Are Shareholder Proposals an Important Corporate Governance Device? Evidence from US and UK Shareholder Proposals

Abstract

In the past decade, as a result of many interrelated changes in the economic environment, the role and the pressures on the corporate governance of firms have been significantly transformed in the US and the UK. To test the magnitude of this changed environment, we study one aspect of corporate governance, historically viewed as not very important, proposals by small investors. We construct comprehensive samples of US and UK shareholder proposals for the period 2000-2006 and examine where shareholder proposals occur, and the relationship between shareholder proposals and firm performance. We suggest shareholder proposals, which originate outside the internal firm governance, provide a “natural experiment” on the impact of shareholder actions on firms. The more recent data and the comparison of US and UK proposals allow us to update earlier research from earlier periods. We find that, despite perceived negligible power to force change, US shareholder proposals are associated with more significant firm changes than UK proposals, although the UK proposals have greater legal power to effect changes. US shareholder proposals are followed by significant changes in CEO turnover, board structure and long-term stock price performance, unlike what researchers found in pre 2000 data. We suggest that our results complement other studies showing that shareholder influence has increased in recent years, especially in the US.