Political, Social, and Environmental Shareholder Resolutions: Do they Create or Destroy Shareholder Value?

Joseph P. Kalt is the Ford Foundation Professor (Emeritus) of International Political Economy at the John F. Kennedy School of Government, Harvard University and a Senior Economist at Compass Lexecon. L. Adel Turki is a Senior Managing Director of Compass Lexecon. Kenneth W. Grant and Todd D. Kendall are Executive Vice Presidents, and David Molin is Vice President, at Compass Lexecon. The views expressed here are solely those of the authors and do not necessarily reflect the views of their employers or the National Association of Manufacturers and/or its members.

The increased use of politically-charged shareholder resolutions has garnered considerable attention in recent years, as shareholder meetings have become venues for discussion and debate regarding corporate positions and actions on issues of the day. Recent proxy seasons have seen corporate management being asked to address issues as diverse as deforestation, corporate clean energy goals, climate change, the uses of antibiotics and pesticides, political contributions, human rights risks through the supply chain, indigenous rights and human trafficking, cybersecurity, the development and reporting of sustainability metrics, and tax fairness. As we show, this change has both expanded the number of resolutions to which a given company may be required to respond and broadened the range of issues that boards and senior managers are being asked to address.

This study explores the impact of social and environmental shareholder proposals on shareholder returns. Specifically, using the case of climate-change-related proposals to test the economics, we examine statistically the reaction of companies’ stock prices to both increased disclosure of climate-change-related information and shareholder proposals calling for such disclosure. We focus on climate change resolutions both because of the growing activism on the part of certain large institutional investors around climate change disclosure and because of the argument upon which that activism is predicated, i.e., that such additional disclosure provides meaningful information to the marketplace and therefore serves to benefit shareholders. Our analysis fails to find support for such assertions. Rather, we find that the evidence demonstrates that the adoption of such shareholder resolutions has no statistically significant impact on company returns one way or the other.

Notwithstanding the stridency of arguments surrounding politically charged shareholder proposals, our finding that such proposals do not enhance shareholder value is not surprising. The fundamental drivers of risk and the impact of an issue like climate change on the ability of management’s decisions to enhance or detract from shareholder value are political. Specifically, whether a company should be doing more or different in responding to an issue like climate change turns overwhelmingly on political actors and factors: Will nation A adopt certain kinds of policies to deal with climate change? If so, when? Will adopted policies “stick”, or will new political forces come along and change the direction of policy? How will other nations respond? And so forth…

In the face of such fundamentally political determinants of a company’s fate, shareholder resolutions that would purport to enhance shareholder value by compelling management to undertake certain adaptive measures or analyses implicitly entail the proposition that corporate managers are better able to make predictions about the direction of national and world politics than the myriad other sources—from think tanks to governments—to which investors might turn for such forecasting. There is no basis for such a proposition.

That is, there is no general expectation that corporate managers have special abilities in predicting tastes, preferences, voting behavior, and/or institutional capabilities across a wide and varied number of independent political actors operating within independently acting nations across the globe. Under such conditions, resolutions that, for example, compel disclosure of outcomes under particular political scenarios (e.g., the political paths that might put the world on a trajectory to achieve a goal such as the “not more than 2 degrees temperature rise” goal that came out of the Paris climate accords in 2015) do not add materially to the information already available to investors from other sources. As such, they cannot be expected to add to shareholder value.

Our results should not be taken to mean, however, that such resolutions are harmless. First, such proposals can often cost millions of dollars. Second, and perhaps of greater importance, such activism may open the door to the diversion of resources towards goals besides shareholder returns, with consequent harm to good corporate governance. It raises the question, for example, of which issues are to be considered “significant” by whom and, thus, warrant the use of management resources and consumption of corporate assets.

Creating incentives for managers to act in ways that focus more on social objectives rather than shareholder wealth may license boards and corporate executives to seek what we could agree are less worthy outcomes, such as maximizing personal wealth or popularity. While there is a substantial literature on the role of “corporate social responsibility” in corporate governance, and not every instance of firm social engagement necessarily leads to a reduction in the quality of governance, the academic literature also finds that the long-run impact of social-issue shareholder proposal activism is negative.

None of this is to say that we should not be extremely concerned about such issues as global climate change, human trafficking, cybersecurity, and the like. Effectively dealing with such problems, however, will require that wise public policy measures be taken across a wide swath of the world’s nations. While frustration with slow progress on this front is understandably accompanied by the desire to “do something”, doing something effective in such arenas is the task of our political institutions. Shareholder resolutions targeted at prominent corporations is an ineffectual substitute for sound policy making via the political institutions of democracy.

The complete publication is available here.

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  1. Aryt Alasti
    Posted Sunday, June 17, 2018 at 12:07 pm | Permalink

    Compass Lexecon is infamous for having done a series of “studies” at the behest of the Independent Petroleum Association of America, each using a different set of bogus criteria to arrive at the same demonstrably false conclusion: that fossil-fuel divestment would cost investment funds enormous amounts of income. Their credibility on such topics is nil. If the National Association of Manufacturers has funded this report, it’s just one more indication of Compass Lexecon’s role as mercenary mouthpiece for industry.

    Corporations most certainly have the agency to reduce risk by better assessing and addressing environmental, social and governance issues which are of concern to shareholders. The fact that large investors such as BlackRock and Vanguard are supporting such resolutions indicates what is the reality of the value-adding potential.

  2. Sam
    Posted Sunday, June 17, 2018 at 2:10 pm | Permalink

    I am disappointed that the Forum would agree to give a platform to this “study” given its highly flawed methodology.

    The authors purport to use an event study to show that shareholder proposals on sustainability have no impact on shareholder value. Their approach is flawed for a multitude of reasons, but I’ll just focus on a couple.

    To begin, you can’t use a simple event study on shareholder proposal votes to assess the effect of a proposal on shareholder value because you’d expect investors to predict the vote outcome in advance and price that outcome before the vote. Indeed, only one of the proposals listed in Table 2 was even remotely a “close call” (PPL, with 56.8% of votes for. Other proposals passed or failed by as many as 17 percentage points.

    That’s why researchers who aren’t being paid by industry (n.b., this “study” was commissioned by the National Association of Manufacturers) have rejected the simple event study as an approach to evaluate the impact of shareholder proposals on shareholder value. Instead, sophisticated researchers use an event study approach combined with a regression-discontinuity design. See, e.g., Cunat et al., The Vote Is Cast: The Effect of Corporate Governance on Shareholder Value, in the Journal of Finance. This approach effectively examines only “close call” proposals, taking the difference between narrow passes and narrow fails as the local average treatment effect. In fact, one paper (Flammer, Does Corporate Social Responsibility Lead to Superior Financial Performance? A Regression Discontinuity Approach, in Management Science) uses this approach and finds that the adoption of close-call corporate responsibility proposals leads to positive CARs and superior accounting performance. This “study” does not even cite the Flammer paper.

    The RD design approach to studying shareholder proposals is not perfect either (see Bach & Metzger, Are Shareholder Votes Rigged?), but it is far superior to the simple event study approach, which lacks any internal validity whatsoever.

    You also can’t use the proxy filing date as the event date because it is far too noisy. There is a ton of information contained in a proxy statement that is far more material than the submission of a proposal related to sustainability. Indeed, event studies using the proxy filing as the event date have not found statistically significant CARs for any type of shareholder proposal, as far as I’m aware. Thus, the absence of statistically significant CARs here says nothing about the impact of sustainability proposals. It’s just a feature of shareholder proposals generally.

  3. Josh Gotbaum
    Posted Thursday, October 4, 2018 at 2:34 pm | Permalink

    Beyond the study’s significant methodological shortcomings, there is also the question how a forum devoted to corporate & financial regulation could fail to disclose that the research it was describing had been paid for by an industry association. Have HLS standards slipped that much?