Shareholder activism has become the “new normal” for public companies, and boards increasingly choose to settle with activists quickly, often within weeks.
There are, of course, good reasons to settle. Boards and activists often find common ground during private negotiations. Proxy contests are time-consuming, distracting, and costly. But new evidence shows that boards frequently grant activists more influence in settlements than activists could achieve in a proxy contest. While activists almost always threaten proxy fights, the reality is that the risks of going to a shareholder vote are lower than many directors believe.
At the same time, the inherent conflicts of activist directors and the frequency of failed settlements suggest that quick settlements rarely deliver lasting peace and often alienate long-term investors. Strategic patience – being willing to push back until you get a fair amicable resolution – is often the stronger defense.
1. New Study Shows the Fear of Losing Big Is Overblown
For many directors, the specter of an activist winning control of the board looms large. Yet new data shows these fears are largely overstated.
On September 1, 2022, the SEC’s universal proxy card rules took effect, allowing shareholders to freely “mix and match” nominees from management and dissident slates in contested elections. Many experts predicted this would make it easier for activists to win seats. To test this, we conducted a comprehensive analysis of all late-stage contests in the Russell 3000 since 2018. [1]
Our study revealed that management continues to win a “clean sweep” in most contests (52%). The average number of activist candidates elected is down 22%. The most frequent successful outcome for an activist is just one seat (24% of contests). Activists won three or more seats in only 12% of cases. Moreover, while activists nominate their fund principals in 58% of contests, those principals were elected in only 33% of the contests where one was nominated. No activist has won a change-of-control fight under the new rules.
This data undercuts the common fear that resisting an activist will lead to wholesale turnover of the board. The reality is that the most likely worst-case outcome is the election of one new independent director — a result that rarely justifies granting multiple seats in a rushed settlement.
“The worst likely worst-case outcome for most companies is the election of one new independent director — not a boardroom takeover.”
2. The Inherent Conflicts of Activist Directors
If boards are tempted to settle by offering activists board representation, they should proceed with caution. Most activists demand a “shareholder representative” from their fund. At first glance, giving a significant shareholder a board seat may seem sensible. On closer inspection, however, activist fund principals often face irreconcilable conflicts.
Like every director, activist representatives owe fiduciary duties to the company and all its shareholders. But they also owe loyalty to their funds and investors, who often have brief holding periods and demand high returns. These dual fiduciary roles frequently clash, leading to a predictable over-focus on short-term results.
While not all activists are the same, there are many examples of activist directors pressing for an immediate sale of the company, buybacks, special dividends, or asset disposals rather than investments in growth. Rarely do activist directors advocate for R&D, plant expansion, or workforce development — initiatives that depress short-term earnings but can build lasting value. By conceding seats to activist principals, boards risk importing the activist’s short-term agenda directly into the boardroom, often to the detriment of long-term shareholder value.
“An activist in the boardroom often brings a fund’s agenda with them.”
3. Failed Settlements and Subsequent Proxy Fights
Even when boards hope settlements will buy peace, many deals prove temporary. Numerous activist situations resolved by quick settlements later escalated into renewed battles once the standstill period expired. These agreements often last only six to nine months — a short reprieve that leaves boards exposed in the next proxy season.
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In many cases, activist directors deliberately create dysfunction to pressure for the sale of the company or the removal of a CEO. Resistance by the incumbent directors is often met with renewed threats of a proxy contest by the activist. In the event of a follow-on proxy contest, it is much more difficult to stage an effective defense with activist directors on the board. In some cases, activist directors can share company information with the activist fund, which is particularly problematic if an activist relaunches a campaign from within the boardroom.
The result is instability. Boards that settle in the hope of buying peace often face renewed activism in short order, sometimes with the activist better armed than before.
“A quick truce often sets the stage for the next battle.”
4. A Changing Investor Sentiment on Settlements
Institutional investors have noticed these dynamics, and their views have evolved. Whereas large investors once uniformly supported settlements to avoid costly fights, some now argue that quick capitulations undermine shareholder democracy and give too much power to activists. Several have signaled frustration with companies that strike private deals while sidelining other shareholders.
Long-term investors increasingly prefer that companies be willing to push back against unfair settlements and, if necessary, allow proxy contests to proceed, giving these investors the opportunity to evaluate competing visions. Private settlements outside the public eye deprive them of that chance and raise suspicions that boards prioritize expedience over long-term value creation.
Investors also recognize the short-term focus of many activist funds. With most hedge funds demanding short-term results, their incentives often diverge sharply from those of index and pension funds. For long-term holders, quick settlements not only risk empowering activists but also weaken confidence in management’s commitment to long-term strategy.
“Long-term investors now want their say — not backroom deals.”
5. Strategic Patience Is Often the Stronger Defense
Taken together, these trends make clear that boards should not view activism as a binary choice between immediate settlement and all-out proxy war. There is a third way: strategic patience. Companies can engage constructively with activists without conceding prematurely. They can adopt reasonable suggestions unilaterally, refresh boards proactively, and address performance concerns directly with shareholders. Crucially, they can push back with confidence, knowing it is increasingly difficult for an activist to win more than one seat in a proxy contest.
Strategic patience does not mean diving headfirst into a proxy contest. It means avoiding capitulation while demonstrating responsiveness and demanding an amicable resolution that is fair to all shareholders. Boards can use the early stages of an activism campaign to build stronger relationships with institutional investors, ensuring these shareholders hear directly from management about long-term plans and have a chance to share their perspectives. By showing readiness to defend their vision, boards not only protect long-term strategy but also send a clear message: they are accountable to all shareholders, not just the loudest ones.
“Patience and conviction are often the best defense.”
The Bottom Line
The lesson for companies is to resist the temptation to fold early. Settling too quickly may feel like the path of least resistance, but it often hands activists more than they could win in a proxy contest. By slowing down, boards can protect long-term value, maintain alignment with long-term investors, and ensure that strategy is shaped not by short-term pressures but by enduring shareholder support. Patience, conviction, and trust in your long-term shareholders tends to be the stronger defense.
