Activist CEOs are good for business

CEOs are increasingly speaking out on social and political issues, and it appears to be good for business.

At least, this is the conclusion of a working paper that investigates the link between CEO activism and firm value.

The authors of the paper searched news archives and Twitter for so-called ‘activist events’ by CEOs of S&P 500 companies between 2011 and 2019, and then looked at how the stock moved in the days and weeks surrounding the event.

The first thing that the authors noticed was that the number of activist events increased dramatically over the course of the observation period. In 2011, less than 1% of the companies monitored were involved in a CEO activist event, but by 2019, that figure was 37.53%.

The second thing they saw was that these socially conscious outbursts by CEOs generally precipitated small increases in stock prices.

‘The aggregate effect of CEO activism is positive and translates into a $10–$27 million gain in shareholder value, based on the median announcement returns and the median market capitalization of $13.72 billion,’ according to the researchers.

On its face, this finding looks like it contradicts an earlier study, which concluded that investors generally respond negatively to corporate activism. But the authors of the working paper wave away any conflict by pointing out that the other researchers limited their research to 'polarising' political topics.

In fact, the results of the new study appear to back up the idea that investors get squeamish around genuinely divisive topics. While the data showed that investors?rewarded CEOs who spoke out on diversity and the environment, there was no such support for leaders who used their public standing to get stuck into messier political topics.

Does that make investors poseurs who like the appearance of purpose but shrink at anything stronger than platitudes? Not quite. The data showed that investors at least seemed to prefer it when CEOs' 'activist' statements on social and environmental issues were accompanied by actions that ‘had direct cash flow implications’ on their companies.

But given that only 3% of the activism events collected by the researchers were accompanied by any kind of action, that’s a depressingly small sample size on which to base any conclusions.

Read more about the working paper in our latest edition of Strategist’s Digest,?here.

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