Shareholder Approval Research Articles

Compensation Representatives: A Prudent Solution to Excessive CEO Pay

Currently, CEO pay is determined by a company's board of directors, subject to limited shareholder approval in certain circumstances. However, as Lucian Bebchuk and Jesse Fried have argued, directors and CEOs do not necessarily engage in real arms length bargaining over CEO pay. Instead, CEOs may exert managerial power to extract economic rents. To address the problem, Bebchuk and Fried have proposed granting large shareholders the right to nominate candidates for the board, and would require the company to pay the expenses for the proxy fight if the nominee received a designated minimum level of support. This article accepts the fundamental point that the CEO pay-setting process is flawed and that reforms are necessary. Nonetheless, it recognises that high CEO pay may be attributable to factors other than managerial power, and it questions whether certain of Bebchuk and Fried's proposed solutions might have negative consequences beyond CEO pay. Therefore, to remedy the problems in the pay-setting process, it proposes that large shareholders be allowed to appoint to look after the interests of all shareholders on matters relating exclusively to CEO pay. Compensation representatives would have the right to attend all compensation-related meetings, to question board members, to make recommendations, and to report their views to shareholders. Shareholders could use the representative's report as a basis for rejecting unreasonable pay arrangements. This approach would insert into the pay-setting process parties who are immune to CEO pressure and responsive to shareholder concerns. It would address compensation process flaws, without fundamentally altering the relationship between the shareholders and directors. Its implementation is highly feasible, since it could be adopted by shareholder by-law, without changing existing law. Finally, it could be vindicated or discredited by the market itself. As such, it would constitute a prudent solution to excessive CEO pay.

Approval of shareholder-sponsored proposals: Evidence from Canada

Little is known about shareholder voting at firms incorporated outside of the United States. Proposals sponsored at such firms and the voting patterns and factors associated with these proposals should conceivably be similar to those in the U.S. if the legal and governance structures of the countries are similar. We examine 264 shareholder proposals sponsored at Canadian firms between 2001 and 2005 in order to determine if differences created by the Canadian governance system, being more voluntary than that of the U.S. system, lead to differences in shareholder voting. We find many similarities between voting at the Canadian firms and those found in the literature for their U.S. counterparts, including some types of frequently submitted proposals and factors impacting the level of shareholder approval. However, unlike the concurrent literature on U.S. firms, we find very few majority approved proposals and a much lower overall level of affirmative voting returns.

Regulating Post-Bid Embedded Defenses: Lessons from Oracle versus PeopleSoft

This article shows that courts should not adopt a rule of strict shareholder choice that requires managers to obtain shareholder consent for actions taken post-bid that could deter a hostile acquisition. Managers need to be able to act unilaterally to protect the target when a hostile bid threatens its value. Such threats require managerial action, unfettered by a shareholder approval requirement, when the target needs to be able to respond quickly. The conclusion that shareholders can benefit from granting managers unilateral authority to adopt some takeover defenses, even when shareholders are well-informed, is well-illustrated by the Oracle-PeopleSoft contest. PeopleSoft's shareholders would have been worse off had their managers not been able to defend the firm from the threat posed by Oracle's bid because PeopleSoft's shareholders could not have acted sufficiently quickly to preserve the firm's value. In addition, this article shows that shareholder choice proponents cannot remedy the over-regulation problem by amending the rule to grant managers authority to adopt some post-bid defenses. Such a rule would create a zone of weakly regulated low-cost defenses within a strict shareholder choice regime, thereby encouraging managers to employ substitute defenses that may be more costly for the firm than are traditional takeover defenses.

Does Shareholder Voting on Acquisitions Matter?

I examine the effects of shareholder voting on acquisitions by comparing acquisitions that require acquirer shareholder approval to acquisitions that do not in a sample of 1,969 acquisitions announced between 1995 and 2003. I find that shareholder approval is less likely to be required in acquisitions that can be completed faster without it, and that these acquisitions take longer to complete when approval is required. By contrast, I do not find that acquisitions are less likely to require approval when opposition is likely, or that the approval requirement is related to announcement returns or premiums. Finally, I find that acquisitions requiring shareholder approval are less likely to be completed. This relation, however, is not affected by announcement returns, the presence of guaranteed shareholder support, or the type of majority required, suggesting that opposition is not the reason for the lower completion rate.

Why Some Companies Seek Shareholder Ratification on Auditor Selection

Federal and state laws do not currently require companies to seek ratification from shareholders on auditor selection, but some companies do so. Previous studies document the determinants of voting behavior when such voting is solicited by the management, but do not examine why some companies seek shareholder approval on auditor selection while others do not. We examine whether companies avoid seeking ratification when they are likely to face nonratification. We find no strong evidence that this is the case. In fact, companies that pay higher total fees to auditors are more likely to ask shareholders to vote on auditor selection. Andersen clients are less likely to seek ratification, which we attribute to the fact that our sample time period coincides with the Enron-Andersen crisis. The only other indication that companies may shy away from shareholder ratification is a negative association between shareholder dissatisfaction with the board and the likelihood of seeking ratification. Finally, we find that financial expertise of audit committees is positively associated with the likelihood of seeking ratification, supporting results in other studies that show audit committee financial expertise has positive monitoring effects.

The Relationship Between Major-League Sports' Official Sponsorship Announcements and the Stock Prices of Sponsoring Firms

This study presents analysis of the impact of “official product” sports sponsorships with the National Football League (NFL), Major League Baseball (MLB), the National Hockey League (NHL), the National Basketball Association (NBA), and the Professional Golfers Association (PGA) on the stock prices of sponsoring firms. The primary finding of the study is that, in the main, announcements were accompanied by increases in shareholder wealth. The 53 sponsors analyzed experienced mean increases in stock valuations of about $257 million. A multiple regression analysis of firm-specific stock price changes and selected corporate and sponsorship attributes indicates that official product sponsorships with the NBA, NHL, and PGA and those with smaller market shares were associated with the largest gains in share prices. Although corporate cashflow (a proxy for agency conflicts) is statistically unrelated to shareholder approval, sponsorships by high-technology companies were associated with stronger stock price reactions than otherwise. Finally, product congruence with the sponsored sport was positively related to changes in stock prices.

A Remedy for the Executive Pay Problem: The Case for “Compensation Discussion and Analysis”

After acknowledging the strengths of Bebchuk and Fried's case for managerial power in setting executive pay, this article expresses three major reservations: First, concerns about the apparent lack of pay for performance do not alone provide a sufficient framework for understanding the controversy over CEO pay or devising a remedy. In fact, such concerns may well take a backseat to popular unrest about the levels of pay, a problem that Bebchuk and Fried largely ignore. Second, many of the compensation practices identified as “smoking guns” of managerial power, such as the failure to index stock and options and the use of “stealth compensation,” may have benign explanations. For example, since the vast majority of employee stock options are awarded to people well below the executive ranks, the absence of indexing may help to preserve a simple, visible score-card (however flawed) for motivating all levels of the organization. And the use of stealth pay may be justified as a means of preventing public scrutiny from distorting private decisions. Third, even if corporate governance needs improvement, the best remedy may be not a wholesale expansion of shareholder power, but rather a tailored series of measures designed to bolster the defacto independence of the compensation committee. Most important, the SEC should require proxy disclosure of a “Compensation Discussion and Analysis” statement, signed by all the members of the compensation committee, that summarizes and justifies all compensation elements for all senior executives. The resulting process “ownership” and reputation-staking will strengthen the committee's hand against managerial pressure. In addition, serious thought should be given to a shareholder approval vote on the CD&A following the new U.K. practice.

Pay without performance: the unfulfilled promise of executive compensation

This book provides a detailed account of how structural flaws in corporate governance have enabled managers to influence their own pay and produced widespread distortions in pay arrangements. The book also examines how these flaws and distortions can best be addressed. Part I of the book (titled The Official View and its Limits) critically examines the arm's length contracting view, which underlies much of the academic research on executive compensation as well as the law's approach to it. We show that boards have not been operating at arm's length from the executives whose pay they set. While recent reforms can improve matters, they cannot be expected to eliminate significant deviations from arm's length contracting. We also show that the constraints imposed by market forces and shareholders' power to intervene are not tight enough to prevent such deviations. Part II of the book (titled Power and Pay) shows how an understanding of the role of managerial power can help explain executive compensation practices. We provide a framework for assessing whether pay arrangements are a product of managerial influence. We discuss managers' interest in camouflaging the amount and the performance-insensitivity of their pay. Applying our framework, we discuss how managerial influence can help explain, among other things, the evidence on the relationship between managerial pay and managerial power; the use of retirement benefits and other compensation arrangements to provide stealth compensation; and the ability of departing managers to obtain more than their contractual entitlement. Part III of the book (titled Decoupling Pay from Performance) examines how managerial influence has operated to reduce the performance-sensitivity of executive pay. Among other things, we examine the structure of non-equity compensation, the design of conventional option plans, the use of restricted stock grants, and managers' freedom to unload options and shares. Part IV of the book (titled Going Forward) discusses how executive compensation - and corporate governance more generally - can be improved. We examine the extent to which pay arrangements can be improved by adopting board process rules, imposing shareholder approval requirements, and making pay more transparent. We conclude that problems with compensation arrangements cannot be fully addressed without ensuring that directors focus on shareholder interests and operate at arm's length from the executives whose compensation they set. To achieve this result, we argue, it is not sufficient to make directors independent of executives as recent reforms has sought to do; it is also necessary to make directors dependent on shareholders by changing the legal arrangements that insulate boards from shareholders.

Does Your Vote Count? When Firms Bypass Shareholder Approval of Board Appointments

Although U.S. state corporate laws require shareholders to elect the firm's directors, under certain circumstances managers can circumvent this requirement and appoint new directors without shareholder approval. The appointment of directors without shareholder approval usually occurs simultaneously with the private placement of financial securities. In this study we examine the causes and consequences of this appointment of directors without a shareholder election, a phenomenon that remains unexamined in the literature. The 'bundling' of board seats with the purchase of corporate securities that is characteristic of some private issues serves as a unique environment in which to assess the importance of shareholder voting rights. Our analysis of the effect of circumvention of shareholder approval on the nature of the directors subsequently appointed contributes to the policy controversy regarding the need for external regulation to strengthen the position of independent directors. In particular, our study is relevant to the current debate over the SEC's recent proposal to provide shareholders with the power to directly place director candidates on the corporate ballot in certain circumstances. Further, since this research examines the effects resulting from the nullification of a basic shareholder right, it helps to establish the impact that the violation of one share-one vote rules might have on the corporate governance for firms in countries with weak shareholder protection. By analyzing a sample of U.S. firms that appoint directors in combination with private offerings between 1995 and 2000, we find that firms in which agency costs are higher are more likely to nullify shareholder approval of board appointments at the time of the private placement. Firms that bypass shareholders are also less likely to appoint independent directors or to elect an independent director as chairman of the board. We also find that the stock market reacts more positively to the announcement of the private offering when the firm submits the board candidates for shareholder approval. Further, we show that firms that bypass shareholder approval significantly underperform after the private offering when compared to firms seeking shareholder approval. We conclude from our findings that the firm's decision to circumvent shareholder ratification is most consistent with the entrenchment hypothesis.

Effective Tax Rate Changes and Earnings Stripping Following Corporate Inversion

We examine the financial and valuation consequences of corporate inversion using a sample of 12 inversion firms and 24 matched firms. We find that firms' effective tax rates (ETRs) decline substantially following inversion. Based on pre- to post-inversion changes in foreign profit margin, U.S. profit margin, and the geographic composition of pre-tax income, we infer that inversion-related ETR reductions are due to U.S. earnings stripping. For four firms, we provide evidence that intercompany debt is the mechanism used to strip earnings. Finally, we find that abnormal returns at shareholder approval dates are associated with inverted firms' realized ETR changes.

The NASCAR Phenomenon: Auto Racing Sponsorships and Shareholder Wealth

This study presents the first analysis of the impact of NASCAR sponsorship announcements on the stock prices of sponsoring firms. The primary finding of the study-that NASCAR sponsorship announcements were accompanied by the largest increases in shareholder wealth ever recorded in the marketing literature in response to a voluntary marketing program-represents a striking and unambiguous stock market endorsement of the sponsorships. Indeed, the 24 sponsors analyzed in this study experienced mean increases in shareholder wealth of over $300 million dollars, net of all of the costs associated with the sponsorships. A multiple regression analysis of firm-specific stock price changes and select corporate and sponsorship attributes indicates that NASCAR sponsorships with more successful racing teams, corporate (as opposed to product or divisional) sponsorships, and sponsorships with direct ties to the consumer automotive industry are all positively correlated with perceived sponsorship success, while corporate cash flow per share (a well-known proxy for agency conflicts within the firm) is negatively related with shareholder approval.

The Amount and Timing of Goodwill Write-Offs and Revaluations: Evidence from U.S. and U.K. Firms

This paper investigates criticisms that U.S. GAAP had given firms too much discretion in determining the amount and timing of goodwill write-offs. Using 1,576 U.S. and 563 U.K. acquisitions, we find little evidence that U.S. firms managed the amount of goodwill write-off or that U.K. firms managed the amount of revaluations (write-ups of intangible assets). However, our results are consistent with U.S. firms delaying goodwill write-offs and U.K. firms timing revaluations strategically to avoid shareholder approval linked to certain financial ratios.

The Future of Broad-Based Options

Numerous studies have investigated the effect that the new expensing rules will have on existing balance sheets, but a closer analysis demonstrates that companies will have an opportunity to rethink their existing approach to accounting and, ultimately, equity compensation. In addition to accounting for stock options, companies also have to expense their employee stock purchase plans. New rules from the NYSE and the NASDAQ will also influence equity compensation plans, calling for shareholder approval of all employee stock ownership plans. Specialists in benefits and compensation must understand the scope of changes that will arrive in 2005. Perhaps broad-based equity compensation plans will be the answer. As recent studies linking broad-based equity pay to performance show, they might just be a welcomed alternative.

Is Acquiring-Firm Shareholder Approval in Stock-for-Stock Mergers Perfunctory?

Despite mixed stock returns for acquirer shareholders in large stock-for-stock mergers, acquiring-firm merger proxy votes rarely fail; in the sample we examine, the average approval rate of votes cast is 95%. Our examination of whether merger votes are effective in monitoring management's acquisition policy indicates that the margin of approval varies substantially with firm and deal characteristics, and while there are no failed votes in our sample some deals are only narrowly approved. These findings support the notion that merger proxy votes provide credible threats despite high average approval rates.

Effective Tax Rate Changes and Earnings Stripping Following Corporate Inversion

This study examines the financial and valuation consequences of corporate inversion using a sample of twelve inversion firms and twenty-four matched control firms. Consistent with managements' claims, we find that inverting firms' total effective tax rates (ETRs) decline substantially following inversion. Based on pre- to post-inversion period changes in foreign profit margin, U.S. profit margin, and the geographic composition of pre-tax income, we infer that inversion-related ETR reductions are due to U.S. earnings stripping. For a subset of our sample, we provide evidence that intercompany debt is the mechanism used to strip U.S. earnings. Finally, we find that abnormal returns at shareholder approval dates are associated with inverted firms' realized effective tax rate changes.

Regulating Poison Pill Devices

This article examines the various theories put forward to explain poison pills and the empirical evidence to support these theories. Such an examination leads to the conclusion that it is not possible for regulators to adopt a monolithic approach in their treatment of takeovers. An analysis of the common law approach to fiduciary duties including the recent Court of Appeal decision in Criterion Properties Plc v Stratford UK Properties LLC & Ors indicates a number of unresolved issues remain including a reluctance to interfere with the business judgment of the directors, a difficulty in identifying the purpose and consequences of an exercise of power and problems of enforceability. The Takeover Directive agreed in December 2003 which allows Member States to avoid implementing a prohibition on frustrating actions is viewed as an opportunity missed. While the City Code and Takeover Rules are particularly effective in regulating poison pills, they do not currently regulate actions taken prior to the time an offer is made or is believed to be imminent. One solution proposed is the amendment of the City Code and Takeover Rules to render certain contracts which might frustrate the making or implementation of an offer and which are entered into by a company prior to this time period subject to shareholder approval during the offer period.

Corporate governance practices, CEO characteristics and firm performance

This paper examines the link between firm performance, CEO characteristics and changes in corporate governance practices using an unbalanced panel of 1721 firms from 1980 to 1995. This paper provides the stylized facts about corporate governance practices and details how governance practices have evolved over time. By 1995, the majority of firms had implemented differing types of charter amendments, poison pills or other governance provisions that are potentially harmful to shareholders. Most firms have adopted multiple and even redundant governance provisions. Shareholders are more likely to approve an increase in the power of the boards of directors of better performing firms, while the boards of poorly performing firms are much more likely to initiate governance changes, such as poison pills, that circumvent shareholder approval. I find no relationship between CEO age, tenure or compensation and governance changes.

Why Continental European Takeover Law Matters

This paper addresses the following question in the context of considering the recommendations of the High Level Group of Company Law Experts on Takeover Bids: Why does Continental European takeover law matter given the concentrated ownership structure of most Continental European firms? In answering this question, the paper discusses the interaction between takeover rules and ownership structure and the possible lessons that can be drawn from the British and American experience with takeover regulation. While a ban on the use of defensive tactics without shareholder approval (possibly in conjunction with a mandatory bid rule) can theoretically have the effect of either encouraging or discouraging the adoption of dispersed-ownership structures, the empirical evidence suggests that the former would be the more likely result. Moreover, the British and American experience highlights the importance of adopting a takeover regime earlier rather than later in time.

Do Voting Rights Matter?: Evidence from the Adoption of Equity-based Compensation Plans

Recent corporate scandals and subsequent regulatory actions have heightened both the academic communities and the public's interest in corporate governance issues. Academics have long argued that voting rights constitute a critical component of a system of corporate governance. We provide evidence on the importance of one aspect of the firm's corporate governance system, namely shareholders' voting rights, by examining the determinants of the decision to grant equity-based compensation to the employees of the firm with or without shareholder approval. We find that poorly-performing firms and poorly-governed firms are more likely to adopt equity-based compensation plans without shareholder approval. Furthermore, when we examine financial performance subsequent to adoption of equity-based compensation plans, we find that poorly-governed firms that adopt equity-based compensation plans without consulting shareholder do not appear to gain any significant benefits associated with the incentives the plans are supposed to provide. In fact, in the year after an equity-based compensation plan is adopted, these firms perform worse than firms that have good systems of corporate governance or firms that place equity-based compensation plans to a shareholder vote. Overall, our results suggest that shareholder voting rights are an important tool of corporate governance.

Collaborative Corporate Governance: Listing Standards, State Law and Federal Regulation

The traditional view of corporate law as arising from state law, with federal law in a supporting role no longer describes the post Sarbanes-Oxley world. This paper presents modern corporate governance as a collaborative process between the federal government (mostly acting through the SEC), state law (mostly acting through the Delaware courts, but also including its legislature and those in other states) and the self-regulatory organizations such as the stock exchanges. The focus is on the third source, particularly the listing requirements of the New York Stock Exchange. The Reforms announced in 2002 portend a dramatic increase in the role of the listing requirement in defining American corporate governance. The interaction between the NYSE and state and federal law is heavily tilted toward its overlap with federal law. The pattern of NYSE regulation of the last decade is that the SEC chair makes a speech or a telephone call identifying a problem, the Exchange convenes a committee of experts and proposes a solution that is sent to the SEC and the various interested parties engage the Exchange and the SEC in discussions about what the law should be. Prominent examples include requirements for independent directors, shareholder approval of stock options, audit committee procedures and one share/one vote rules. This is a different process than what occurs in state law or in direct SEC regulation and it is becoming a larger part of American corporate governance.