John G. Matsusaka is Charles F. Sexton Chair in American Enterprise, Professor of Finance and Business Economics at the University of Southern California Marshall School of Business. This post is based on a recent paper authored by Professor Matsusaka; Oguzhan Ozbas, Associate Professor of Finance at USC Marshall School of Business; and Irene Yi.
Corporate managers, by and large, are skeptical of shareholder proposals. A shareholder proposal, placed in the proxy statement by an activist shareholder, allows shareholders as a group to vote on a change in the company’s bylaws or advise management to alter company policies. Managers routinely resist expanded use of shareholder proposals, both through organizations that seek to influence regulations such as the Business Roundtable, and by seeking to omit individual proposals from the company’s proxy statement using the SEC’s no-action letter process.
The reason managers fight shareholder proposals is a matter of some dispute. The “responsible manager” view is that shareholder proposals are harmful to the firm; they distract managers, disrupt the company’s operations, and in some cases are designed to push the company in a direction that benefits special interest shareholders such as labor unions, public pensions, and environmental groups. The underlying logic of this view has a long tradition in the law, and is the basis for the business judgement rule that presumes shareholders are less informed about the company than managers, and that managers are acting in the best interest of shareholders. The “self-interested manager” view, in contrast, is that shareholder proposals increase firm value, and that managers resist them in order to protect corporate practices that serve their private interests. The underlying logic of this view also has a long tradition, dating back at least to Berle and Means, who argued in The Modern Corporation and Private Property (1932) that separation of ownership and control in the modern corporation allows managers substantial leeway to pursue their own interests at the cost of shareholder wealth.
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