The number of activist short selling campaigns has been on the decline for several years, but the consequences continue to be significant.

An analysis of data, as of September 15, from Diligent Market Intelligence (DMI) suggests that 89 CEOs and over 100 chief financial officers have exited as part of campaigns going back to 2018.

Rather than appeasing activist short sellers, an executive departure could incentivize them to double down on their campaign, depending on the impact on the target’s stock price.

“If an executive resigns or is fired, we see that as a validation of our thesis and suggests our thesis has been taken seriously by the market, the authorities, or the company,” Gabriele Grego, founder of Quintessential Capital Management told DMI in an interview.

A trophy for the shorts?

Several short sellers told DMI that forcing an executive departure was not necessarily the goal of their reports, but a byproduct when their allegations of fraud or mismanagement resonate with the market.

“That’s not our goal,” said Grego. “Our goal is to have the truth come out.”

“Generally, our criticisms are a holistic reflection of management’s poor decision-making,” said Spruce Point Capital Management’s Ben Axler, who proclaims on his firm’s website that “50+” CEOs and CFOs have resigned following its campaigns. “In certain cases, we are more vocal that it is time to see certain executives resign.”

“We certainly believe that our carefully researched reports are a catalyst for change.”

Not all departures can be explicitly tied to a short attack. Some are portrayed as planned transitions or mutually agreed partings, although activists will likely take credit.

Last month, waste water engineering company Xylem announced that CEO Patrick Decker would retire at the end of the year and be replaced by Matthew Pine, its chief operating officer, while CFO Sandra Rowland was leaving to pursue new opportunities. A statement announcing the changes made no mention of the activist short seller and said they were a natural evolution of the company’s growth plans. However, Spruce Point, which had published a report on the company a month earlier, said the resignations ‘‘only bolsters [sic]’’ its concerns.

In many cases, action is taken with the stock well-down from before the short attack. In August, Enviva parted ways with its chief financial officer – 10 months after a short attack from Blue Orca Capital and with the stock languishing at about one-fifth of its pre-campaign price.

But in some cases, the departure of an executive can lift a stock battered by a short seller. Aphria, a cannabis company, announced that its CEO and a co-founder would transition out of their roles in early 2019, about a month after Quintessential and Hindenburg Research accused the company of acquiring worthless assets at inflated prices.

While claiming the move as a vindication, Quintessential closed its short position and said the company could recover. “With a new management team the company has a chance to a brighter future and we are accordingly moving on to new projects,” the short seller tweeted at the time. Aphria later merged with Tilray and trades on the Nasdaq exchange.

Boards under pressure to investigate

Other departures follow a more formal investigation, as in the case for two targets of Muddy Waters Research. In February 2020, NMC Health removed its CEO and a member of its treasury team over possible reporting discrepancies. Three months later, Luckin Coffee fired its CEO and chief operating officer as part of an investigation into its sales practices. Both stocks were delisted in the first half of 2020.

Responding to activist short campaigns often requires a case-by-case approach, with each involving a unique set of facts and allegations, say advisors.

“Sometimes there’s a disconnect between the company and shareholders about the business and the short seller identifying that gap allows the company to communicate better,” says Lawrence Elbaum, a partner at law firm Vinson & Elkins who advises companies targeted by short sellers. “There are other situations in which you can’t react immediately… You can’t act until you know the facts.”

But allegations of financial misdeeds can invite regulatory interest, Elbaum adds. “If the SEC ever shows up, it would be better for the board to say, we looked into it and the results are here,” he told DMI in an interview. “Your investors want to know that, however spurious, you took the allegations seriously and investigated.”

“Fraud allegations often cause a board to feel vulnerable and either conduct an investigation or take a closer look,” said Nick Lamplough, a partner at communications firm Collected Strategies, which advises the targets of short reports.

“It’s not always because the allegations are accurate [that a CEO resigns]. Sometimes the board finds something else or there’s a performance issue,” he adds. “When boards feel vulnerable, they often take action.”

CEOs might take comfort from the fact that the number of resignations has fallen in recent years – and in relative terms too. There were just 15 CEO resignations as part of a short campaign tracked by DMI in 2021 and 2022, an average of about 7% of the total campaigns during those two years. In 2019 and 2020, there were 44 resignations, representing about 13% of the campaigns in that period.

For CFOs, the number has dropped from 45 to 30 but the proportion, about 14%, has stayed largely in line.

That may reflect changing defense tactics.

“The trend you’re seeing more and more is not acknowledging it at all,” said Lamplough of activist short reports. “There’s a negative perception of short sellers among long-term investors. By acknowledging reports, companies sometimes lend short sellers credibility.”