Board Monitoring, CEO Incentives, and Shareholder Activism

74 Pages Posted: 11 Mar 2016 Last revised: 27 Jul 2018

Date Written: July 12, 2018


This paper studies how hedge fund activism reshapes board monitoring, CEO incentives and compensation. I find that activists target CEOs who have co-opted the board, have poor performance records and weak equity portfolio incentives, are less subject to relative performance evaluation (RPE) but receive higher total pay. Following activist intervention, target firms oust underperforming CEOs, strengthen CEO incentives, and increase the use of RPE. CEO pay levels rise following activism campaign launch due to target firms’ increased propensity to hire new CEOs from outside the company. Channels through which activists realize these changes include public demands for governance improvements, hostile campaign tactics such as initiating proxy fights, and board turnover. Additional analyses help to isolate the effect of activist intervention from alternative explanations, including activists’ stock-picking skills, boards’ voluntary reforms, or sample attrition.

Keywords: Corporate governance, shareholder activism, CEO compensation, hedge funds

JEL Classification: G23, G34, J33

Suggested Citation

Keusch, Thomas, Board Monitoring, CEO Incentives, and Shareholder Activism (July 12, 2018). Available at SSRN: or

Thomas Keusch (Contact Author)

INSEAD ( email )

Boulevard de Constance
77305 Fontainebleau Cedex

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