Greenbackd

Gretchen Morgenson of The NYTimes reports in Elect a Dissident, and You May Win a Prize that a new study of 120 “hybrid” boards (those formed when activist shareholders won one or more director seats) from 2005 through 2008 found that, on average, these companies’ shares outperformed their peers in both the short and long-term. The study was conducted by the Investor Responsibility Research Center Institute, a nonprofit organization, and Proxy Governance, a proxy advisory firm.

The results are compelling:

From the beginning of the contest period for a board seat through the first year of a hybrid board’s existence, companies’ total returns were 19.1 percent, or 16.6 percentage points better than peers’. And total share price performance through the three-year anniversary of the hybrid boards averaged 21.5 percent, almost 18 percentage points more than their peers.

According to Morgenson, much of the excess return occurs shortly after an activist announces his or her intention to seek board seats:

Investors, taking their cue that the company may be undervalued, typically bid up its shares in the three months leading up to the formation of a hybrid board. Keep in mind, too, that averages mask both exceptional and disastrous outcomes.

The size of the stake held by the dissident shareholder affects results: The bigger the shareholding, the bigger the gains:

At companies at which dissidents held 5 to 10 percent of shares, for instance, results over the following 15 months moderately exceeded those of their peer groups. But for companies in which the dissidents owned 10 percent to one-quarter of the stock, price appreciation significantly outshone peers, averaging almost 68 percentage points higher over the ensuing 15 months.

Performance at the companies where dissidents held less than 5 percent of shares was only in line with peers, on average.

Says Jon Lukomnik, director of the Investor Responsibility Research Center:

I think what it says is there is some value to owners being able to challenge existing management and that there are also some limits to that value.

The study is timely, coinciding with the Securities and Exchange Commission’s consideration of steps to make it easier for investors to nominate alternative directors to corporate boards.