Shareholder proposals in the new millennium: Shareholder support, board response, and market reaction

Abstract

Although the owners of publicly traded companies have had the right to offer shareholder proposals using Rule 14a-8 for several decades, the effectiveness of the rule has been frequently questioned because few of these proposals received substantial support from other shareholders and even fewer have been implemented by boards. Using new data from the 2002–2004 proxy seasons, we analyze shareholder voting patterns on these proposals, board reactions to them, and market responses. We find some big changes from earlier periods: many more proposals are receiving majority shareholder support during our sample period relative to earlier studies, and this support has translated into directors implementing more of the actions called for by shareholders. In particular, boards are increasingly willing to remove important anti-takeover defenses, such as the classified board and poison pill, in response to shareholders' requests, something rarely seen in the past. Despite the increase in support for shareholder proposals and board action in response, we find small and insignificant stock market reaction. We conclude that shareholder proposals under Rule 14a-8 have an emerging role in reducing agency costs by increasing director responsiveness to shareholder concerns to open the market more fully to corporate control.

Introduction

In 1942, the Securities and Exchange Commission (SEC) adopted Rule 14a-8 to strengthen shareholders' voice in corporate affairs by permitting them to place certain types of proposals in annual corporate proxy statements where they would be voted on by all stockholders. Despite its longevity, the usefulness of the rule has been questioned on the grounds that many of these proposals were frivolous, that they generally received little shareholder support, that they were widely ignored by managers even when shareholders did support them, and that they did nothing to increase the value of targeted firms. As a result, there have been calls to limit or eliminate shareholder proposals based on its cost and limited success (Pound, 1991).

In recent years, however, shareholder activism has become an increasingly important force (Katz, 2005). With this changing environment, it is important to reassess Rule 14a-8's effectiveness. In this paper, we examine shareholder proposals during the 2002–2004 proxy seasons and document a significant change in shareholder voting patterns relative to earlier periods. In particular, we find that shareholder proposals are heavily concentrated on topics that relate directly to important corporate governance issues, such as anti-takeover defenses and executive compensation. Thus, the rule appears to be facilitating closer scrutiny of important substantive issues. Moreover, more proposals received majority shareholder support during our sample period than in the past, especially those relating to the removal of anti-takeover defenses. This suggests that shareholders are sending a clearer message to directors about their desires. Boards are also being more responsive to majority vote proposals with directors implementing a greater percentage of the actions called for by shareholders. Strikingly, as a result of these proposals, substantial numbers of companies are dismantling their anti-takeover defenses, thereby opening up the market to corporate control. The stock market reaction to these proposals remains generally insignificant, however.

The next section reviews the relevant literature and summarizes our research hypotheses. Section 3 discusses the sample selection process and the data for this study, while Section 4 presents the study's results, including descriptive and statistical data. Section 5 presents our results relating to the stock price reaction to shareholder proposal announcements and meeting date. Section 6 presents our conclusions.