Tactical Weapons Used by Activist Shareholders

By Cydney Posner

Following is a link to an article in Fortune discussing a new tactic employed by shareholder activists: exposing fibs, exaggerations and indiscretions of management.  This tactic, common among politicians, "is migrating to the corporate world as a new tactic for unhappy shareholder activists to win changes they seek in the executive suite." Of course, exhibit number one is the recent humiliating departure of Yahoo's former CEO after disclosure of an imaginary degree listed on his resume. While detection of embroidery on a resume may not be new to the corporate world, what is new is the messenger: this discovery was brought to the board's attention by an activist hedge fund that was trying to shake up management. (Apparently, the discrepancy was discovered through examination of an earlier resume, which did not list the fictitious degree, from the CEO's former employer.) Using this tactic, the fund was able to depose the CEO and secure seats on the board. The article suggests that delving into the backgrounds of executives puts "a new, more personal, face on tactics to effect corporate shake-ups. A noticeable number of top-level executives have been booted when skewed relationships with subordinates came to light, and others have been felled by professional failings. But exposing discrepancies in [the CEO's] academic record provides a new avenue for activist investors and hedge funds to root around in past professional, academic, and perhaps even personal, events or omissions to ferret out discrepancies." According to a senior researcher at a corporate governance research firm, "‘It's a new tactic because typically it's been boards that uncovered fabrications rather than shareholders.' " Similarly, the chief policy officer of Glass Lewis maintained that anything "that goes to the integrity of the individual is appropriate to examine, whether it was a mistake or an intention to deceive….His degree is part of a skill set that he brought to the job."

Commentators cited in the article suggest that, as a result of this success in dislodging the CEO, investors and activists may now be encouraged to routinely conduct background checks and personal investigations. Consequently, boards will need to do a better job vetting candidates, rather than relying solely on vetting performed by outside executive recruiters: " ‘The boards look foolish, and the company suffers reputational damage when they hire an unsuitable CEO. Plus it's expensive to hire and fire the CEO; it costs the shareholders.' [However, these] investigations ‘raise the specter of looking into backgrounds, as far as back as high school, of executives and board members that could lead to overreaching. In politics, there is so much scrutiny that it chills the willingness of many to take part….If it goes too far, it will be open season on executives.' "

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