Corporate Governance Risks in SPACs: Leadership Instability and Its Impact on Investor Confidence and Shareholder Value

Special Purpose Acquisition Companies (SPACs) have long been marketed as a streamlined alternative to traditional initial public offerings (IPOs), offering private companies a faster route to public markets. However, the structural incentives embedded in SPACs-particularly the disproportionate rewards for sponsors-have created persistent governance risks. As of 2025, the SPAC landscape is experiencing a modest resurgence, with 91 new SPAC IPOs raising $16.5 billion year-to-date, compared to $5.3 billion in the same period in 2024, according to a Forbes article. Yet, beneath this revival lies a critical challenge: leadership instability within SPACs and its corrosive effect on investor confidence and shareholder value.

Leadership Instability: A Structural Weakness

SPACs are inherently dependent on the credibility and expertise of their sponsors, who typically receive 20% of the common equity in the SPAC for minimal upfront investment, as Investopedia explains. This structure creates a misalignment of incentives, as sponsors stand to gain significantly more than traditional investors if the SPAC successfully merges with a target. However, when sponsors fail to identify viable acquisition opportunities within the 18- to 24-month deadline, leadership instability often ensues. According to a Fidelity report, such instability can manifest in rushed or poorly vetted deals, eroding trust among shareholders.

The pressure to meet deadlines also incentivizes sponsors to prioritize speed over quality. For instance, SPACs that extend their merger timelines or replace sponsors mid-process risk triggering investor redemptions, where shareholders withdraw funds due to skepticism about the proposed acquisition, Investopedia notes. This dynamic was evident in the mid-2020s, when many SPACs faced high redemption rates following the announcement of underperforming or speculative targets, as Forbes reported.

Investor Confidence and Shareholder Value

Historical data underscores the fragility of investor confidence in SPACs. A study cited by Investopedia found that SPACs launched in 2019 and 2020 delivered mean returns of -12.3% and -34.9% over six and twelve months post-merger, respectively. These figures highlight the risks of overvalued targets and post-merger underperformance, which are exacerbated by leadership instability. When SPAC sponsors lack continuity or clear strategic direction, investors perceive higher uncertainty, leading to reduced demand for SPAC shares and lower valuations.

Regulatory scrutiny has further amplified these concerns. The U.S. Securities and Exchange Commission (SEC) has introduced measures to enhance transparency, such as requiring SPACs to prominently disclose dilution risks in filings, as noted in the Wikipedia entry on SPACs. While these rules aim to mitigate conflicts of interest, they also underscore the systemic vulnerabilities in SPAC governance. For example, the SEC's mandate for quarterly earnings reports places additional pressure on sponsors to justify their strategies, potentially exposing weaknesses in leadership or target selection, as Britannica explains.

Regulatory Responses and Market Adaptation

The SEC's interventions reflect a broader effort to address SPAC-related risks. The Wikipedia entry also notes that new regulations now require SPACs to provide detailed proxy statements for proposed acquisitions, empowering investors to make more informed decisions. These changes are critical in a market where leadership instability has historically led to suboptimal outcomes. However, critics argue that regulatory fixes alone cannot resolve the inherent conflicts of interest between sponsors and shareholders, a point raised by Fidelity.

Despite these challenges, some SPAC sponsors have adapted by leveraging their track records to rebuild trust. For example, Betsy Cohen's successful 2025 merger of Kyivstar Group raised $178 million, demonstrating that experienced sponsors can still attract investor interest. Such cases highlight the importance of leadership continuity and strategic clarity in mitigating governance risks.