Shareholder Proposals Contested by Firm Management

Suraj Srinivasan is Professor of Business Administration at Harvard Business School. This post is based on a recent paper by Professor Srinivasan; Eugene F. Soltes, Jakurski Family Associate Professor of Business Administration at Harvard Business School; and Rajesh Vijayaraghavan.

In our new paper, What Else Do Shareholders Want? Shareholder Proposals Contested by Firm Management, we explore proposals that managers seek to exclude from their firms’ proxy statements. We find that managers often seek to exclude shareholder proposals from the proxy. Over four thousand proposals, or nearly 40%, of all proposals received during 2003-2013 were contested by management. These proposals covered a wide range of issues including executive compensation, antitakeover measures, voting procedures, environmental issues, and social policy. The SEC allows firms to exclude many of the proposals that managers contest. Specifically, 72% of all proposals that managers seek to exclude from the proxy are allowed by the SEC (i.e. SEC provides firm a “no action” opinion letter).

We find that some firms are more inclined than others to seek exclusion of shareholder proposals. Firms that are larger, have worse performance, and have less institutional shareholders are more likely to contest proposals they receive. There is also the tendency for management to behave similarly over time. If a firm contests a proposal in the prior year, they are more inclined to contest a proposal in the subsequent year.

For the 28%, or 1,177 shareholder proposals, that managers cannot exclude from the proxy, managers have a choice. They can either proceed with placing it on the proxy or they can seek to engage with the submitting shareholder to reach some compromise that would lead to the shareholder withdrawing the proposal before the vote. Our evidence supports the idea that managers often seek to exclude proposals that are not necessarily frivolous and are supported by a significant proportion of shareholders.

Regulation only requires that shareholders hold $2,000 of stock or 1 percent of the share capital for at least one year to be eligible to create a proposal. However, we find that the vast majority of shareholders who create proposals have considerably larger holdings. The median shareholdings of submitters whose proposals are contested have $43,000 in shares and the mean submitter has $9.6 million in share ownership. This skew reflects the holdings of larger institutional investors (e.g. pension funds, hedge funds, etc.) whose proposals are often contested. Thus, the shareholders whose proposals are contested are typically not marginal holders of the firm’s securities.

More importantly, for the proposals that are contested, but for which the SEC does not offer an exclusion, we find that 18% of all contested proposals that are brought to a shareholder vote are approved by shareholders. By comparison, 25% of non-contested proposals that are placed on the proxy receive majority shareholder support. Thus, proposals contested by management that eventually make their way to the proxy often gain broader shareholder support at a level comparable to non-contested proposals. Notably, even those contested proposals that fail to be approved still gain considerable support. Contested proposals that fail, gain on average an additional 21% percent of all shares outstanding in incremental support over the shares held by the submitter. This suggests that even those proposals that fail are not entirely frivolous given this magnitude of shareholder support. Together, this evidence suggests that managers often contest proposals that are supported by their shareholder base.

After contesting a proposal and even after receiving a no-action letter, managers still have an alternative to placing the proposal on the proxy. In particular, managers can negotiate with shareholders prior to a vote. These negotiations can lead to the withdrawal of the proposal by the submitting shareholder after the submitter is satisfied with the firms’ actions. 16% of all contested proposals are eventually withdrawn by the submitting shareholder or simply implemented by the firm (i.e. in effect withdrawing the proposal). We find that managers are more willing to negotiate with shareholders with larger holdings and with institutional entities like pension funds and hedge funds. Managers are also considerably more likely to conclude a private resolution with the shareholder once the SEC disallows the firm from excluding the proposal from the proxy.

Overall, our evidence is consistent with managers often seeking to exclude proposals that represent the interests of their shareholders. In 28% of proposals that managers sought to exclude but were not permitted to do so by the SEC, shareholders approved the proposal through a vote or the submitter withdrew due to implementation. Given that shareholder interests regularly seem to differ from that of management, this analysis suggests that which proposals are excluded plays an important role in determining governance outcomes. The SEC’s selection process plays an important role in either facilitating or encumbering shareholder interests.

The full paper is available here.

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