How a CEO’s Gender Impacts Shareholder Decision Making

Key Takeaways:

 

• The gender of a firm’s CEO is a major input in how company shareholders respond to activist campaigns.
• Proactive organizational communication may reduce investors’ reliance on stereotypes and gender-based discrepancies in shareholder decision making.

In recent years, shareholder activism has risen considerably. Activist investors (“activists”) are high-net-worth professional investors, often affiliated with private equity firms or hedge funds, who own a large amount of stock shares in a publicly traded company and push for change in the organization with the goal of increasing the value of their shares in the company. To pressure board members and top executives to implement their recommendations, activists often wage highly visible campaigns against the organization. For example, Bill Ackman of Pershing Square appeared on CNBC’s “Mad Money,” and produced video appeals as part of a campaign targeting ADP. Nelson Peltz of Trian Fund spent an estimated $100 million dollars on advertisements and mailings in its campaign targeting Procter & Gamble.

Campaigns by these activists can have a significant impact on an organization and its leaders. Targeted organizations face greater stakeholder scrutiny and must devote significant time and resources to addressing activist demands. Further, successful campaigns can result in a new CEO and/or board members, new strategic initiatives and a new capital structure. Both journalists and academics have raised concerns that activists appear to disproportionately target organizations with female (vs. male) CEOs.

Yet just because an organization is targeted does not mean an activist campaign will succeed in implementing activist investors’ recommendations. Understanding whether CEO gender impacts campaign success is critical in advancing the conversation on how and why gender-based discrepancies arise for female CEOs and the organizations that they lead.

When an organization is not receptive to proposed changes, an activist may escalate the campaign to a proxy contest. A proxy contest occurs when an activist lobbies all company shareholders to cast a vote to fill open seats and/or replace the company’s current board members with activist-aligned director candidates, and sometimes the activist himself. Winning a proxy contest allows an activist to take control of the company’s board of directors and create change from within the organization.

To win a proxy contest (i.e., to win a seat or seats on the board), activists must often rely on retail investors voting in favor of their preferred candidates. Retail investors are not professional investors but rather individual shareholders who trade stocks from personal accounts; however, they collectively hold a large ownership stake in targeted companies and are therefore highly impactful on organizational outcomes.

For example, in early 2021 GameStop retail investors increased the share price by over 1,000% in two weeks through coordinated trading facilitated via online forums. Logic suggests that the merits of an activist campaign should affect how retail investors vote in a proxy contest, but recent research suggests that the gender of an organization’s CEO has a significant impact on the outcome of campaigns.

The results of two studies, conducted with 492 retail investors, show that their willingness to support an activist campaign via how they vote in a proxy contest depends on the gender of the firm’s CEO. Proxy contests are a competition between a company’s nominated directors and those put forward by the activist.

However, retail investors perceive a proxy contest as a rivalry between the CEO and activist investor because they are the “face” of the company and activist campaign, respectively. Retail investors perceive that they are being forced to “choose sides” when casting a vote in a proxy contest, leading them to use stereotype-influenced standards to evaluate the relative competence of the activist versus the CEO in managing the organization. An activist is perceived as more competent than a female CEO, but similarly competent to a male CEO. Consequently, an activist is more likely to win a proxy contest against a firm with a female CEO than a male CEO.

The gender of the activist can further impact retail investors’ proxy contest voting behavior. When an activist is male, stereotype-influenced evaluations result in more support for activist campaigns against female-led than male-led organizations. Yet when an activist is female, retail investors do not differ in their proxy voting behavior for female-led versus male-led firms. This occurs because female activists remain underrepresented and challenge gender stereotypes. Therefore, stereotypes are perceived as less useful in this context and exert less influence on relative evaluations of competence for the activist versus the CEO. 

Shareholder activism has increased dramatically in the last decade, with activist campaigns disproportionately targeting female-led organizations. Because of the consequential outcomes of such campaigns for organizations and their leaders, understanding how and why female-led firms may be systematically disadvantaged in investment decisions is important in reducing biased targeting and outcomes of activist campaigns.

Importantly, there is hope that proactive communication from a company and its board to retail investors may decrease the influence of stereotypes and, with it, gender-based discrepancies.

Based on a forthcoming article that will be available, upon publication, here: http://dx.doi.org/10.1037/apl0000968