Board Focus: When a Former CEO Turns Activist

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The activist investor knew the firm’s inner workings in a way that most wouldn’t know. He was familiar with its vulnerabilities and skeptical of its strategic direction. He had other ideas on how to run the business. And, most importantly, he already had the support of a good number of shareholders and employees. That’s because the activist was the firm’s former CEO.  

In a new study that should concern incumbent leaders and board directors everywhere, researchers found that activist campaigns launched by “quasi-insiders,” such as a former CEO, founder, or director, are becoming increasingly more common—and more successful. The study found that former insiders launched 280 activist campaigns from 1995-2001. While that is only slightly more than the average number of activist campaigns launched in any single year over that timeframe, the study found that quasi-insiders achieved their main objective in 43% of campaigns. The overall success rate for activist campaigns varies by year, sometimes averaging less than 30% and sometimes more than 60%.

Torrey Foster, a vice chairman in Korn Ferry’s consumer, CEO, and board practices, says a former leader launching an activist campaign or teaming up with an activist firm to go after their old company is “a bit of a scorched earth approach.” He says it is a rebuke not only of their successor but also of the firm’s governance. “The level of antagonism has to be high to burn those relationships,” says Foster. To be sure, according to the study, quasi-insiders often targeted smaller companies that were struggling financially to launch campaigns aimed at returning them to leadership or a role on the board.

Business history is littered with examples of former founders and leaders coming back with great fanfare to revive their ailing firms, of course. Steve Jobs, Howard Schultz, and Bob Iger are just a few that come to mind. But in those instances, as in most others, the returning leader only came back at the behest and with the support of the firm’s board. “The vast majority of leaders prefer to stay out of the way once they are gone,” says Dennis Carey, vice chairman and co-leader of board services at Korn Ferry. “They know it’s in the best interests of the company not to second guess the board or challenge the incumbent CEO.” That’s not to say they don’t stay available to the new CEO or the board, however. Carey says many former CEOs serve in a shadow capacity as an advisor or a sounding board for their successors, and many remain on the board in an emeritus-type role. When they do get back involved, it is usually because the board decided that the company has lost its way and sought them out, he says.

Jane Edison Stevenson, global leader of board and CEO succession at Korn Ferry, says activist campaigns by former insiders introduce a level of complexity that goes beyond that of a typical campaign. She says it complicates the CEO’s ability to run the day-to-day business with the former leader watching every move, for instance, and creates confusion for stakeholders. “It’s an indication that there is a level of unfinished business, the reasons for which vary as much as the people involved,” says Stevenson.

Other potential risks incumbent leaders and boards face for a former leader’s activist action include losing control of the narrative in the media, where the firm could be painted as going backward instead of forward, and losing credibility with shareholders who would be forced to take sides should it get to the point of a proxy battle. “Even if a new leader is struggling and the firm isn’t performing,” says Foster, “that doesn’t mean going back to the former leader is the right idea.”

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