Shareholder proposals in the new millennium: Shareholder support, board response, and market reaction☆
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.
Section snippets
Literature review and hypotheses
From the shareholders' perspective, Rule 14a-8 provides a cheap and relatively simple way to present matters to the company's owners for a vote. These nonbinding proposals generally ask the company's board of directors to take action on one of two broad topics: corporate governance changes or social responsibility reforms. Corporate governance proposals request such things as the removal of the company's anti-takeover defenses, changes in the way directors are elected to the board, or
Descriptive statistics and proposal type
This paper uses data collected by the Investor Responsibility Research Center (IRRC) for all shareholder proposals for the 2002, 2003, and 2004 proxy seasons, a total of 1614. We exclude observations due to missing data for: shareholder proposal sponsor identity (23), Compustat data (15), CRSP data (10), operating margin data (13), institutional ownership data (54), shareholder voting data (25), and three-year indexed returns (20). Other shareholder proposals are not in our sample because the
Specification of the control variables
Karpoff et al. (1996) suggest a number of factors and firm characteristic control variables that may affect the voting patterns and stock price response to a shareholder proposal. They include: (1) valuation, (2) profitability, (3) growth, (4) stock price returns prior to the board meeting, (5) firm size, (6) leverage, (7) institutional ownership, and (8) insider ownership.
To control for size, we use the natural log of each firm's market capitalization, or the natural log of the firm's shares
Univariate abnormal return results
Table 6 outlines stock price behavior around the proxy mailing date and shareholder meeting date by type of shareholder proposal and sponsor. For the full sample, for the period from − 1 to + 1, these returns are weakly significant at the 10% level for the meeting date, where the cumulative abnormal return was 0.16%. Looking at the cells within the table, only compensation proposals appear to be regularly significant (positively). These results are generally consistent with those of Karpoff et
Conclusions
Shareholders have had the right to offer proposals under Rule 14a-8 requesting changes in the companies they own for more than 60 years but, until recently, these proposals have had very little effect. This paper examines a large sample of these shareholder proposals for the 2002, 2003, and 2004 proxy seasons to determine whether this form of shareholder activism has changed since the 1980s and 1990s.
We try to answer three questions. First, are Rule 14a-8 proposals frivolous or substantive?
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We would like to thank Professor Roberta Romano, an anonymous referee for the Journal of Corporate Finance, and participants in the Conference of Boundaries of SEC Regulation at the Financial Economics Institute at Claremont-McKenna College, the Duke Law School's Corporate Governance Workshop, the Washington University Law School's Faculty Workshop, Wake Forest University Research Series, the Financial Management Association's 2006 Annual Meeting and The Georgetown Law School's Empirical Methods Workshop for helpful remarks. We acknowledge the support received from the Archie Fund for the Arts and Humanities at Wake Forest University in the purchase of data for this project. This paper has been presented under the title, “Shareholder Proposals Post-Enron: What's Changed, What's the Same?”