Courtesy of Ali Akyol
Rule 14a-8 of the Securities Exchange Act of 1934 allows shareholders to submit non-binding proposals demanding a vote on certain corporate matters at annual meetings. In theory, improving shareholder rights reduces agency costs associated with the separation of ownership and control. Shareholder proposals, thus, could reduce agency costs by increasing the board’s responsiveness to shareholder concerns. Because of their non-binding nature however, they have long been thought to have little impact on shareholder value (Black, 1990; Bebchuk, 2005; Thomas and Cotter, 2007). This was probably true until the early 2000s, as shareholder proposals were receiving low support and were somewhat focused on social responsibility issues which were viewed as frivolous (Black, 1998; Karpoff, 2001). At the time, few proposals were receiving majority votes, and boards were ignoring them (Ertimur, Ferri and Stubben, 2010).
The corporate governance scandals of the early 2000s led to calls for more shareholder empowerment and participation in corporate decisions. Over time, shareholders have been given additional power, including the ability to vote on executive compensation (have a say on pay) and to nominate directors (proxy access). Another way these calls have manifested themselves is through the increased participation of shareholders in corporate affairs via the submission of proposals geared towards governance (Bebchuk, 2005). Studies such as Ertimur et al. (2010) find that boards are now more responsive to shareholder demands after the scandals of the early 2000s and are more likely to implement those proposals which receive majority votes. Additionally, there seem to be real consequences for board members and executives in firms which do not implement majority vote proposals.
In this new environment, obtaining the support of more than 50% of shareholders has become more important for proposal sponsors, as it increases the chance that management will implement the proposal. Given the importance of a majority vote in corporate elections, the rules surrounding the voting process such as how votes are counted, how the results are disseminated, or what information is provided to proposal sponsors have become important.
Proposal sponsors can use every bit of information available to them to devise their campaigns. For example, a proposal sponsor fearing that its proposal will fail, may choose to contact other shareholders to improve the chances of the proposal receiving a majority vote. Management may also employ similar tactics to increase support for its proposals or to ensure that shareholder proposals do not get a majority vote. As noted in Bach and Metzger (2017), management may try to lobby shareholders to increase turnout, choose to increase the participation of retail shareholders who are more likely to favor management, and campaign more aggressively when it does not want a proposal to pass.
In a recent study, I use a decision made by a vote-tabulating firm to withhold interim vote tally data from proposal sponsors in exempt solicitation campaigns to examine the implications of shareholder power for firm value. I argue that the decision by the vote-tabulating firm took power away from shareholders and weakened their ability to obtain a majority vote on a shareholder proposal. Different from most papers on shareholder empowerment, my study approaches the debate on shareholder empowerment from an opposite direction and examines the value implications of shareholder empowerment by studying a case that limits shareholder power rather than one that increases it.
In the United States (U.S.), vote tallying at corporate meetings is done by intermediaries. One such intermediary is Broadridge Financial Solutions, Inc. (Broadridge). Broadridge is a U.S. public company responsible for distributing proxy statements and tallying shareholder votes on behalf of its clients (brokerages and banks). The company controls about 90% of the proxy market (Schaefer, 2013). Most shares in the U.S. are held by brokerages in “street names,” and brokerages are required to ensure that shareholders get all shareholder communications. Rather than doing it themselves, brokerages delegate this responsibility to a third-party such as Broadridge. Since Broadridge is acting as an agent for brokerages and helping companies distribute their shareholder communication materials, including their proxy statement to shareholders, Broadridge also provides interim vote tally data to companies for the proposals voted on at annual meetings. In exempt solicitation campaigns, Broadridge was also providing interim vote tally data to proposal sponsors who requested the information up until May 10, 2013.
JPMorgan Chase & Co’s (JPMorgan) 2013 annual meeting was held on May 21, 2013. A shareholder proposal to split the roles of chairman and CEO was included in the company’s proxy statement. The proposal was co-sponsored by a few institutional investors, and an exempt solicitation was filed. A similar proposal in 2012 received 40% support from shareholders. News reports published before the annual meeting suggest that the vote on this proposal was being watched closely and was highly contentious (Browdie, 2013). On May 10, 2013, Broadridge stopped providing interim vote tally data to the sponsors of the JPMorgan proposal at the urging of the Securities Industry and Financial Markets Association, which also represents JPMorgan. Broadridge defended its decision by noting that it was contractually obligated to follow the directive of its clients. More importantly, Broadridge also stopped providing interim vote tally data to sponsors at other companies (Craig and SilverGreenberg, 2013a).
Drawing fire from investors, JPMorgan later agreed to give the information directly to the sponsors, subject to a confidentiality agreement to be signed by the sponsors. Some investors, such as CtW, however, argued that receiving the interim results at that stage was of little use to them (Freifeld and Henry, 2013). The shareholder proposal at the center of the fight between JPMorgan and the sponsors received the support of 32.2% of shareholders at the annual meeting, down from 40% the previous year.
After Broadridge changed its policy on interim vote tally data in exempt solicitations, investors argued that having interim vote results help each side devise their campaigns, including sending extra materials or making more calls to other investors (Silver-Greenberg and Craig, 2013b). As noted in Silver-Greenberg and Craig (2013a), a losing side may also choose to add more resources to its campaign to make additional calls or send additional letters to shareholders to increase the chance that its proposal passes. Proposal sponsors could also use interim vote results to hire proxy solicitors to call investors who have not voted, and, according to Chasan (2014), the lack of interim vote results could make it harder for sponsors to know which investors have not voted yet. Additionally, when Broadridge decided not to share the interim vote results with the sponsors of the JPMorgan proposal, some institutional investors argued that “cutting off access to them gives JPMorgan, which is getting frequent updates, an upper hand” in adjusting its campaign strategy accordingly (Craig and Silver-Greenberg, 2013b). Overall, it can be argued that interim vote results are important for each side of a proposal. Being able to see interim vote results was a valuable tool available to shareholder proposal sponsors and Broadridge’s decision on May 10, 2013 may have disadvantaged them in designing effective campaigns.
Using the decision by Broadridge, I examine how the market reacted to the decision and whether the market’s reaction was different for firms with certain proposal types and firms with proposals submitted by certain sponsors. I start my analysis by examining the distribution of proposals and their sponsors. The firms in my sample received a total of 344 proposals that went to a vote in 2012. Most of these proposals were submitted by individuals (118 proposals), and most of the individual investor sponsored proposals were on governance-related issues (96 proposals). There were 20 proposals by hedge funds but, unlike other sponsors, hedge funds were mostly involved in proxy fights, as there were 17 proxy campaigns initiated by hedge funds in 2012.
In my multivariate analysis, I first measure the market’s reaction to Broadridge’s decision using the standard event study methodology to examine how firm and proposal characteristics were related to the market’s reaction. I find that the market’s reaction was more positive for small firms, high market-to-book firms, and firms with better recent stock price performance. For firms with a shareholder proposal, I also found that the market’s reaction was more positive if those firms had better stock price performance. Thus, when Broadridge denied access to interim vote results, the market reacted more positively for better performing firms with shareholder proposals, suggesting that the market did not view shareholder proposals as value-enhancing for those firms.
I also examine how proposal type and sponsor identity were related to abnormal returns. I first start with proposal types. There are different shareholder proposal types and some may be viewed as value-enhancing and others as value-decreasing. For example, social responsibility proposals may be seen as frivolous (Black, 1998; Karpoff, 2001). Given the prior research, I would expect to find a positive stock market reaction to firms with social responsibility proposals assuming social responsibility proposals are not viewed favorably by the market. I find that the market’s reaction to Broadridge’s decision was significantly positive for firms that received social responsibility proposals. Additionally, the market reacted negatively for firms that were the target of a proxy fight. These results, which are consistent with the literature, indicate that proxy fight proposals overall are viewed as value increasing by the market (the market reacted negatively for firms that were involved in a proxy fight when Broadridge denied access to interim vote results), whereas social responsibility proposals are viewed as value-decreasing (this time the market reacted positively for firms with social responsibility proposals when Broadridge denied access to interim vote results).
Assuming that firms with hedge fund proposals in 2012 were more likely than other firms to receive hedge fund proposals in the future, Broadridge’s decision might have made it relatively difficult for hedge funds to communicate with other investors who had not yet voted. For firms with hedge fund proposals, I find that the market’s reaction was strongly negative. This is consistent with the findings of studies (such as Brav, Jiang and Kim, 2010) that show that hedge fund activism is, on average, value-increasing. Individual investor proposals may be seen as a nuisance by management (Larcker and Tayan, 2016; Matsusaka, Ozbas and Yi, 2017). If this is the case, I would expect Broadridge’s decision to especially benefit firms with proposals sponsored by individual investors. The results support this argument as the market’s reaction was significantly positive for firms that received proposals sponsored by individuals. These results suggest that the market views hedge-fund sponsored proposals as value-increasing and proposals sponsored by individual investors are viewed as value-decreasing.
Next, I examine whether Broadridge’s decision affected vote outcomes. For the meetings held between May 11, 2013 and December 31, 2013, I expect shareholder proposals to receive less support if Broadridge’s decision weakened coordination and communication among shareholders. The results support this argument. After controlling for firm characteristics, I find that support for shareholder proposals decreased by more than 6% after Broadridge’s decision.
Taken together, the results indicate some shareholder proposals, especially those targeted at well-performing firms, and proposals by some sponsors may be seen as distractive by the market. The results suggest that it is important to understand how shareholders get involved in corporate affairs to correctly gauge the benefits and costs of shareholder empowerment. The results also shed light on the obscure world of corporate voting and suggest the need for more research in this area.
Bach, Laurent and Daniel Metzger, 2017, Are shareholder votes rigged? Swedish House of Finance Research Paper No. 17-3.
Bebchuk, Lucian A., 2005, The case for increasing shareholder power, Harvard Law Review 118, 835–914.
Black, Bernard S., 1990, Shareholder passivity re-examined, Michigan Law Review 89, 520–608.
Black, Bernard S., 1998, Shareholder activism and corporate governance in the United States, In: Newman, Peter (Ed.), The new Palgrave dictionary of economics and the law (p. 459-465), Palgrave Macmillan: New York.
Brav, Alon, Wei Jiang and Hyunseob Kim, 2010, Hedge fund activism: A review, Foundations and Trends in Finance 4, 1-65
Browdie, Brian, May 16, 2013, JPM exec’ SIFMA ties could help Dimon vote, American Banker, Retrieved from https://www.americanbanker.com.
Chasan, Emily, February 7, 2014, Proxy Voting Change Could Level Playing, The Wall Street Journal, Retrieved from https://www.wsj.com.
Craig, Susanne and Jessica Silver-Greenberg, May 15, 2013a, Shareholders denied access to JPMorgan vote results, The New York Times, Retrieved from https://www.nytimes.com.
Craig, Susanne and Jessica Silver-Greenberg, May 17, 2013b, Investor group asks S.E.C. to intervene on access to shareholder vote totals, The New York Times, Retrieved from https://www.nytimes.com.
Ertimur, Yonca, Fabrizio Ferri and Stephen R. Stubben, 2010, Board of directors’ responsiveness to shareholders: Evidence from shareholder proposals, Journal of Corporate Finance 16, 53–72.
Freifeld, Karen and David Henry, May 20, 2013, JPMorgan, under pressure, gives up vote information, Reuters, Retrieved from http://www.reuters.com.
Karpoff, Jonathan M., 2001, The impact of shareholder activism on target companies: A survey of empirical findings, University of Washington Working Paper.
Larcker, David F. and Brian Tayan, 2016, Gadflies at the gate: Why do individual investors sponsor shareholder resolutions? Stanford University Working Paper.
Matsusaka, John G, Oguzhan Ozbas and Irene Yi, 2017, Why do managers fight shareholder proposals? Evidence from no-action letter decisions, University of Southern California Working Paper.
Schaefer, Steve, Oct 30, 2013, The broad reach Of Broadridge, the most important financial firm you’ve never heard of, Forbes, Retrieved from https://www.forbes.com.
Thomas, Randall S., and James F. Cotter, 2007, Shareholder proposals in the new millennium: Shareholder support, board response, and market reaction, Journal of Corporate Finance 13, 368–391.
 An exempt solicitation is some form of communication – usually a letter prepared by a proposal sponsor – that does not involve the distribution of a proxy card. In an exempt solicitation, the proponent is mostly explaining their vote to other shareholders in a particular proposal.
 Broadridge changed its mind at the end of 2013 and is now ready to share interim vote results with proposal sponsors subject to the signing of a three-party (Broadridge, the issuer, and the sponsor(s)) confidentiality agreement.