CHAMPAIGN, Ill. — By mounting high-profile campaigns that have successfully unseated corporate titans and won shareholder-friendly reforms, activist investors have become increasingly successful in agitating for change in publicly held companies. And according to new research from a University of Illinois expert in social network analysis, there’s little that business leaders can do to blunt their impact now that their elite social networks in the form of corporate board “interlocks” have been disrupted.
While executives were once able to stock boardrooms with friends in high places and feather their own nests at the expense of investors, corporate leaders are now more vulnerable to the vocal shareholder value movement, says a recent paper from Richard A. Benton, a professor of labor and employment relations at Illinois.
“My findings indicate that as corporate social networks have unraveled, the insulation benefits conferred to those who are well-connected with their C-level peers have waned,” Benton said. “While well-connected firms were once able to rely on their networks to ignore the demands of activist shareholders, corporate leaders are now much more vulnerable to activist interventions.”
The study focuses on shareholder activism by analyzing large and midsize publicly traded corporations between 1998-2013. The analysis is divided into two components: social entrenchment as a predictor of proposal targeting, and social entrenchment as a predictor of proposal implementation.
The results confirm that firms’ social entrenchment is related to shareholder proposal targeting, meaning that “more cohesively nested firms are more likely to be targeted in general as well as by unions and individual investors,” according to the paper.
“I looked at how firms responded to activists, and how activists differentially target firms,” Benton said. “I found that activists are far more likely to target firms that are deeply embedded in this network, meaning that activists have a sense that this ‘old boys club’ network doesn’t serve their interests, and that they want to try and do what they can to break it apart by targeting highly connected firms.”
Benton also found that, during the early part of this decade, the network functioned as a shield from activist pressure for corporate elites. But toward the end of the decade, “that network starts to fracture,” he said.
“There’s a lot of concern about what does all this shareholder activism mean,” Benton said. “Before the mid-2000s, social entrenchment once reduced managers’ responsiveness to shareholder proposals. But that effect has since disappeared. There’s been a big spike in shareholder activism through the mid-2000s and this decade, as well. It’s been a big concern in terms of what it means for corporate strategy and corporate control.”
The fracturing of business elites’ social networks has removed an important “collective infrastructure” that renders corporate leaders more susceptible to shareholder demands and pressures, Benton said.
“Shareholder advocates would argue that an entrenched and insulated corporate elite harms a stock’s performance and exploits shareholders,” he said. “The board network traditionally served an important function among managerial elites in helping them preserve autonomy and power. They relied on it to protect themselves from external pressures. But as this network has become less relevant, these leaders are far more susceptible to activists’ demands than they once were.”
According to Benton, the disintegration of the network has tipped the balance in corporate power, thereby promising to reinvigorate long-standing debates about who controls large, publicly traded corporations.
“As a result, the network’s dissolution may have important consequences for corporate governance, as corporate elites became increasingly isolated and focused on firm-specific concerns,” he said.
The long-term consequence of this is that corporate elites don’t have the same kind of resources that they once did to protect their fiefdoms of power.
“Critics would argue that unbridled shareholder influence may be harmful for workers and communities,” Benton said. “When corporate leaders had greater capacity for coordination and autonomy, they had greater freedom to pay attention to diverse corporate stakeholders, invest in their communities and create good jobs.”
The paper was published in the journal Organization Science.