recent psychology research finds that gender stereotypes are more prevalent under ambiguous scenarios. Due to this, investors are prone to rely on the salient characteristic of CEO gender and any related gender stereotypes when a company is targeted by shareholder activism.

Using an experiment with professional MBA students acting as shareholders, we predict and find that investors perceive matches or mismatches between a CEO and the nature of shareholder activism, based on assessments of femininity or masculinity stemming from the CEO’s gender. Specifically, investors perceive the communal qualities stereotypically associated with female CEOs (e.g., kind, sympathetic, sensitive, passive, nurturing, and having an overall concern for the welfare of others) to be more of a match with the communal nature of environmental and social-focused activism (e.g., having a more socially diverse board, supporting fair and humane working conditions in suppliers, employing environmentally safe business practices). Alternatively, these same communal qualities are stereotypically seen as less of a match for profitability-focused activism (e.g., advocating changes to operations to create gains, cut waste, and increase efficiencies). This type of activism is seen as more of a match with the qualities stereotypically associated with male CEOs (e.g., aggressive, assertive, independent, self-confident, influential). We also find that investors rely on these stereotypes when determining their willingness to invest in a company being targeted by shareholder activism. When CEOs “match” the activism type (that is, males with more profitability-focused activism and females with environmental and social-focused activism), investors – male and female alike – are more likely to perceive that CEO as better equipped to address the activism. This leads investors to punish female CEOs that are targeted by profitability-focused activism and reward female CEOs that are targeted by environmental and social-focused activism.

Importantly, however, we find a simple way that CEOs – especially women – can dramatically reduce this stereotype-driven reaction. We find that female chief executives facing immediate, bottom-line activism can decrease the ambiguity surrounding the shareholder activism by disclosing an optimistic earnings guidance figure – either point or range. This information allows investors to overcome the gender-based expectations that are informing their investment judgments.

Our study addresses some of the SEC’s concerns regarding the effect of shareholder activism on other financial players by differentiating the effects on investors of profitability-focused and environmental and social-focused activism. The study also adds to the literature investigating gender differences in accounting settings and illustrates a specific scenario in which communal, feminine traits are valued over male traits (which is not typical in most business settings). Finally, we identify earnings guidance disclosure as a relatively simple way for female CEOs of targeted companies to overcome the negative impact of gender-based stereotypes. Our findings suggest that, as instances of shareholder activism continue to increase, further examination of shareholder activism and its effect on financial markets is needed.

This post comes to us from professors Scott C. Jackson at the University of South Dakota and Chris Agoglia and Dave Piercey at the University of Massachusetts Amherst. It is based on their recent paper, “Do Investors Prefer Female CEOs in Activist-Targeted Firms? The Role of CEO Gender, Shareholder Activism Type, and Earning Guidance Disclosure,” available here.

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