Corporate Governance and Shareholder Activism in 2011

In recent years, a small number of activist shareholders have increasingly sought to use their equity stock holdings to exert influence over business management. Proponents of “shareholder democracy” have successfully pushed shareholder proposals offered for votes at the annual meetings of public corporations that change the manner in which directors are elected and in which shareholders can force corporate action outside those annual meetings. Proponents of “corporate social responsibility” have pushed companies to change their behavior with a clear interest in pursuing policy goals rather than share-price maximization. Critics of management’s pay levels have pushed for shareholder advisory votes on executive compensation—a practice borrowed from Britain but unheard of in the United States a decade ago—and such “say on pay” votes are now mandated under federal law by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.

Academics and investors alike have debated shareholder activism generally and these proposals specifically; but to date, hard data have generally not been publicly available about this phenomenon. To fill in this informational gap and to uncover and analyze trends in this aspect of shareholder activism and its influence over corporate governance, the Manhattan Institute launched its Proxy Monitor project. The ProxyMonitor.org database assembles information on the 150 largest corporations (by revenues, as ranked by Fortune magazine) and currently includes searchable and sortable information on every shareholder proposal submitted at each company from 2008 through August 1, 2011. (Earlier years’ proposals, and a broader data set of companies, will be added to the database in the months ahead.)

This report is an early analysis drawn from the database as of the end of the 2011 proxy season. Among its key findings:

• Shareholder proposals are sponsored by a small subset of shareholders. The overwhelming majority of shareholder proposals since 2008—98 percent—were offered by three very specific types of stock owner:
  • 1. A small number of individuals widely known as “corporate gadflies” —small investors who provoke management by repeatedly filing multiple substantially similar shareholder proposals at many companies (more than two-thirds of all proposals submitted to Fortune 150 companies by individual investors came from Evelyn Davis and members of the Steiner, Chevedden, and Rossi families).
  • 2. Pension funds and other investment vehicles affiliated with labor unions, in both the public and private sectors.
  • 3. Social investment vehicles affiliated with religious organizations or public policy groups, or otherwise organized as social-interest funds focused on policy goals other than share-price maximization.
• Different industries face different levels of shareholder activism. Manufacturing companies dealt with nearly twice as many shareholder proposals as did technology companies during the study period. Energy and financial-services companies also face more proposals than do companies in other sectors. Shareholder proposals were more likely to pass in the retail sector than in others.
• The types of shareholder proposals introduced vary over time. Proposals related to executive compensation fell markedly in 2011, after advisory shareholder votes on management pay plans and golden parachutes were mandated in Dodd-Frank. Proposals seeking to authorize shareholders to act outside of annual meetings by written consent were first introduced in 2010, and their numbers increased in 2011. Proposals seeking social or policy goals vary in type, based on the broader political discourse—often involving “health-care principles” during the debates over federal health-insurance reform and increasingly involving corporations’ political spending in the wake of the Citizens United v. Federal Election Commission decision by the U.S. Supreme Court.
• Success rates of shareholder proposals vary greatly according to subject. In the study period, 21 percent of proposals related to general process-based corporate-governance concerns passed, but only 7 percent of those on executive compensation succeeded. None of the proposals related to social or policy goals, including proposals relating to corporations’ political spending, were supported by a majority of a company’s shareholders.
• Labor unions’ shareholder activism appears potentially linked to union organizing campaigns and motivated by concerns other than shareholder return. Labor-affiliated funds disproportionately introduced shareholder proposals at companies that are in industrial sectors publicly targeted by union organizing campaigns. Labor-affiliated funds’ shareholder proposals also tend to focus on executive compensation and the separation of the chairman and CEO position for companies—management-sensitive topics that potentially signal an effort to use the shareholder-proposal process as leverage over management to the benefit of union workers rather than in the interests of the broader class of shareholders. On balance, the empirical evidence analyzed in this report tends to throw into question the push for “shareholder democracy” and suggests that shareholder activism in the form of shareholder proposals submitted on the proxy ballots of publicly traded companies may be more a vehicle for interest-group capture of corporations rather than for mitigating agency costs and improving shareholder returns. Further studies are necessary, however, to solidify this conclusion.

In recent years, publicly traded American companies increasingly have found themselves confronted by shareholders who want to influence corporate management. [1] Simultaneously, the federal government has sought more influence over corporations by increasing its role in the enforcement of corporate law, first through the 2002 Sarbanes-Oxley reforms [2] (enacted in the wake of the collapsed Internet stock bubble and frauds at Enron and other large companies), and second through the 2010 Dodd-Frank measures [3] enacted in the wake of the 2008 financial crisis. The new federal rules have themselves empowered shareholders and reinforced a particular form of shareholder activism, namely, proposals submitted by shareholders at the annual meetings of publicly traded corporations.

The rise of such activism has been praised by some scholars and investors but excoriated by others. [4] Their ongoing debate has raised new theoretical arguments but has offered little empirical analysis of actual activity by shareholders. [5] Basic factual questions have gone unanswered: Who are the shareholders involved in shareholder activism? What do they propose, and whom do they target? How, if at all, do their proposals benefit shareholders at large?

To fill this gap, the Manhattan Institute launched the Proxy Monitor project, to uncover and analyze actual trends in shareholder-proposal activity and its influence over corporate governance. The ProxyMonitor.org database assembles information on the 150 largest publicly traded American corporations by revenues, as ranked by Fortune magazine, including searchable and sortable information on every shareholder proposal submitted at each company from 2008 through August 1, 2011. Thus, the data for 2011 cover all Fortune 150 companies that mailed proxy materials in advance of an annual meeting, or that held such a meeting, as of August 1. Because most corporations hold their annual meetings between mid-April and mid-June, the data set includes most companies: shareholder proposals for 134 of the Fortune 150; and voting results for 133.

This report is an early analysis drawn from information contained in the database. We have used the information to create an empirical assessment of current shareholder activity as it relates to corporate governance, with a focus on revealing:

• Who is driving shareholder activism—i.e., who are the most frequent sponsors of shareholder proposals?
• Where is shareholder activism focused—i.e., which companies and industries are being targeted with shareholder proposals?
• What is the subject of shareholder activism—i.e., what are the principal agendas being advanced through shareholder proposals?

The database reveals that most shareholder activism is sponsored by very few investors: a subset tied to organized labor, religious institutions, and “social investing” funds sponsors most proposals. The rest comes from a handful of “corporate gadflies,” small investors who provoke management by repeatedly filing multiple substantially similar shareholder proposals at many companies. Institutional investors outside the social-investing sector largely eschew the shareholder-proposal process. This pattern, along with early returns on Dodd-Frank-mandated advisory votes on executive pay, suggests that much of today’s shareholder-proposal activity is, at best, loosely related to most shareholders’ financial interests.

Endnotes

[1] See, e.g., Paul Rose, Common Agency and the Public Corporation, 63 Vand. L. Rev. 1355, 1356 (2010) (observing that “general trends have supported increased shareholder power and influence within public companies in recent years”).
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[2] Sarbanes-Oxley Act of 2002, Pub. L. No. 107-204, 116 Stat. 745 (2002).
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[3] The Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203, 124 Stat. 1376 (2010) [hereinafter Dodd-Frank Act].
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[4] Compare Lucian A. Bebchuk, The Case for Increasing Shareholder Power, 118 HARV. L. REV. 833 (2005) (arguing for increased shareholder power over corporate governace) with Stephen M. Bainbridge, Director Primacy: The Means and Ends of Corporate Governance, 97 NW. U. L. REV. 547 (2003) (arguing for a traditional director-centered approach to corporate governance).
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[5] But see, e.g., Yonca Ertimur et al., Board of Directors’ Responsiveness to Shareholders: Evidence from Shareholder Proposals, 16 J. CORP. FIN. 53 (2010); and Joao Dos Santos and Chen Song, “Analysis of the Wealth Effects of Shareholder Proposals“, VOL. II (U.S. Chamber of Commerce/Workforce Freedom Initiative), May 2009 available at http://www.workforcefreedom.com/sites/default/files/analysis_wealth_effects_volume2.pdf.
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