AIG American International Group Inc

By David Benoit 

Activist investors, a perennial nuisance for chief executives, are becoming an existential threat.

Since January, they have helped push out the leaders of three high-profile S&P 500 companies: insurance giant American International Group Inc., railroad CSX Corp. and aerospace-parts maker Arconic Inc. They are gunning for the CEOs at other companies including Buffalo Wild Wings Inc. and Avon Products Inc.

Chief executives have long felt pressure from these investors, who take stakes and push for changes to boost the stock, and turnover at the top tends to increase after they show up. But activists are increasingly asking for CEOs' heads at the outset of campaigns, a new level of aggressiveness for a group already known for its bold actions and impact on corporate America in recent years.

So far in 2017, activists have started nine campaigns targeting top management, the fastest pace on record, according to FactSet.

The shift has been years in the making. After the financial crisis, activists regularly won board seats and successfully pushed for moves that can produce quick returns like breakups or share buybacks. Many activists and analysts now question whether the easy pickings are gone.

The answer for some is to pursue changes in operations, which can be more of a slog and require new management.

"The activists are finding that just settling for board seats is not all that productive," said Peter Michelsen, president of CamberView Partners LLC, which advises some of the largest U.S. companies on how to deal with activists. "They are having to get more involved, including pushing for changes in management and operations."

Some CEOs who have been targeted complain privately that activists don't understand their businesses. "They've never built anything in their life, except a spreadsheet," one said recently. Others say boards should determine the CEO. They argue that activists seek too much power given the size of their stakes, which amount to as little as 1% in some cases.

The increased aggressiveness portends even nastier fights between activists and their targets. It may also make private-company executives more reluctant to tap public markets and prompt them to employ stronger defenses when they do. Many well-funded startups are already staying away, contributing to a roughly one-third decline in the number of public companies since 1997, according to the University of Chicago's Center for Research in Security Prices.

"Why would you want to go public if you can you lose control of your company that easily because somebody makes a public statement and the stock goes up," Jeffrey Ubben, founder of activist ValueAct Capital Management LP, said at a conference last month. "You are hijacked."

What happened at CSX Corp. could be cited as a case in point.

Paul Hilal, formerly of William Ackman's Pershing Square Capital Management LP, raised his own fund with the sole purpose of replacing the railroad's CEO with Hunter Harrison. When The Wall Street Journal reported the plan in January, CSX stock shot up 23%.

The market's endorsement helped Mr. Hilal, with 4.9% of CSX's stock, push for board changes he argued were needed to support Mr. Harrison and his efficiency strategy, known as precision railroading.

CSX, already planning succession, agreed to hire Mr. Harrison and name five new directors.

That wasn't even the most dramatic activist-fueled CEO change this year.

Elliott Management Corp.'s fight with Klaus Kleinfeld at Arconic resulted in the CEO's exit in April, though not for reasons either side anticipated. In pushing for his ouster, Elliott called Mr. Kleinfeld the worst CEO in the S&P 500. It cited missed targets and what it characterized as his lavish spending -- like on ads based on the Jetsons cartoon.

"CEOs do not hold the job by right," Elliott wrote in one letter to Arconic, which was created when Alcoa broke into two companies. "The Board must continually evaluate who should be running the company."

Arconic defended Mr. Kleinfeld, saying he deserves credit for building the company and breaking up Alcoa. Last month, Mr. Kleinfeld sent a vaguely threatening note to Elliott's founder. Arconic said at the time that Mr. Kleinfeld has stepped down by mutual agreement. He hasn't commented since.

What happened at AIG is more typical. In late 2015, Carl Icahn agitated for a breakup of the insurance company and a CEO change. The sides settled, with Mr. Icahn getting a board seat and CEO Peter Hancock pledging to improve performance. When AIG missed its targets, Mr. Hancock resigned because, he said, he lacked "wholehearted shareholder support."

At Avon Products, Barington Capital Group LP and NuOrion Partners AG called for a CEO change after the beauty-products seller reported a surprise loss this month, claiming a turnaround is taking too long. The company said its plan is on track.

Even CEOs with strong overall returns aren't safe.

Sally Smith has led sports-bar chain Buffalo Wild Wings since 1996, presiding over rapid store growth and a roughly 1700% stock return. The company still increased stock buybacks, added five new directors and made other changes activist Marcato Capital Management LP sought. Marcato nonetheless last month called on Buffalo Wild Wings to fire Ms. Smith, saying the company has lost its way amid slowing growth. Buffalo Wild Wings says she is the right person for the job.

Write to David Benoit at david.benoit@wsj.com

(END) Dow Jones Newswires

May 16, 2017 08:14 ET (12:14 GMT)

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