The Corporate Opportunity Structure for Shareholder Activism: How Activist Hedge Funds Exploit Board Demographic Diversity

Inspired by research on social movements, we extend the idea that activists look for opportunities to target firms to the realm of financially motivated shareholder activists. Focusing on activist hedge funds, we argue that hedge fund campaigns are more likely to succeed when boards are slow and less united and that, compared with more homogeneous boards, demographically diverse boards tend to act more slowly and with less unity. Although these attributes make demographically diverse boards more effective under “normal” circumstances, they become a liability in confrontations with activist hedge funds. We, therefore, hypothesize that when subject to governance and performance problems, firms become more likely targets of activist hedge funds when they also have demographically diverse boards. To further probe our theory, we explore the opportunity recognition of activist hedge funds in two ways. First, we posit that this opportunity will be recognized and exploited primarily by experienced activist hedge funds. Second, we argue that activist hedge funds’ opportunity recognition is correct in so far that demographically diverse boards respond to activism campaigns in ways that are likely to benefit activist hedge funds. Using data on United States-based activism campaigns, we find support for our theory. By simultaneously studying problems and opportunities, this study establishes a foundation for examining when the disciplinary effect of shareholder activism may go awry and reveals why a strict business case for demographic diversity may be insufficient to align all shareholders behind board diversity. Supplemental Material: The online appendix is available at https://doi.org/10.1287/orsc.2023.1679 .