Shareholder Proposals Research Articles

Shareholder Proposal Rights: Balance Between Protection of Minority Shareholders’ Rights and Efficiency of Company Decision-Making–Article 115 of PRC Company Law

Shareholder Proposal Rights: Balance Between Protection of Minority Shareholders’ Rights and Efficiency of Company Decision-Making–Article 115 of PRC Company Law

A landscape analysis of investors in the global breast milk substitute industry to target for advocacy.

The International Code of Marketing of Breast-milk Substitutes and subsequent resolutions (the Code) was adopted to address increases in mortality and morbidity resulting from the practices of the breast-milk substitute (BMS) industry. The lack of success in ensuring company compliance with the Code has prompted advocates to consider engaging with investors to shape the governance of BMS companies. To support these efforts, this paper aimed to identify prominent investors in the global BMS industry and explore their Code-related policies and practices. Using multiple methods and data sources, we developed a novel approach to identify and rank investors in the world's leading publicly listed BMS companies. We also examined the policies and voting behaviour of a sample of investors using publicly accessible materials from 2020 to 2022. We found that a small number of large investors, led by BlackRock and Vanguard, hold a substantial share in the global BMS industry. Of the top-10 ranked investors, only Norway's Government Pension Fund (NBIM) reported policy information relating specifically to BMS marketing. Most of these large investors also opposed the sample of public health-related shareholder proposals analysed. In addition, we identified several investors that have reported engaging with BMS companies on Code-related issues, including NBIM, Pictet, and UBS, along with several potential investor targets for future advocacy efforts, including some North American public pension funds. The inclusion of Code-related issues as part of broader policies, disclosures and regulations related to environmental, social and governance oriented investment warrants increased attention.

What Are the Firm Value Implications of SEC-Challenged Shareholder Proposals?

The Securities and Exchange Commission (SEC) permits managers to request the exclusion of shareholder-initiated proposals. I construct a novel data set of excluded and withdrawn proposals from the SEC’s responses to managers’ requests. An examination of announcement returns to withdrawal and exclusion decisions demonstrates that SEC-challenged proposals are value destroying. I find that special interest investors pursuing self-serving agendas and retail investors advocating for one-size-fits-all reforms explain the value-destroying nature of SEC-challenged proposals. On average, the SEC challenge benefits firm value by filtering out these harmful proposals. However, a regression discontinuity design reveals that proposals the SEC refuses to exclude may receive majority shareholder support and destroy firm value. This paper was accepted by Suraj Srinivasan, accounting. Funding: I thank the Swiss Finance Institute for its generous financial support. Supplemental Material: The online appendix and data files are available at https://doi.org/10.1287/mnsc.2022.01344 .

The value impact of climate and non-climate environmental shareholder proposals

We study the value impact of environmental shareholder proposals (ESPs) for Russell 3000 firms from 2006 to 2021. We distinguish between climate-dedicated ESPs and non-climate ESPs covering other environmental topics. We use two approaches to evaluate management's ability and willingness to select value-enhancing ESPs and reject value-destroying ESPs: (i) cumulative abnormal returns around the final proxy filing date and (ii) a regression discontinuity design around the voting threshold at the annual general meeting. Our results suggest that management has screening ability for ESPs, especially for climate proposals, and that investors and managers share common objectives in environmental activism.

A real effect of climate-related shareholder proposals: Diversification

To date, the literature has not discovered diversification to be a firm policy that shareholders can influence through their proposals at annual meetings but has explained contexts in which diversification can defend. I contemplate and test diversifying responses to shareholder proposals made in the context of climate change. By following 440 shareholder-initiated proposals in the United States that contain “climate change” – from the first instance in the 1994 proxy season until 2020 – I find that firms in receipt of such proposals diversify more, mostly into related industries. Further, diversification prompted by climate proposals generally leads to wealth enhancements. Beyond correlations and the main results of ordinary least squares regressions, I address the endogenous nature of corporate policies in a variety of ways: a matching estimator, fixed effects, and an instrumental variable, along with a placebo and a GMM estimator. Robustness tests confirm prior results and expose a subtle difference between sales and asset diversification. Climate-related proposals appear to influence sales diversification slightly more than asset diversification, suggesting that agents may be less responsive to owner concerns than customers. Overall, shareholder proposals related to climate change can have the real effect of prompting firms to diversify.

Gender diversity and environmental activism: Gender discrimination or socialisation?

AbstractThis paper empirically investigates the association between different executive roles taken by women and environmental shareholder activism at the shareholder proposal filing stage and the withdrawal stage. Building on gender socialisation theory and the managerial power perspective, and with 2350 firm‐year observations from Standard and Poor's (S&P) 1500 companies in the United States for the years 2010–2018, we find that environmental activists display a greater propensity to target firms led by women CEO–Chairs at the shareholder proposal filing stage, while no significant preference is observed towards general women directors or CEOs. To explore the rationale behind this preference—whether it stems from gender discrimination or socialisation—we extend our investigation to the withdrawal stage and identify a significantly positive influence from both women CEOs and CEO–Chairs, with the influence from CEO–Chairs being more pronounced. We postulate that both the managerial power and women's socialised traits (such as being more altruistic, collaborative and communicative) are plausible explanations for this gender effect, and women without substantial legitimate power in environmental matters are unable to exert a significant impact.

Which investors support the transition toward a low-carbon economy? Exit and Voice in mutual funds

Reducing portfolio carbon footprints (Exit) and voting in favor of climate-related shareholder proposals (Voice) are among the main actions that investors can take to promote an accelerated transition toward a low-carbon economy. This paper studies three important investor groups that can be instrumental in driving the transition and evaluates their Exit and Voice behavior. I find that the five largest asset managers perform poorly on Exit and Voice over the full sample period but improved on both in more recent years. Only a small fraction of signatories to sustainable investor initiatives are supportive of the transition. Counterintuitively, investors who perform poorly on Exit, perform well on Voice. Finally, I examine the financial consequences of employing Exit and Voice and find that Exit is positively related to risk-adjusted fund returns; however, this is not necessarily attributable to superior skill of fund managers.

The Role of Passive Investors in Corporate Governance and Socially Responsible Investing: Evidence from Shareholder Proposals

We study whether the substantial rise in passive ownership reshapes activist shareholders’ behavior in sponsoring shareholder proposals, which shareholders use to address issues they believe are crucial for the sustainable growth of a company. Our findings reveal a positive impact of passive investors on the initiation of governance, socially responsible investing (SRI), and an aggregate of both proposals. Interestingly, we show that managerial ability and board co-option potentially moderate their link. In the subsequent analysis, we note a constructive influence of passive investors on post-initiation outcomes, evidenced by an increase in withdrawal and voting percentage of proposals corresponding to heightened levels of passive ownership. These findings suggest that passive investors foster communication between activists and management and endorse the case even when it progresses to the voting stage. More importantly, the market values these proposals positively as reflected in higher observed buy-and-hold returns. Finally, our results are robust to instrumental variable analysis using Russell reconstitution as an exogenous shock. Taken together, our study offers broad implications that passive investors can indirectly engage in promoting sustainable practices by encouraging activist investors to sponsor governance and socially responsible proposals, a collaborative approach where shareholders contribute to sustainability efforts.

Unintended Consequences of CEO-Employee Pay Ratio Disclosure Mandate: Evidence from Shareholder Proposals

Unintended Consequences of CEO-Employee Pay Ratio Disclosure Mandate: Evidence from Shareholder Proposals

Shareholder Proposals and the Negative Speech Rights of Corporations

Shareholder Proposals and the Negative Speech Rights of Corporations

The Corporate Contract and the Private Ordering of Shareholder Proposals

The Corporate Contract and the Private Ordering of Shareholder Proposals

The Value Impact of Climate and Non-climate Environmental Shareholder Proposals

The Value Impact of Climate and Non-climate Environmental Shareholder Proposals

The social cost of investor distraction: Evidence from institutional cross-blockholding

Institutional investors routinely hold blocks of stocks in multiple firms within an industry. While such cross-blockholding boosts a portfolio firm’s financial performance, could it distract investors from attending to firm activities in a nonfinancial domain, hurting its performance in that domain? The authors answer this question in the context of corporate social responsibility (CSR). They first document that cross-held firms perform worse on social responsibility than non-cross-held firms do. A quasi-natural experiment based on mergers between institutional blockholders helps establish causality. Next and as their primary contribution, the authors demonstrate investor distraction as the mechanism. Using two proxies of distraction—EDGAR search volume and shareholder proposals on socially responsible investment—they show that the negative impact of institutional cross-blockholding on CSR mainly comes from investor distraction when investors hold multiple blocks simultaneously. By highlighting the social cost of institutional cross-blockholding, this article finds a distraction effect of institutional cross-ownership, which extends our understanding of this unique ownership structure.

Shareholder Activism in Europe: A Rising Trend?

This article discusses the rising trend of shareholder activism in Europe. It summarizes the empirical evidence on different levels of shareholder activism across the world and offers three potential explanations for the higher level of shareholder activism in the US compared to continental Europe. First, the omnipresence of controlling shareholders in continental Europe could explain why shareholder activism is relatively less common. Secondly, higher levels of some types of shareholder activism environmental, social and governance (such as ESG shareholder activism) in the US can be explained by differences in corporate laws, in particular the relatively low thresholds to file shareholder proposals in the US. On the other hand, higher levels other types of shareholder activism (such as hedge fund activism) are more difficult to explain by differences in corporate law between the US and continental Europe. Third, more activist-friendly securities laws in the US could also explain why shareholder activism is relatively more common in the US than in continental Europe. Because these three explanatory factors are unlikely to change soon, the article concludes that the rising trend of shareholder activism in Europe is unlikely to reach American levels. shareholder activism, engagement, ESG activism, comparative company law

Corporate Social Responsibility

Is shareholder interest in corporate social responsibility driven by pecuniary motives (abnormal rates of return) or nonpecuniary ones (willingness to sacrifice returns to address various firm externalities)? To answer this question, we summarize the literature by focusing on seven tests: ( a) costs of capital, ( b) performance of portfolios, ( c) ownership by types of institutions, ( d) surveys and experiments, ( e) managerial motives, ( f) shareholder proposals, and ( g) firm inclusion in responsibility indices. These tests predominantly indicate that shareholders are driven by nonpecuniary motives. To stimulate further research on welfare implications for global warming, we assess whether estimates of the foregone returns for shareholders willing to reduce carbon emissions (or “greeniums”), along with the wealth pledged to firms that become sustainable, are consistent with the growth of aggregate investments in the decarbonization sector.

The unfolding of shareholder activism in India: an exploratory study

PurposeThe purpose of this study is to provide a holistic view of the emergence of shareholder activism (SA) in India. However, specifically, this study aims at fulfilling the research gap by discussing the policy and legal advancement in the area of SA and investigating the chronological evolution of SA, manifestations of SA, motives of SA, outcome of SAs and impact of SA on the financial performance of the firm.Design/methodology/approachThis study used a mixed methodology (both qualitative and quantitative) to draw inferences, including content analysis, descriptive statistics, independent sample t-test and paired sample t-test. The data has been collected from the annual reports of the sample companies and the Prowess database. Return on assets and return on equity have been used as measures of financial performance while investigating the difference in financial performance between firms subjected to SA and firms not subjected to SA.FindingsThe findings of this study suggest that there has been significant growth in the occurrence of SA incidents in India in the past decade, with shareholders prominently manifesting by opposing the proposals at annual general meetings/extraordinary general meetings, mostly involving governance-related demands. The findings from the independent sample t-tests revealed that there has been a significant difference in the financial performance of the sample subjected to SA and firms not subjected to SA. Furthermore, the results of the paired sample t-test provide strong evidence of significant improvement in the financial performance of firms’ post-SA.Practical implicationsThe findings of this study have implications for various stakeholders. The findings of this study suggest that SA has been relatively more successful in the Indian context and may encourage minority shareholders to follow active participation through shareholder proposals and votes rather than a passive strategy to trade and exit. For firms, it can provide valuable inferences about the emergence of SA and how it has a positive impact on the financial performance of the firm, which can lead to a change in the perception of investors and promoters who perceive SA as a threat (Gillan and Starks 2000; Hartzell and Starks, 2003). For policymakers, it can act as a tool to investigate whether the regulatory changes have been able to bring the intended transparency, accountability and enhanced shareholder participation. This will encourage policymakers to be more agile, as their efforts are bearing fruit. This will also act as a guide to formulating future policies and regulations.Originality/valueThis study is an effort to provide a holistic view of SA scenarios in a developing economy setting like India, where SA is a very recent phenomenon. Although there are studies in the area of SA, there is a dearth of studies that have investigated the various dimensions of SA in the Indian context in a very systematic and extensive manner, investigating all the different dimensions of SA. Furthermore, this study also intends to investigate the impact of SA, which is normally perceived as a threat to financial performance and provide valuable contrasting evidence.

ESG Mutual Fund Voting on Executive Compensation Shareholder Proposals

ABSTRACT We investigate how mutual funds with environmental, social, and governance (ESG) objectives vote on shareholder proposals related to executive compensation. Using a sample of 94,695 votes by 2,354 mutual funds from 2012 to 2021, we find ESG funds are 9.4 percent more likely than non-ESG funds to vote in favor of such proposals, and the likelihood increases to 19.2 percent for proposals aligning executive compensation with environmental and social (ES) objectives. ESG funds are also 14.9 percent more likely to support proposals to improve transparency, but only 7.0 percent more likely to support proposals about redesigning compensation. Our results are consistent with ESG funds perceiving greater net benefits from supporting shareholder compensation proposals, particularly those related to ES objectives and transparency. Additionally, funds committed to ESG objectives in regulatory filings are more likely to support such proposals than fund families that voluntarily signed the United Nations’ Principles of Responsible Investment. JEL Classifications: G23; G30; M12; M14.

Resolved: Exploring the Role of Dialogic Engagement in Shareholder Activism for Diversity, Equity, and Inclusion

ABSTRACT As the drive for enhanced diversity, equity, and inclusion (DEI) intensifies in the public sphere, shareholders are increasingly leveraging their influence and resources to proactively advance DEI causes that align with broader societal concerns. However, our understanding of “social” shareholder activism remains rudimentary. To address this gap, this research employs the dialogic engagement framework in public relations to examine the interactions between shareholder activists and corporations on DEI issues. Using a mixed methods research design, the study analyzes social issue shareholder proposals voted on from 2010 to 2022 (n = 1773) and conducts a detailed case study of shareholder activist-corporate engagement. Results indicate shareholders’ emphasis on an array of DEI matters, spanning from racial disparities to LGBTQ+ rights, and their push for increased disclosures, data-driven reports, and comprehensive racial equity audits. The case study underscores the pivotal role of relational, collaborative dialogic engagement within internal stakeholder activism. The study concludes by discussing various theoretical and practical ramifications stemming from the confluence of internal activism, dialogic engagement, and issues management were discussed.

Shareholder primacy or stakeholder pluralism? Environmental shareholder proposals and board responses

PurposeThis study examines shareholder and board motivations regarding corporate social responsibility (CSR) to understand boards' stewardship approaches to environmental issues.Design/methodology/approachUsing content analysis, the authors classify CSR motivations in all environmental shareholder proposals and board responses of Fortune 250 companies from 2013 to 2017 from do little (a shareholder primacy perspective) to do much (a stakeholder pluralism perspective). The authors calculate the motivational dissonance for each proposal-response pair (the Talk Gap) and use cluster analysis to observe evidence of board stewardship and subsequent environmental disclosure and performance (ED&P) changes.FindingsBoard interpretations of stewardship are not uniform, and they regularly extend to stakeholders beyond shareholders, most frequently including profit-oriented stakeholders (e.g. employees and customers). ED&P changes are highest when shareholders narrowly lead boards in CSR motivation and either request both action and information or information only. The authors observe weaker ED&P changes when shareholders request action and the dissonance between shareholders and boards is larger. When shareholders are motivated to do little for CSR, ED&P changes are weak, even when boards express more pluralistic motivations.Research limitations/implicationsThe results show the important role that boards play in CSR and may aid activist shareholders in determining how best to generate change in corporate CSR actions.Originality/valueThis study provides the first evidence of board stewardship at the proposal-response level. It measures shareholder and board CSR motivations, introduces the Talk Gap, and examines relationships among proposal characteristics, the Talk Gap, and subsequent ED&P change to better understand board stewardship of environmental issues.

Should the Board Have Control over Shareholder Proposals? Evidence from China

Abstract This Article empirically investigates the impacts of the board’s rejection of shareholder proposals on corporate value and the appropriate approach to regulation. The study utilizes a dataset of such incidents in China, where the board enjoys significant discretion in rejecting proposals due to the inadequacy of legal enforcement mechanisms. The findings provide suggestive evidence that the market reacts negatively to the announcement of proposal rejections, leading to a significant decline in a firm’s stock value. The most adverse effects are associated with rejections of director nomination proposals and blockholder-sponsored proposals. The inclusion of external legal opinions can help alleviate these adverse consequences. Additionally, the research uncovers that while the two stock exchanges in China demonstrate overall competence in identifying harmful rejection decisions, the effectiveness of their regulatory actions via comment letters is hindered by the inherent weakness of the soft law approach. Drawing upon these results, this study posits that the critical value of the shareholder proposal regime lies in providing a low-cost approach for dissident shareholders to replace poorly performing management and facilitating the constructive engagement of large shareholders and the management. Furthermore, it is recommended that China establish an SEC-style review process for board rejection decisions, with the exchanges as the ultimate authority permitting the exclusion of shareholder proposals.