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E-MailTara Bhandari is a Financial Economist at the U.S. Securities and Exchange Commission. The Securities and Exchange Commission, as a matter of policy, disclaims responsibility for any private publication or statement by any of its employees. The views expressed herein are those of the author and do not necessarily reflect the views of the Commission or of the author’s colleagues upon the staff of the Commission. Peter Iliev is an Associate Professor of Finance at Pennsylvania State University. Jonathan Kalodimos is an Assistant Professor of Finance at Oregon State University. This post responds to a post, Creating a Foundation for a Substantive Debate on Proxy Access Proposals. Related research from the Program on Corporate Governance includes Lucian Bebchuk’s The Case for Shareholder Access to the Ballot and Private Ordering and the Proxy Access Debate by Lucian Bebchuk and Scott Hirst (discussed on the Forum here).
In an August 2016 post on this blog, Bernard Sharfman discussed a previous version of our paper, Governance Changes through Shareholder Initiatives, describing it as a well-done study but one whose results he interpreted differently than us. We agree with Sharfman that careful analysis and continued research in this area is important. However, we believe important progress has been made. In particular, there is substantial evidence that the market believes that proxy access would be value-enhancing at many companies, but also that the expected benefits of proxy access vary significantly across companies.
In our paper, we use proxy access as a unique setting to study the shareholder proposal process from targeting through implementation, in order to better understand the effectiveness of this channel for governance change. One of our findings, which Sharfman discusses at length, is that the announcement of proxy access proposals was associated, on average, with a positive abnormal return of 53 basis points for the targeted company.
In his post, Sharfman questions the extent to which we can learn something about the market as a whole from the sample in our event study. The primary cause for concern would be if the companies targeted were those that were expected to benefit most from proxy access, which would result in an overestimate of the value of a proxy access proposal for a typical firm. However, we find that the companies that were expected to benefit the least from proxy access were just as likely to be targeted as those that were expected to benefit the most. Therefore, the average returns we estimate could be a reasonable proxy for the effects at an average company, and provide a rare glimpse at the value of shareholder proposals.
We are also sensitive to Sharfman’s concern that some confounding factor may be driving this finding, as is inherent to any empirical results. However, in addition to controlling for traditional risk factors and industry returns, we relate our results to the market reaction to previous events related to proxy access. The relation between our event study returns and returns for the same companies to these other events provides confidence that we are capturing the value of proxy access proposals.
Specifically, using returns to a market-wide event previously studied by Becker, Bergstresser, and Subramanian (2013) to sort companies into those that were expected to benefit more or less from mandatory proxy access, we find that the abnormal return upon receiving a proxy access proposal is significantly higher for those expected to benefit more. The results are striking: we find the quintile of firms expected to benefit the most had a statistically significant average abnormal return of 137 basis points, compared to an insignificant negative 7 basis points for the quintile of firms expected to benefit the least.
We use placebo tests to confirm that this relationship is robust to alternative interpretations. For further robustness, we also consider returns to an alternative event studied by Cohn, Gillan, and Hartzell (2016) and find similar results. Our results thereby also help to validate the results of these previous studies that have focused on the value of mandated proxy access. Overall, each event provides corroborating evidence that proxy access is expected to be value-enhancing at many companies, but also that the expected benefits of proxy access vary significantly across companies.
Given the variation in these expected benefits, the shareholder proposal process could be a useful channel for adopting proxy access only where it is needed, and our event study results demonstrate that it can indeed be valuable. However, we find that coordination and agency problems can impede this process from delivering optimal outcomes. In particular, proponents do not target or tailor proposals in a way that would be optimal for all shareholders. Moreover, management resists proposals most strongly where the market appears to value them most highly. Also, shareholder voting outcomes are not always aligned with market views on where proxy access would be valuable. Our paper contains more detail on these results and how the incentives and constraints of the different parties involved in the shareholder proposal process can impede the effectiveness of this channel for governance changes.
Overall, our results underline that there are no simple answers to the difficult questions in the field of governance. We agree that it is important to be careful about how studies are interpreted. However, we think that important research is being done with new data becoming available on a continuous basis, and hope to see more work in this area to benefit the understanding of all parties.
The full paper is available for download here.
