After enjoying a period of protection created by the sudden onset of the COVID-19 pandemic and with tightening markets now exposing any lingering performance issues, CEOs who are not seen to be delivering in line with their peers are finding themselves in the crosshairs of activists.

According to DMI data, 16% of all CEOs who left S&P 500 companies so far this year did so after an activist had initiated a campaign at the company within the prior year. This compares to 14% in the 12 months of 2021, and 12% in 2020.

“It’s almost certainly the case that management teams during the pandemic were given more leeway, because the companies were dealing with so much that the last thing you would want is a CEO transition on top of that. So, it’s likely one of the reasons that we’re seeing a bit more movement now,” a lawyer, who wished to remain anonymous, told DMI.

Driving a wedge

In one of the more prominent of such departures this season, Illumina CEO Francis deSouza relinquished his role at the DNA sequencing company, one month after surviving a bitter proxy fight with Carl Icahn that saw the activist install one of his lieutenants and oust the chair. The contest was largely hung on deSouza and his fellow senior executive team’s handling of the company’s controversial acquisition of Grail without the approval of regulators.

Another saw Werner Baumann, CEO of German life-science giant Bayer, prematurely removed from the top post before his contract expired in 2024 after investors including Deka Investment and Inclusive Capital Partners applied pressure to part ways due to the company’s lackluster share price.

However, such publicly articulated demands for a CEO’s transition are not commonplace due to the significant downside risks if executed incorrectly. “If there’s a public attack on the head of the company, then it’s going to have an effect on the company’s employees, on its suppliers, on its customers, which the company will then have to communicate through an address. That does cause significant disruption,” Steve Balet, partner at Strategic Governance Advisors, told DMI.

A public attack on a CEO also presents activists with a tougher hurdle to get other investors on board who may not want to rock the boat. “They’re going to have to play to the broader shareholder base, and the truth is, index funds own 30% of every company, and they are very long holders so activists have to modulate their message to resonate with the shareholders who aren’t necessarily as impatient and are more forgiving, or want to see things play out,” the lawyer explained.

Instead, many dissidents have opted to employ other tactics such as the recent push for operational changes seen this proxy season, in a bid to drive a wedge between the CEO and the board.

“In the current market where selling the company or buying back shares is not an objective that investors may want or that can be executed well, activists have switched focus to operational changes such as a de-conglomeration, changing its structure, and so on in order to produce yield. These changes are often in conflict with what was the CEO’s prior strategy,” Balet told DMI. “If the CEO doesn’t want to pursue the strategy that the board is now switching to, that’s probably driving a lot of the change that we’re seeing.”

Thin ice

With 45 CEO exits from S&P 500 companies overall in the first nine months of this year, including without activist intervention, the rate of turnover has already almost reached that recorded in all of 2021. “CEOs are growing weary in the job. Many of them want to bail out before the 10-year mark. The job has become so wearing, the political scrutiny, the travel, the 24-hour news cycle, it’s much different to their predecessors’,” Jeffrey Sonnenfeld, senior associate dean for leadership studies at the Yale School of Management, told DMI.

And, as market challenges and rising interest rates continue to pile on the pressure, many such CEOs may find themselves on thin ice.

“They are leaving at a greater rate,” said Balet. “As we get into difficult comps for certain companies in certain industries, I do think the pattern of CEOs either being targeted outright or targeted through a different approach by the activist is definitely going to continue.”