First published in the W. P. Carey magazine, Spring 2016.
Research by Christine Shropshire, Associate Professor of Management
Kraft Foods Group Inc. was forced into splitting the company in two, leaving one half focused on groceries, the other on snack foods. Hewlett-Packard Co. made a similar obligatory split, which resulted in separate companies for its manufacturing and services entities. General Motors Co. wasn’t strong-armed into divestiture, but it was compelled to buy back some $5 billion in stock.
Granted, the industries of these companies differ widely, but two circumstances bind the three together: each was pushed into the aforementioned moves by activist shareholders, and each company was led by a female CEO at the time.
Although women make up half of the nation’s workforce, only 5.1 percent of Fortune 1000 companies have female chief executives. That rarity brings these women leaders loads of media and shareholder attention. But it’s not necessarily the good kind, according to Christine Shropshire, an associate professor of management at the W. P. Carey School of Business.
Female CEOs are far more likely to be targeted for shareholder activism than their male counterparts, and they’re more likely to face investors who are betting their firm’s stock price will drop. But, says Shropshire, it’s not all “doom and gloom” for the woman who finally heads the c-suite. “Female-led firms do have disproportionate amounts of shareholder activism, but our research also shows that they can do something about it.”
Weapons of mass disruption
Shropshire, along with doctoral student Abbie Oliver of the University of Georgia, began her research with a look at shareholder activism in general, but she quickly noticed that a big share of it was aimed at companies with women in charge. How do companies come under fire from vocal investors? One way is through shareholder proposals, which are formal recommendations a stakeholder who owns at least $2,000 worth or 1 percent of the stock can submit to a publicly traded company. These proposals specify a course of action or policy change the shareholder advocates.
Often, as with Kraft and GM, the activist shareholder wants the company to spin off underperforming divisions and focus on its core business, Shropshire notes. A company may have several divisions that are, in the short-term focus, disappointing the investors. Those divisions may not be delivering top-line value but, in the longer-term, they do shore up the company as a whole. For instance, the divisions may help smooth out cyclical demands for core-business products or, perhaps, there are efficiencies achieved, such as having core business suppliers in-house.
“Investor activists are looking at diversification and saying, rather than keep those costs on your books, you should divest these underperforming units and focus on what is it that you do best today,” Shropshire says. “The short-term focus is that it takes longer to reap the benefits of diversification, and underperforming units may not contribute to this quarter’s results.”
Although it’s not a formal method of shareholder activism, another way investors weigh in on their view of the firm is through short selling. Rather than purchase stock with cash, short sellers set up special accounts at a brokerage, which allows them to essentially borrow shares of a stock, sell those shares immediately and pocket the proceeds. Short sellers are betting the stock price will drop and, when they replace those borrowed shares, they’ll make money by purchasing the replacement stock at a lower price than the original shares.
And the hits keep coming
Shropshire examined both of these phenomenon — short selling and activist shareholder proposals — at Fortune 1000 companies during the time period 2003 to 2013. Results, she says, were a little “depressing.”
Among the shareholder proposals, Shropshire scrutinized all those that required a firm response of some kind. When a resolution is filed and it’s completely irrelevant to the company’s business, the firm can ask the U.S. Securities and Exchange Commission for permission to omit the item from the proxy vote, and often times the SEC will allow that. But, if not omitted, then the firm either has to put the resolution on the proxy and allow it to go out for a vote among all shareholders, or the firm has to get the shareholder to withdraw the resolution, which typically means there has been some level of negotiation and settlement.
Shropshire examined all non-omitted resolutions in a sample of firms expected to differ only by CEO gender — performance, size and so on are nearly identical. “For every resolution that a male-led firm gets, the female-led firms are getting one and half times as many. That means for every 10 resolutions that a male-led firm is getting, the female-led firms are getting 15,” she says. Moreover, these women CEOs are more than three times more likely to be targeted for shareholder activism.
Similar results show up for short selling of stock, which is both a vote against the firm and means of damaging it. “Having 40 percent or more of your shares being shorted is a meaningful threshold above which the market in general considers that your firm is on the decline,” Shropshire says. It’s so damaging that the SEC put a stop to short selling during the financial meltdown of 2008. Still, she adds, data from the past three years show that “female-led firms have, on average, a 44 percent short sale ratio relative to 35 percent for the male-led firms.” And, it gets worse. When female-led firms receive a high number of resolutions, they experience an increase in their short ratio of 75 percent compared to male-led firms, which suffer only a 29 percent increase.
Not so pretty in pink
Shropshire’s research indicates that the reason for these discrepancies between male- and female-led firms boils down to simple stereotypes and something called “signaling theory.”
The stereotypes are well established in society, she wrote in a paper on her studies. “Female leadership is often perceived as interactive and collaborative, an engagement-oriented stereotype, while male leadership is typically categorized as authoritative and powerful,” the paper states. Shropshire posits that perhaps one reason women come under fire is because activist investors think they’ll be able to sway or bully them more easily.
In addition, social norms tend to see women as emotional and nurturing, not objective, rational and ambitious, which are words used in association with men. Since successful leadership goes hand-in-hand with stereotypically male characteristics, there’s a perception that women are somehow unfit for the CEO role. On top of this, women CEOs are very rare, so investors have more uncertainty about performance and, when knowledge is missing, stereotypes fill in the gaps. That’s why Shropshire sees signaling theory at play.
“The seminal work on signaling theory was an economics paper on how employers make hiring decisions,” Shropshire explains. “A way to short-cut your screening process is to see where someone’s degree comes from. It provides a signal of unobservable characteristics.” In other words, the prestige of the degree implies an unobservable quality within the job applicant.
According to Shropshire, the gender of the CEO may also provide a signal about a firm. “There have been several previous studies that find a negative market reaction to the appointment of a female CEO. At the time the female CEO is announced, the stock price drops,” she says. “Those effects aren’t just to the firm that is announcing its female CEO. There are negative spill-over market effects for other female-led firms at the same time.”
Saving inc. with ink
Female CEOs garner far more media attention than their male counterparts, “and not for corporate performance and policy decisions alone,” Shropshire remarks in her paper. “For example, as Silicon Valley’s most prominent woman in a male-dominated profession, Yahoo CEO Marissa Mayer’s appearance, pregnancy and parenting are frequently discussed — yet these topics rarely surface for male CEOs.”
Given the scrutiny women chief executives endure, Shropshire wondered if having more public information through proactive impression management — a.k.a. public relations efforts — could moderate the shareholder activism these same women face. Her research showed that women-led firms do produce some 20 percent more press releases than male-led firms. What’s more, firms with a female CEO receive twice as much media coverage as firms led by a man. Both of these circumstances — the proactive PR and the media coverage — deflect some of the shareholder activism female-led firms receive.
She says this reflects signaling theory in action. “Fundamental to signaling theory is the idea that there is asymmetric information, meaning we don’t know unobservable characteristics about a firm, and that makes us more likely to draw on stereotypes,” Shropshire explains. Press releases and media coverage fill in those information gaps. “In both cases, they help offset that increased activism we find at the female-led firms.” — Betsy Loeff
Based on a working paper titled “The Glare of the Spotlight: Stereotypes of Female Leadership and Shareholder Activism,” by Christine Shropshire, associate professor of management at the W. P. Carey School of Business, Arizona State University, and Abbie G. Oliver, management doctoral student at the C. Herman and Mary Virginia Terry College of Business at the University of Georgia. — Betsy Loeff