Abstract
Shareholder activism on sustainability issues has become increasingly prevalent over the years, with the number of proposals filed doubling from 1999 to 2013. We use recent innovations in accounting standard setting to classify 2,665 shareholder proposals that address environmental and social issues as financially material or immaterial, and we analyze how proposals on material versus immaterial issues are related to firms’ subsequent environmental or social performance and market valuation. We find that 42 percent of the shareholder proposals in our sample are filed on financially material issues. We document that filing shareholder proposals are related to subsequent improvements in the performance of the company on the focal environmental or social issue, even though such proposals nearly never received majority support. Improvements occur across both material and immaterial issues. Proposals on immaterial issues are associated with subsequent declines in firm valuation while proposals on material issues are associated with subsequent increases in firm value. We show that managers increase performance on immaterial issues in companies with agency problems, low awareness of the materiality of sustainability issues, and poor performance on material issues.
Highlights
A growing number of investors are engaging companies on environmental, social and governance (ESG) issues, in addition to traditional executive compensation, shareholder rights, and board of directors’ topics.1 In line with increasing engagement, shareholder proposals on ESG topics have more than doubled in the last two decades
We observe that filing shareholder proposals is effective at improving the performance of the company on the focal ESG issue across both material and immaterial issues
See http://www.ussif.org/resolutions See https://www.globalreporting.org/resourcelibrary/Sustainability-and-Reporting-Trends-in-2025-1.pdf this increase in shareholder pressure relating to ESG issues, there is limited evidence as to whether shareholder activism relating to ESG improves sustainability performance, and whether firms benefit in terms of firm value
Summary
A growing number of investors are engaging companies on environmental, social and governance (ESG) issues, in addition to traditional executive compensation, shareholder rights, and board of directors’ topics. In line with increasing engagement, shareholder proposals on ESG topics have more than doubled in the last two decades. Past research has shown that shareholder proposals on traditional corporate governance issues, such as executive compensation, takeover provisions and board of directors’ composition, have in recent years been effective at changing corporate governance, their impact on firm valuation is unclear (Ertimur, Ferri and Muslu 2011). These proposals, not binding, increasingly receive majority support by voting investors and as a result proxy access is being considered an important corporate governance mechanism. Past research has found mixed results on the financial implications of these practices and many investors still do not take into account ESG issues in investment decisions (Kotsantonis, Pinney and Serafeim 2016)
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