Does Adding an Activist to the Board Improve Shareholder Returns?

Earlier this year, we published research revealing that public companies that settle with activists tend to underperform the market, on average, over the three years following the settlement. Specifically, we examined 634 settlements in the U.S. over 14 years (2010–2024) and found that in the aggregate, companies that settled with activists underperformed the S&P 500 by 7.1%.

These findings suggest that settlements do not generate positive returns for investors. The exception occurs when looking at companies that were sold within the same three-year period. On average, these companies outperformed the market by more than 15%. It should therefore not be a surprise when activists push companies to run a sale process.

In this second edition of our research, we took a closer look at the settlement data to determine if the addition of one or more activist principals to the board led to a different stock price outcome in comparison to settlements that only added independent directors (for clarity, “activist principal” means an executive that works for the activist fund; “independent” means a director that is not an employee of the activist fund. [1]) We also examined whether companies were more or less likely to sell themselves if an activist principal was added to the board versus only independent directors.

Does adding an activist principal to the board lead to better (or worse) returns versus adding only independent directors?

Marginally. Companies that added one or more activist principals to their boards as part of a settlement, on average, underperformed the S&P by 6.5% during the three years after settlement, while companies that added only independent directors underperformed the S&P by 7.8% [i]

This finding suggests that activist principals are not able to create outsized value for shareholders when serving as directors. There may be a few reasons for this. First, in a large majority of cases, activist principals represent only one or two seats in the boardroom and therefore have limited ability to influence board strategy and decision-making. In other words, unless the activist directly controls a majority of the board, it’s difficult to drive differentiated outcomes. Second, it’s possible that activist principals themselves do not have differentiated skills or insights that would enable the company to drive a differentiated outcome. It is also possible that activists never fully integrate into the boardroom, preventing their strategies from being implemented.

There are countless examples of settlement discussions in which the activist claims that the only way the company will be able to create outsized value is by adding the activist to the board. Our research findings clearly call this assertion into question.

Is a company more likely to sell itself with an activist in the boardroom?

The second edition of our research examined whether companies were more or less likely to sell themselves if they added at least one activist principal to their board versus only independent directors. Of the 634 total settlements examined, 331 added only independent directors and 303 added at least one activist principal. 92 of the independent-only settlements eventually led to a sale within three years, a rate of 27.8%, while 88 of the activist principal settlements led to a sale, a rate of 29.0%. The difference of ~1.2% is negligible – supporting the (perhaps surprising) conclusion that adding an activist principal did not make a material difference in whether the company sold itself post-settlement.

This finding may reflect a fundamental truth about M&A: a company is only able to sell itself if it is an attractive acquisition target and there is a willing buyer. Having an activist principal on the board generally cannot influence this.

Are activist principals becoming more or less represented in settlements?

During the fourteen-year timeframe in our research, we have seen a steady decline in activist principals added to boards in connection with settlements. In 2011, the second year of our sample set, activist principals represented 83% of directors added to boards. In 2024, the final year of our sample set, activist principals represented only 32% of directors added to boards.

This shift in companies adding more independent directors and fewer activist principals could be for several reasons. First, in the early years of activism, there was a stigma attached to being an activist board nominee, which undoubtedly made it more difficult for activists to find qualified director candidates. This stigma has arguably subsided, with more high-quality independent directors willing to join activist slates. Second, both boards and activists alike have become more proactive in identifying compelling independent director candidates to bring to the table in settlement negotiations. Third, activists have learned over time that although joining a board may advance their strategic vision and influence, it restricts their flexibility to size their position up or down and triggers a range of burdensome regulatory constraints.

Key Takeaways 

The second edition of our research finds that companies with activists in the boardroom perform only slightly better than companies that add only independent directors as part of a settlement. We also found that having an activist on the board does not mean a higher chance of selling the company.

The implication: companies should not buy into activist claims that having an activist principal in the boardroom can create differentiated value. The real question is which director candidates have the right skillset to help the company execute its strategy, whether standalone or through a sale.