December 20, 2017
“Your services are no longer needed.”
Many CEOs and senior executives are hearing this in the wake of increasingly successful activist investor demands in what has been a wild year of forced CEO turnover.
This growing trend has impacted C-suites at one-third of S&P 500 and Fortune 500 companies that replaced a CEO in 2017 – a diverse list that includes American International Group, Arconic, Avon Products, Buffalo Wild Wings, CSX and Mondelez – and continues to gain widespread support from institutional investors and Wall Street.
Indeed, 2017 revealed a seismic shift in power between executives and investors. CEOs face heightened pressure to deliver turnaround results at a quicker pace than ever before – especially when activist investors get involved. FTI Consulting research shows CEO turnover increases dramatically – as much as 200 percent – over a 12-month period when an activist investor begins a public campaign.
However, when activist investors succeed in replacing management personnel, the subsequent shift in alignment as a result of strategy change creates an inherent disconnect between the Boardroom and general workforce that almost always guarantees culture shock. Employees, still reeling from the sudden upheaval in the C-suite, may be unwelcome to – or at least uncertain of – the new leadership and strategy.
Research shows that companies with a participative culture reap an ROI that averages nearly twice as high as those in firms with less efficient cultures. In other words, engaged employees and a productive culture are critical to the success of the business strategy that these activist investors have fought so hard to institute.
Building a winning culture requires instilling in employees a sense of belonging, motivation and engagement that enables them to execute against the company’s vision, strategy and priorities. For the Board and incoming CEO, this means connecting the employee experience to the business strategy. Take Arconic, one of the largest suppliers in the aerospace industry, as a recent example. Elliott Management pushed for a spinoff as part of their strategy to drive shareholder value and commented at the company’s insufficient growth. Employees, now tasked with delivering on higher sales and profit goals, were immediately impacted. Elliott positioned “culture” as a cornerstone of their investment strategy, thus addressing culture in the short-term in order to execute in the long-term.
This type of forward-thinking policy can be adopted by other companies as they enter into a change of strategy or leadership – or both, as is often the case in these situations.
Today’s activist investor world presents a new set of challenges for CEOs – particularly for incoming leaders who must respond immediately to their Board’s expectations for change. However, when new leadership is successful in shaping corporate culture, employees will be positioned to improve financial results and enhance shareholder value.