Wag the Dog: How Embattled Corporate Leaders use Diversionary Tactics against Shareholder Activism

Abstract

This paper examines how initiating a corporate restructuring process could help corporate leaders address threats to their power. Hypotheses are developed based on applying diversionary war theory—a theory advanced in political science—to the corporate context. Specifically, we theorize that when an activist shareholder submits a proposal to reduce corporate leaders’ power, those leaders will undertake corporate restructuring. This, we claim, will increase the perception among the shareholders that a strong and powerful leadership is necessary, resulting in less voting in support of reducing the leaders’ power. We test our theory using a sample of 978 proposals aimed at reducing corporate leaders’ power voted on at 305 firms between 2000 and 2016 and find support for both our hypotheses: First, shareholder proposals threatening leaders’ power receive less voting support in firms that just announced a process of corporate restructuring and second, corporate leaders are more likely to announce a process of corporate strategy restructuring right after a proposal to reduce their protection has been submitted. We discuss implications for the literature on shareholder activism, corporate leaders’ responses to shareholder pressures, and corporate governance in general.