The long shadow of former CEOs as change agents has touched companies from Starbucks to Disney. Charismatic former executives have successfully lobbied company board members to oust their successors. These situations rely heavily on past relationships and goodwill with members of the board, and are something of a family affair.

Former senior executives with industry experience are also regularly sought after as independent company directors and activist nominees at companies where they have no prior employment history.

Many of these individuals serve as knowledgeable and experienced change agents and leaders. (E.g. the late railroad legend E. Hunter Harrison was enlisted by activist investors at Canadian Pacific Railway and CSX Corp.) This is by no means a new phenomenon and one that boards and investors frequently navigate.

An Unexpected Alliance

However, former CEOs and executives appear to be increasingly teaming up with activist investors to target their previous employers.

Recently, Pfizer’s former chief executive and chair and its and former chief financial officer partnered with a prominent and well-regarded activist investor to agitate for change at the company (before dropping out days later). Earlier this year, high-profile contests including at companies such as Disney and Crown Castle, also featured former executives, either as activist nominees or as activists themselves.

These contests feature a dynamic marked by personal familiarity and an attendant level of heightened rancor. Former executives are frequently at odds with their former Board, and typically their successor in the C-Suite, who in turn view them as disloyal or disingenuous. The addition of these individuals as shareholder nominees can lend a significant edge to an activist campaign but they may also bring significant baggage to the fight.

Boards can draw on potentially years of corporate records including emails and HR complaints, and offer an “insider’s” view the public and private track record of the executive – which may not have occurred upon their departure.

Motivations of Former Executives

• A genuine desire to protect what they believe is their legacy, and/or to preserve the value of their remaining shareholdings in the company
• To seek redress after a hasty or unjust termination
• A perceived loss of professional relevance and prestige
• A sense of loyalty to former colleagues, shareholders or strategic partners
• Commercial opportunism

Meet the New Boss, Same as the Old Boss

Shareholder campaigns that include former executives provide unique advantages and disadvantages for activist investors.

Advantages:

• Former executives can lend instant credibility to the activist case for change and plan for the company and amplify the resonance of the activist case, even if the activist holds a relatively small amount of stock
• Bridge the gap for activists seeking management change by providing a transitional or permanent leadership solution
• Pre-existing relationships with key employees, customers, partners and shareholder relationships
• Contribute specialized knowledge and experience about the business and its assets

Vulnerabilities:

• Dated beliefs and perspective on the company’s opportunity set, deficiencies, changed competitive dynamics of the business and even significantly changed macro tailwinds that may not be readily apparent
• An exaggerated track record or claiming undue credit that the company did not challenge in the interests of a smooth exit of an executive. (Magnanimous farewell messages from the Board often mask what may not have been a strictly voluntary departure by the executive)
• Personal rivalries and excessive familiarity with the company or its employees, including hearing from the most disgruntled current directors and employees, which may substantially color the assessment of the company or leadership team
• Individuals are susceptible to coercion by the Company to disassociate from the activist. Tactics could include: threatening loss of pension or other benefits; enforcement of long-forgotten non-disparagement clauses in employment or separation agreements; application of social pressure from former colleagues; and potential embarrassment if previously unknown facts about the individual’s conduct are revealed as part of Company defense

Concluding Thoughts

Activists should proceed with caution when enlisting or being enlisted by former executives of public companies. The individual’s background, true track record, and assessment of the company, require proper due diligence.

Much of the preparation for Boards and management teams is similar to the preparation activities that all companies should have on hand, including the development of “Break the Glass” materials.

Boards should maintain independent relationships with shareholders and ensure that successor executives quickly establish those relationships early in the onboarding process.

Companies facing activist approaches that include former executives should take extra care to practice good communications hygiene, including limiting potential leaks back to the former executive and ensuring the current executive team is aligned with the Board’s direction.

Finally, the potential return of a former executive can create an additional sense of unease among employees and internal communications should also reassure them directly.

We do not believe this trend will abate, and regularly become aware of restive retired executives teaming up with activists, at what appear to be larger and more sophisticated companies.