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How Does Shareholder Unrest Affect CEO Careers?


A lot depends on whether investors are upset about a company’s financial results or its poor social impact

Illustration of bowling pin dressed in a tie and top hat.

In June 2016, Travis Bornstein stepped to the mike at the Teamsters union’s annual convention in Las Vegas. You could hear a pin drop. For the next several minutes Bornstein, an Ohio Teamsters official, talked about his late son, Tyler, an athlete who got addicted to painkilling opioids prescribed for his injured arms. Two years earlier, Tyler had died of an overdose in a parking lot in Akron, Ohio.

The speech became a rallying cry for the union. Teamsters members came forward by the dozens to talk about their own families’ struggles with opioid addiction. It also galvanized the union to take on drug distribution giant McKesson. The union criticized McKesson for failing to keep tight controls on its supplies of oxycodone and hydrocodone pills.

In 2017, the Teamsters held more than US$30 million in McKesson shares. That July, it successfully led a shareholder vote to reject a proposed pay increase for then-CEO John Hammergren. A year later, Hammergren agreed to a 10 per cent pay cut. Then, in March 2019, he left the company.

When shareholders get restless

Thirty years ago, it was rare for shareholders to weigh in on a social issue. Typically, shareholder activism aimed to increase investor wealth. But as corporate social responsibility (CSR) has become more important in recent years, CSR-focused shareholder activism has grown as well.

That shift fascinates Michelle Lee and is one reason why the Smith School of Business assistant professor of strategy and organizations wanted to look at shareholder activism in-depth. More specifically, she wanted to know how wealth- and CSR-oriented shareholder activism impacts the careers of CEOs.

“There have been some studies that looked at the relation between career outcomes and wealth-oriented activism,” she says. “And there are a few that study CSR-oriented activism. But we decided it was important to understand both alongside each other, because boards and CEOs themselves consider both when assessing CEO performance or job difficulty.” The result of that research is an Academy of Management Journal paper forthcoming in February 2022.

To figure out how both forms of shareholder activism might impact CEOs, Lee and her co-authors, Abhinav Gupta of the University of Washington, and Don Hambrick of Penn State University, examined S&P 1500 firms between 2005 and 2016.

Usually, researchers measure shareholder activism by looking at the number of resolutions shareholders file. But there are other measurements to consider. Shareholder unhappiness can also be reflected in the percentage of votes in favour of resolutions, the number of institutional sponsors of those resolutions (e.g., banks) and the number of resolutions endorsed by Institutional Shareholder Services, the leading provider of recommendations on shareholder resolutions.

Lee and her co-authors took these factors into account, as well as the number of resolutions filed. They also introduced the concept of “shareholder unrest” to describe shareholder dissatisfaction.

Pooling these factors, the researchers found that shareholder unrest does substantially affect the career outcomes of CEOs.

Social impact comes into play 

One of their study’s more surprising findings is that CSR-oriented unrest is more strongly associated with cuts in CEO pay and a greater likelihood of CEO dismissal than wealth-oriented unrest. At first, Lee and her co-authors believed it would be the opposite. But when they thought about it more, they realized that there isn’t a lot of agreement on what it means for a company to do well socially. With financial performance, there are concrete indicators; boards don’t need shareholder input to assess the financial performance of a company. But because there is less clarity on CSR indicators, boards look to CSR shareholder unrest as a sign of a company’s CSR deficiencies.

Another interesting finding: Wealth-oriented unrest is highly predictive of voluntary CEO resignations. CSR-oriented unrest, though, is not. This seems counterintuitive given the previous finding. But Lee thinks it’s because of a disconnect between what CEOs and boards value.

“When CEOs are hired, they’re hired expecting to take on and really manage the financial performance of a company. But in recent years, boards have started to see that companies have more of a social obligation than ever before and that there’s potential for great reputational damage if they ignore CSR issues. CEOs might not understand this yet or perceive it as part of their primary obligation to the company.”

Finally, and perhaps not surprisingly, the researchers found that when a CEO leaves or is fired, her replacement will likely receive higher compensation since she’ll have to deal with the unrest left by her predecessor. What was somewhat surprising, however, was that both CSR- and wealth-oriented unrest were strongly and equally associated with a new CEO’s pay level. The researchers hypothesized that the pay premiums for CSR-oriented unrest would be higher. But it appears that both types of unrest are seen as equally burdensome, says Lee.

Lesson for leaders

The main takeaways here are twofold, says Lee. For shareholders: beware of what you wish for. “While shareholder activism can be great, since shareholders are able to put their voice into governance, it can also create costs that they have to bear. When there’s a lot of shareholder unrest, this might come at the price of paying a premium in hiring a new CEO to deal with the unrest.”

For CEOs and other business executives, the main lesson is to heed shareholder unrest and to prevent it from intensifying, says Lee. CEOs should be particularly aware of CSR-oriented unrest, she adds, since it’s more likely to have a big impact on their careers.

How should executives and companies like McKesson deal with CSR-oriented unrest? Listening is a good start. “When shareholders put forth resolutions, you’ll see some companies talk to them and try to understand what their needs are,” Lee says. “That shows a proactive approach to engaging with shareholders, and I think it’s the best way to prevent that unrest from escalating and becoming something that has a lot of support.”