A Report on Corporate Governance and Shareholder Activism
By James R. Copland and
Margaret M. O’Keefe
About the Authors
JAMES R. COPLAND is director of and senior fellow with the Manhattan Institute’s Center for Legal Policy, which seeks to develop and
communicate novel, sound ideas on how to improve America’s civil- and criminal-justice systems. He has testified before Congress and state and municipal legislatures; and has authored many policy white papers, book chapters, and articles in journals, including the Harvard Business Law Review and Yale Journal on Regulation, as well as opinion pieces in periodicals, including the Wall Street Journal, National Law Journal, and USA Today. Copland speaks regularly on civil- and criminal-justice issues; has made hundreds of media appearances in such outlets as PBS, Fox News, MSNBC, CNBC, Fox Business, Bloomberg, C-Span, and NPR; and is frequently cited in news articles in the New York Times, Washington Post, The Economist, and Forbes. In 2011 and 2012, he was named to the National Association of Corporate Directors “Directorship 100” list, which designates the individuals most influential over U.S. corporate governance.
Prior to joining MI, Copland was a management consultant with McKinsey and Company in New York. Earlier, he was a law clerk for Ralph K. Winter on the U.S. Court of Appeals for the Second Circuit. Copland has been a director of two privately held manufacturing companies since 1997 and has served on many public and nonprofit boards. He holds a J.D. and an M.B.A. from Yale, where he was an Olin Fellow in Law and Economics; an M.Sc. in the politics of the world economy from the London School of Economics; and a B.A. in economics from the University of North Carolina at Chapel Hill, where he was a Morehead Scholar.
MARGARET M. O’KEEFE is the project manager for the Manhattan Institute’s Proxy Monitor. Her previous employment includes executive-compensation and corporate-governance consulting at Pearl Meyer & Partners. Earlier, O’Keefe worked for more than ten years on proxy advisory consulting, both at the Proxy Advisory Group and at Morrow & Co. She began her legal career at the Chase Manhattan Bank, where she was an associate counsel. O’Keefe is a graduate of St. John’s University School of Law and received an LL.M. in financial services law from New York Law School.
In the last two decades, shareholders have gained power relative to corporate boards. One way shareholders exert influence over corporations is by introducing proposals that appear on corporate proxy ballots. In 2015, shareholders were both more active and more successful in these efforts:
- The number of shareholder proposals is up. The average large company faced 1.34 shareholder proposals in 2015, up from 1.22 in 2014. This is the highest level of shareholder-proposal activity since 2010. The increase in 2015 has been driven largely by the New York City pension funds’ push for “proxy access,” which would give large, long-term shareholders the right to nominate their own candidates for director on corporate proxy ballots.
- The Securities and Exchange Commission has been more lenient in allowing shareholder proposals on the ballot. Another reason for the uptick in shareholder-proposal activity in 2015 is a more permissive stance adopted by the SEC in assessing shareholder proposals’ appropriateness for proxy ballots. In January 2015, the agency suspended the application of its “conflicting proposals” rule—and several companies this year faced shareholder proposals that conflicted with management proposals on the ballot. In 2015, the SEC issued 82 letters assuring companies that it would take no action if they excluded a shareholder proposal from their proxy ballot, down from 116 in 2014; the agency declined to issue no-action letters on 68 petitions in 2015, up from 50 in 2014.
- A small group of shareholders dominates the shareholder-proposal process. As in 2014, one-third of all shareholder proposals in 2015 were sponsored by just three individuals and their family members: John Chevedden, the father-son team of William and Kenneth Steiner, and the husband-wife team of James McRitchie and Myra Young. The NYC pension funds sponsored 11 percent of all proposals in 2015, but the overall percentage of shareholder proposals sponsored by labor-affiliated pension funds—28 percent—is below historical norms because private labor unions’ pension funds have been less active. Institutional investors without a labor affiliation or a social, religious, or policy orientation sponsored only one proposal.
- A plurality of shareholder proposals involve corporate-governance issues. Forty-three percent of 2015 shareholder proposals involved corporate-governance concerns—including 11 percent that sought proxy access. Forty-two percent involved social or policy issues, including 19 percent that focused on the environment. Although shareholder proposals focusing on corporate political spending or lobbying remained common—17 percent of all proposals—the overall number of such proposals fell to 51, down from 67 in 2014.
- The percentage of shareholder proposals receiving majority shareholder support is up. Eleven percent of shareholder proposals were supported by a majority of shareholders in 2015, up from just 4 percent in 2014. This uptick was due to substantial support for proposals seeking proxy access: 23 of 35 proxy-access proposals won majority shareholder backing. Aside from proxy-access proposals, only 4 percent of shareholder proposals—ten in total—received majority shareholder votes. Among the companies in the Fortune 250, not a single shareholder proposal involving social or policy concerns won majority shareholder support over board opposition—as has been the case for the past ten years.
In addition to capturing overall shareholder proposal trends, this report and a companion econometric analysis by University of Tennessee professor Tracie Woidtke assess shareholder-proposal activism by public-employee pension funds:
- Public-pension fund shareholder-proposal activism is associated with lower stock returns. Fortune 250 companies targeted by shareholder proposals by the five largest state and municipal pension funds from 2006 through 2014 saw their share price, on average, underperform the broader S&P 500 index by 0.9 percent in the year following the shareholder vote. Companies targeted by the New York State Common Retirement Fund, which in 2010 launched an aggressive shareholder-proposal effort focused on social issues, such as corporate political spending, saw their share price drop by 7.3 percent, relative to the broader market.
- Social-issue-focused shareholder-proposal activism helps explain a negative share-value effect associated with public-pension fund ownership. Controlling for various factors, companies in which public-pension funds invested from 2001 through 2013 were less valuable than those owned by private pension funds and other investors. This negative ownership effect was particularly pronounced for companies targeted by the New York State Common Retirement Fund with social-issue proposals and does not exist for the 2001–07 period, when that fund did not sponsor social-issue proposals.
- Shareholder votes supporting 2015 proxy-access proposals are associated with a negative stockprice reaction. When shareholders approved a Fortune 250 company’s proxy-access proposal in 2015, the company’s share price underperformed the S&P 500 index by 2.3 percent, on average, in the days following the annual meeting. Conversely, when shareholders voted down a company’s proxy-access proposal, the company’s share price outperformed the market index by an average of 0.5 percent.
In light of these findings, states and municipalities should consider how their public-employee pension funds should engage in future shareholder-proposal activism, if at all.
About Proxy Monitor
The Manhattan Institute’s ProxyMonitor.org database, launched in 2011, is the first publicly available database cataloging shareholder proposals and Dodd-Frank-mandated executive advisory votes at America’s largest companies. This is the fifth winter report previewing the annual proxy season and the 30th publication in a series of findings and reports by Manhattan Institute Center for Legal Policy director James R. Copland, each drawing upon information in the database to examine shareholder activism in which investors attempt to influence corporate management through the shareholder-proposal process.
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