2/18/2025
When Activist Investors Ask for Board Seats
Harvard Business Review (02/18/25) DesJardine, Mark; Tetelbaum, Elina
In June 2024, Elliott Investment Management announced a $1.9 billion investment in Southwest Airlines (LUV). Elliott advocated for strategic changes and leadership replacement, nominating 10 candidates to Southwest’s 15-member board. Just months later, the two parties reached an agreement that included shrinking the board by two seats and appointing six new directors, five of whom were initially proposed by Elliott. The pattern of activists gaining board seats through settlements is not unusual. In recent years, although activists’ success at the ballot box has varied, they have remained successful in influencing the composition of corporate boards and with increased efficiency. In 2024, there were 243 activist campaigns globally, leading to 119 board seats driven by activists. Moreover, in these campaigns, the average days from the public launch of an activism campaign to a formal settlement being reached has decreased dramatically, from approximately six months in 2021 to a few weeks in 2024 (although there is often behind-the-scenes engagement that starts earlier). Given these dynamics, it is necessary for executives, directors, and shareholders to understand activists and their director nominees and how they may influence board dynamics and board effectiveness. Activist-nominated directors can be categorized into two types, based on their affiliations and the nature of their relationships with their activist sponsors. Activist-unaffiliated independent nominees are independent professionals, often armed with industry experience, who are nominated by activist investors claiming they will bring relevant skills and knowledge to boards. They are not employed by, and may have no prior relationships with, the activist fund that nominates them (although some may go on to be nominated multiple times by the same activist). Their backgrounds often include executive roles or public company board experience in relevant sectors to the target company, and they are sometimes identified using an executive search firm rather than sourced through the activist’s personal network. Activist principals are employees or partners of the activist fund itself. Their direct employment aligns their interests closely with the activist’s specific objectives. Often when these individuals join public company boards as part of settlements, such individuals are permitted to share the company’s confidential information with the activist fund. Candidates of either type can find their way onto a board through one of three channels. Given the high stakes of these campaigns and the outcomes that follow, executives and directors need to know how to prepare for and interact with activists and activist board nominees effectively. The first three practices — assess, revamp, and communicate — take place well before an activism campaign manifests. The next three practices — adapt, integrate, and engage — describe reactions when a activism campaign does occur and activist nominees are appointed or elected to a board. By following these practices, executives and directors can ensure better outcomes from hedge fund activism, whatever the circumstances. The nominating and governance committee of a public company board should facilitate regular director self-assessments—sometimes with the help of third parties—of the composition, skills, and effectiveness of the directors. These assessments should help align the directors’ expertise with the company’s strategic vision and the challenges it faces. For instance, a board overseeing a technology company should consider the extent to which it has individuals with knowledge of innovation and emerging technologies. A company navigating complex regulatory changes could evaluate if it might benefit from directors with policy or legal expertise. By treating the board as a strategic asset and aligning its composition with the company’s key opportunities and risks, organizations can identify gaps and preempt vulnerabilities activists might exploit. Any board’s composition should reflect the unique needs of a particular company and be managed so that no critical strategic competency is unaccounted for. For example, when Southwest faced criticism for lacking aviation expertise, Elliott capitalized on this alleged weakness by nominating WestJet’s former CEO. Companies involved in transformative M&A or navigating major regulatory shifts might benefit from having directors with hands-on experience in these areas. A modern, diverse, and well-rounded board not only strengthens decision-making but also undercuts activists’ arguments for change. Transparent communication about the board’s qualifications and alignment with the company’s strategy is essential. Companies should use tools like skills matrices and robust disclosures to demonstrate the depth and diversity of their directors’ expertise. Shareholders must understand that directors bring more than surface-level qualifications; qualities like institutional memory, diplomacy, and strategic oversight are critical to boardroom effectiveness. Activists sometimes try to reduce directors to crude measures, such as age and tenure, but boards that engage and meet with shareholders and clearly articulate the unique contributions of their members can build trust and demonstrate the board’s indispensable role in driving long-term value. When activists are successful in their campaigns, the board should seek to understand what shareholder perspectives and frustrations led them to vote to replace one or more directors. Usually this information could be solicited through direct engagement with shareholders, discussing the topic with the activist-nominated director, or reading through the proxy advisory recommendation reports. Although not always achievable, seeking to understand investor sentiment, including which parts of the company’s strategic plans and priorities failed to resonate with shareholders, will help the board communicate better in the future. Integrating an activist-nominated director requires a clear engagement strategy to ensure their participation is productive and aligned with the company’s strategic vision and the board’s governance norms. A protocol for onboarding new directors should include familiarizing them with the company’s strategy, governance practices, and board processes, including expectations of confidentiality and board decorum. Expectations for constructive collaboration and mutual respect should be communicated and modeled upfront to avoid unnecessary tensions and defensiveness. By facilitating smooth integration, the board can help align everyone toward shared objectives and maintain a cohesive governance structure. To maintain board effectiveness, directors should foster a culture of constructive dialogue where divergent views are respected and debated openly. Once a director joins the board, irrespective of who nominated them, they owe fiduciary duties to the company and all of its stockholders, not only the nominating stockholder. Accordingly, activist-nominated directors may well come to agree with the strategic decisions made by the other board members with the benefit of all the confidential information they were not able to access as an outside party. This approach balances preparedness, collaboration, and strategic focus, ensuring the board can operate effectively and in the best interests of all shareholders, even where an activist has influenced its composition.
Read the article