How gender biases shape investor response to shareholder activism

Investors view CEOs more favorably when they respond to shareholder activism in ways that conform to gender stereotypes, according to new Cornell research.

Female CEOs were held in higher regard when they reacted to shareholder activism - attempts by shareholders, often hedge funds, to wield their influence as partial owners to bring about change in a corporation - using cooperative approaches. Similarly, the study found that male CEOs were regarded more highly when they used dominant or assertive stances, and less highly when they were communal.

"I think one of the most eye-opening aspects of the study was that both male and female leaders were evaluated negatively when their behavior deviated from investors' gender-based expectations," said Kristina M. Rennekamp, professor of accounting in the Samuel Curtis Johnson Graduate School of Management, part of the Cornell SC Johnson College of Business. "This suggests that investors' evaluations weren't based on whether they believed that cooperating or not was the overall right approach to activists, but rather the perceived 'right approach' varied based on the gender of the firm's leader."

Rennekamp is co-author of "CEO Gender and Responses to Shareholder Activism," published June 11 in Contemporary Accounting Research, which used experiments and interviews to uncover attitudes about CEO gender, responses to activism and investor behavior. Co-authors include Blake A. Steenhoven, Ph.D. '21, assistant professor at the Smith School of Business at Queen's University; and Scott C. Jackson, assistant professor at the Lee Business School at the University of Nevada, Las Vegas.

Shareholder activism has become a powerful force. Activist hedge funds manage more than $200 billion in assets worldwide. Between 2017 and 2020, they initiated more than 2,800 campaigns - efforts to mobilize investors to force their agenda - and a large portion ended in success or settlement, according to an activist investor reporton the Harvard Law School blog, "Forum on Public Governance."

The first experiment's results surprised the researchers, Rennekamp said. Female CEOs using uncooperative responses were viewed less positively than those using cooperative approaches, which are stereotypically associated with women. Male CEOs employing cooperative strategies were perceived less favorably than those adopting "agentic" - dominant or assertive - stances, which are stereotypically associated with men.

In a second experiment focusing on female CEOs, the researchers discovered that explanations of responses can lessen negative perceptions. When female CEOs provided a communal explanation for an uncooperative response (e.g., responding to activism uncooperatively out of care for investors), investors reacted more positively than when an agentic explanation was given.

The researchers also conducted interviews with six CEOs and CFOs, and found that executives are acutely aware of potential investor biases and the importance of messaging when responding to activism.

"Our research has far-reaching implications for corporate governance and shareholder relations," Rennekamp said. "It suggests that the higher likelihood of female CEOs cooperating with activists may not stem from inherent differences in management styles. Instead, it could be a strategic response to anticipated investor reactions based on gender stereotypes."

The findings also highlight the critical role of communication in managing investor perceptions. Female CEOs may benefit from carefully crafting their messages when responding to activism, especially if taking an uncooperative stance.

These results complement recent research showing that nonprofessional investors may rely on CEO gender when making investment decisions, particularly in ambiguous situations like shareholder activism.

The study also offers a potential explanation for the observed phenomenon of female CEOs being more frequently targeted by activist shareholders. Rather than reflecting inherent gender biases or differences in management styles, this trend could be driven by the anticipation of more cooperative responses from female leaders - a strategy adopted to avoid negative investor reactions.

For female CEOs in particular, the study suggests that providing communal explanations for decisions - even when taking uncooperative stances - may help maintain positive investor sentiment. This offers a valuable tool for navigating the complex dynamics of shareholder activism while challenging gender-based expectations.

"Our research not only advances our understanding of gender dynamics in shareholder activism but also provides practical insights for corporate leaders navigating these complex waters," Rennekamp said. "As the landscape of corporate governance evolves, recognizing and addressing these subtle yet powerful biases will be crucial for fostering fair, effective and successful business practices."

Sarah Magnus-Sharpe is director of public relations and media relations for the Cornell SC Johnson College of Business.

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