Why Do Managers Fight Shareholder Proposals? Evidence from No-Action Letter Decisions

Abstract

Corporate managers are highly skeptical of shareholder proposals, and often seek to prevent them from coming to a vote. Managers argue that proposals are uninformed or opportunistic, and will destroy firm value. In contrast, governance reformers argue that shareholder proposals are needed to counteract managerial agency problems, and can be used to increase firm value. This study estimates the value consequences of shareholder proposals challenged by managers, using announcement returns from SEC no-action letter decisions. Previous studies have not found a significant market reaction to shareholder proposals, but those studies have been limited by an inability to identify the date at which investors become aware of a proposal. Our new approach is to study a well-defined event date at which the SEC makes an exogenous and arguably unpredictable decision to block or allow a proposal to go forward, allowing estimates that can be interpreted as causal. We find that over the period 2007-2016, the value consequences of shareholder proposals – implied from abnormal returns around SEC no-action letter decision dates – are negative on average, suggesting that investors agree with managers that these proposals are value-destroying. The market's assessment varies across most proposal topics, and investors appear to dislike proposals that would increase the E-Index. Investors are not particularly skeptical of proposals by unions and public pensions, but appear to view proposals by individual gadfly shareholders as value-destroying.