Current perspectives on shareholder proposals: lessons from the 1997 proxy season.
The shareholder-proposal rule allows shareholders, subject to certain constraints, to include a shareholder proposal and 500-word supporting statement in the company's proxy materials. It provides an opportunity for them to communicate with both corporate management and the other shareholders. We summarize the issues addressed in shareholder proposals, the identities of proposal sponsors, and the proposals' voting outcomes. To our knowledge, this study is among the first to present a complete description of proposal types, sponsor types, and voting results for both corporate governance and social policy proposals in a large sample.(1)
Of particular interest is that in May 1998, the SEC adopted a number of revisions to Rule 14a-8. The process began in September 1997, when the SEC proposed a number of procedural revisions to the rule.(2) Two of the proposed revisions were 1) raising the level of stock ownership for proposal submission from $1,000 to $2,000 (requiring that shareholders who wish to submit a proposal must have continuously owned at least $2,000 worth of stock or 1% of the company's voting equity for at least one year prior to proposal submission), and 2) no longer allowing companies to exclude workplace-related social issues on the basis of 14a-8 (c)(7), the ordinary business exclusion. The latter, in effect, reversed a no-action letter the SEC had issued to Cracker Barrel. The SEC suggested returning to the pre-Cracker Barrel situation, when such proposals were reviewed on an individual basis. A third suggestion was to present the rule in a "plain-English" question-and-answer format.
The Commission ultimately adopted all three revisions. Other proposed revisions were not adopted, including the establishment of an "override mechanism." If a shareholder could provide evidence that 3% of the shareholders eligible to vote would like an issue voted on, it could be included in the proxy materials. The override was intended to prevent companies from excluding shareholder proposals based on ordinary-business or economic-relevance criteria. The SEC also suggested that there should be an increase in the thresholds for proposal resubmission. Under the existing Rule 14a-8, if a proposal did not receive at least 3% of the votes cast the first time it was put to a vote, 6% the second time, and 10% the third time, the company could exclude it for a three-year period. The proposing release suggested increasing these thresholds - to 6% on the first vote, 15% on the second, and 30% on the third - and the SEC solicited comments with regard to the proposed higher thresholds.(3)
There is ample evidence that the shareholder-proponent community cares deeply about preserving the proxy mechanism. For example, the SEC received more than 2000 public comment letters in response to recent proposed changes in the proxy rules from interested parties, primarily the sponsor community, its supporters, and corporations.
We focus primarily on the major changes to Rule 14a-8 that were adopted, and we also analyze the likely effect of the proposed revisions that were not adopted. We use voting results and information about withdrawn and omitted proposals from the 1997 proxy season to assess the likely impact of the proposed changes. Section I provides a brief overview of research on voting issues. Section II describes the data employed in the study. Section III provides an overview of the proposals, the sponsors, and the outcomes. Section IV analyzes the potential impact of higher voting thresholds on resubmission. Section V concludes the paper with an assessment of the usefulness of revised Rule 14a-8 as a mechanism through which shareholders can seek change on issues relating to corporate governance and social policy.
I. Research on Voting Issues
The extant research related to corporate voting has focused almost exclusively on issues of corporate governance. While some researchers have emphasized the value of the voting right by studying different classes of voting equity shares, for example Bacon, Cornett, and Davidson (1997) and Kunz and Angel (1996), others have focused on the control of voting rights (Moyer, Rao, and Sisneros, 1992; and Whidbee, 1997). With regard to the study of voting outcomes, papers such as Brickley, Lease, and Smith (1989) emphasize shareholder voting on management-sponsored antitakeover amendments. More recently, emphasis has been placed on votes cast in favor of shareholder proposals. The focus here has also been on governance-related issues, for example, Bizjak and Marquette (1998) and Gillan and Starks (1998a). This study extends the literature on shareholder voting by examining shareholder proposals on issues pertaining to corporate governance and social policy during the 1997 proxy season.
II. The Data
We use data from the Investor Responsibility Research Center's (IRRC) compilation of shareholder proposals for the 1997 proxy season. The IRRC tracked shareholder proposals for approximately 1,800 of the largest US corporations in 1997. Information on the proposals is reported by company and includes company name, the identity of the sponsoring shareholder, and whether the proposal was 1) ultimately included in the proxy, 2) withdrawn by the sponsoring shareholder, or 3) omitted by the company. In addition to describing the proposals, the IRRC classifies them into one of two broad categories: social policy or corporate governance proposals.(4) The voting data include results expressed as a percentage of the votes cast. Our sample includes 287 social policy proposals and 582 corporate governance proposals at 394 companies.
III. Shareholder Proposals Submitted During the 1997 Proxy Season
Shareholder proposals may be voted on, withdrawn, or omitted.(5) In Table 1 Panel A, we present the outcomes for all 869 shareholder proposals. Fewer than half (43.3%) of all proposals were actually voted on. Of the corporate governance proposals, presented in Panel B, 49.2% were voted on and 35.2% were either omitted or withdrawn.(6) In contrast, of the social policy proposals, presented in Panel C, 31.4% were voted on and 61.6% were either omitted or withdrawn. Our investigation of each of these outcomes provides insight into the potential impact of changes to Rule 14a-8. Such an investigation also provides a perspective on recent shareholder voting behavior. We focus on the outcomes, the sponsoring shareholders, and the particular proposals they support.
A. Proposals Submitted to a Vote
To focus on voting outcomes, we present voting results in Table 2. Panel A reports the percentage of votes cast in favor of the social policy and corporate governance shareholder proposals. Corporate governance proposals generally received a higher level of support with a mean of 23.6% of the votes cast in favor versus 6.6% for social policy proposals (medians 19.4% and 6.1%, respectively). There was also a broad range of support for different types of proposals. The percentage of votes cast in favor of corporate governance proposals ranged from 0.8% to 74.5%, and for social policy proposals it ranged from 1.2% to 19.2%.(7)
The variation in voting support is highlighted in Panel B of Table 2 where we rank proposal type on the basis of the average percentage of votes cast in favor of the proposal. As in the overall sample results, social policy issues generally received only weak support. However, there was variation in voting results across social policy proposals with some obtaining sufficient support to pass the highest existing resubmission threshold of 10%.
Corporate-governance-related proposals received the strongest support, particularly those related to antitakeover measures, board pensions, and shareholder voting. For example, proposals seeking to repeal poison pills received a mean vote of 52.8% in favor (median 52.2%). Proposals related to the repeal of a classified board gained a mean vote of 44.4% in favor (median 44.1%).(8) Some governance proposals, however, received relatively low support, particularly those related to executive compensation (mean 11%, median 10%), board stock ownership (mean 8.1%, median 7.2%), and board tenure (mean 7.3%, median 5.1%).
Table 1. Proposal Outcomes for the 1997 Proxy Season This table classifies the outcomes for the 869 proposals submitted to 394 companies during the 1997 proxy season. Panel B presents the outcomes for the 582 corporate governance proposals submitted to 314 companies and Panel C presents the outcomes for the 287 social policy proposals submitted to 171 companies. Each row indicates an outcome, the number of proposals, and the percentage of proposals with that outcome. Percentages are rounded. Panel A. Corporate Governance and Social Policy Proposals Type of Outcome Number Percentage Came to a Vote 376 43.3 Withdrawn 154 17.7 Omitted 228 26.2 Otherwise Not Voted on 111 12.8 Total 869 100.0 Panel B. Corporate Governance Proposals Type of Outcome Number Percentage Came to a Vote 286 49.2 Withdrawn 75 12.9 Omitted 130 22.3 Otherwise Not Voted on 91 15.6 Total 582 100.0 Panel C. Social Policy Proposals Type of Outcome Number Percentage Came to a Vote 90 31.4 Withdrawn 79 27.5 Omitted 98 34.1 Otherwise Not Voted on 20 7.0 Total 287 100.0
The support for various types of proposals may, of course, be attributable to the specific characteristics of a company or its shareholders or both. Table 3 shows voting results for different classifications of sponsoring shareholders. These classifications include individuals, religious groups (primarily the Interfaith Council on Corporate Responsibility (ICCR)), the Investor Rights Association of America (IRAA),(9) pension funds, union funds, and "other" for the sponsors that do not fit into the other classifications. We also identify proponents who have been active over the past decade, including Evelyn Davis (Davis), the Gilbert Brothers & Associates (Gilbert), and the Rossi Family (Rossi).
[TABULAR DATA FOR TABLE 2 OMITTED]
The proposals submitted by Gilbert, IRAA, the pension funds, and the union funds received similar levels of support. Gilbert focuses solely on corporate governance proposals, primarily those pertaining to cumulative voting and repealing classified boards. The IRRA addresses a wider range of corporate governance issues; it has been particularly successful in gaining support for the repeal of poison pills and board declassification. Whereas pension funds and union-based pension funds tend to focus on corporate governance issues, some also submit social policy proposals. Consistent with the overall voting results, Panels B and C of Table 3 indicate that union and pension-fund social policy proposals received substantially less support than their corporate governance proposals.
Votes cast in favor of proposals submitted by individuals and other sponsors, including Evelyn Davis, the Rossi Family, and various religious groups, typically received lower levels of support. Again, these findings should be viewed in conjunction with the correlations between sponsors and proposals. Religious groups often submit social policy proposals, which generally receive lower levels of support. Individuals often sponsor specific types of corporate governance proposals that obtain little support, for example, those related to executive compensation, board stock ownership, and board tenure.(10)
Table 3. Voting Results on the Basis of Sponsor Classifications This table classifies the voting outcomes based on broad classes of proposal sponsors. The data provided for each class of sponsors include the number of proposals and the mean, median, minimum, and maximum percentages of votes cast in favor of the proposals submitted by that class of sponsors. Panel A. All Proposals Sponsor No. Mean Med. Min. Max. Davis 44 13.1 6.9 1.2 52.3 Gilbert 29 29.1 27.2 2.4 55.4 Rossi 4 7.9 7.0 5.8 11.9 Other Individuals 101 19.0 12.8 2.2 71.3 Religions Groups 68 8.3 6.9 1.5 46.3 IRAA 48 29.4 26.0 1.9 74.5 Pension Funds 15 27.7 23.2 7.2 52.9 Union Funds 47 28.7 27.6 3.7 65.9 Others 20 12.3 8.9 0.8 38.2 Total 376 Panel B. Corporate Governance Proposals Sponsor No. Mean Med. Min. Max. Davis 38 14.5 8.3 2.0 52.3 Gilbert 29 29.1 27.2 2.4 55.4 Rossi 4 7.9 7.0 5.8 11.9 Otter Individuals 87 21.2 14.3 3.2 71.3 Religions Groups 18 11.8 9.2 1.6 46.3 IRAA 48 29.4 26.0 1.9 74.5 Pension Funds 10 36.1 37.3 13.2 52.9 Union Funds 41 31.9 31.4 4.1 65.9 Others 11 17.8 14.2 0.8 38.2 Total 286 Panel C. Social Policy Proposals Sponsor No. Mean Med. Min. Max. Davis 6 4.1 3.4 1.2 7.1 Gilbert 0 Rossi 0 Other Individuals 14 5.7 5.4 2.2 10.2 Religious Groups 50 7.0 6.4 1.9 19.2 IRAA 0 Pension Funds 5 10.8 10.5 7.2 15.9 Union Funds 6 6.6 5.8 3.7 10.4 Others 9 5.6 4.2 2.1 11.7 Total 90
B. Omitted and Withdrawn Proposals
As discussed earlier, many proposals do not make it to a vote; instead, they are either omitted or withdrawn. At the aggregate level, in 1997, 26.2% were omitted and 17.7% were withdrawn. Among social policy proposals, 34.1% were omitted and 27.5% were withdrawn, whereas 22.3% of the corporate governance proposals were omitted and only 12.9% were withdrawn.
The number of withdrawn or omitted proposals varies depending on the particular issue and sponsoring shareholder. There are more than 13 separate reasons for proposal omission. based on IRRC classifications, approximately 39% of the omitted corporate governance proposals were excluded on procedural grounds and 25% were excluded on the basis of Rule 14a-8 section c(7), the ordinary-business exclusion.(11) Of the social policy proposals, 17% were excluded on procedural grounds and 50% on the basis of section c(7).
Table 4 presents the specific types of corporate governance and social policy proposals that were withdrawn. Panel A shows that, among the corporate governance issues, proposals pertaining to the board of directors, including the repeal of a classified board, accounted for 48% of those that were withdrawn. An additional 35% of corporate governance proposals related to executive compensation or selling the company. Among the social policy proposals shown in Panel B, more than 72% of those withdrawn pertained to environmental issues, equal opportunities, tobacco, and human rights.
These findings are similar to the voting results in that we observe systematic variation among the particular issues omitted or withdrawn. The question arises as to whether there are also shareholder effects in omitted or withdrawn proposals. Table 5 addresses this issue by classifying the omitted and withdrawn proposals by proposal type and by shareholder type in Panel A. Panels B and C provide the same breakdown separately for corporate governance and social policy issues, respectively. Individuals accounted for more than 85% of the corporate governance omissions and approximately 71% of the social policy omissions. The high level of omissions for proposals sponsored by individuals may be attributed to the complex legal form of the current rule, making it difficult for them to interpret. It is likely that the plain-English format will be easier for all shareholders to understand and will lead to a reduction in such omissions, particularly for individuals.
Table 4. Distribution of Withdrawn Proposals by Proposal Type This table reports the number of proposals withdrawn prior to a shareholder vote. Panel A reports withdrawn corporate governance proposals while Panel B reports withdrawn social policy proposals. Panel A. Corporate Governance Proposals Number Proposal Type Withdrawn Board Compensation 7 Board Independence 3 Other Board-Related 3 Board Pension 3 Board Diversity 7 Board Tenure 1 Repeal Classified Board 13 Executive Compensation 13 Other Corporate-Governance-Related 5 Repeal Golden Parachutes 1 Repeal Posion Pill 6 Sell All/Part of the Company 13 Total Corporate Governance Withdrawn 75 Total Corporate Governance 582 Panel B. Social Policy Proposals Number Proposal Type Withdrawn McBride Principles 2 Ceres Principles 27 Equal Opportunities 15 Environmental Issues 7 Human Rights 4 Maquiladora 2 Miscellaneous 11 Tobacco 8 Weapon-Related 3 Total Social Policy Withdrawn 79 Total Social Policy 287
[TABULAR DATA FOR TABLE 5 OMITTED]
The findings regarding withdrawn proposals contrast dramatically with those for omitted proposals, particularly for corporate governance issues. The results indicate that more than 81% of the withdrawn corporate governance proposals were associated with religious groups, the IRAA, pension funds, and union funds. Withdrawn social policy proposals were primarily sponsored by religious groups (85%). We do not have sufficient information to be able to explain why proposals are withdrawn. Existing evidence suggests that in the case of corporate governance proposals, withdrawal often results from some form of negotiation between the shareholder and the company (Strickland, Wiles, and Zenner, 1996; and Smith, 1996).(12) In the case of social policy proposals, it is not clear to what extent the negotiation procedure takes place. Anecdotal evidence suggests that social policy proposals are sometimes withdrawn when a company demonstrates to the sponsoring shareholder that existing corporate policies already address the issue they have raised.
The overall results suggest that activity by pension funds, union funds, and the IRAA may be more successful, as indicated by more withdrawn proposals and fewer omissions. Though many individuals are successful in getting their proposals in the proxy, others are not. The large number of omitted proposals for individuals suggests that the plain-English format of the revised rule may help individual shareholders navigate the proposal process successfully.
IV. Voting Thresholds
The SEC's proposing release addressed the issue of resubmission thresholds. Under the existing rule, a proposal may be omitted from the proxy materials for three years after the most recent submission, if it does not gain sufficient voting support. The minimum levels of voting support are 3% on the first submission, 6% on the second, and 10% on the third.(13) As already noted, the release proposed that resubmission thresholds be increased to 6% on the first submission, 15% on the second, and 30% on the third. Moreover, comments were solicited regarding the level and form of these thresholds in relation to the current rule. Shareholders who responded generally objected to the proposed increases in favor of the current rule. In contrast, the corporations who responded generally supported an increase in resubmission thresholds.
Though the status quo was maintained with regard to this particular issue, the impact such changes could have had on the shareholder proposal process is of interest. To investigate this issue, we examined how many of the 1997 proposals would have met these higher resubmission thresholds. We identified each proposal voted on at each company in 1997 as a first, second-, or third-time proposal based on IRRC data. If multiple proposals on a similarly classified issue were presented to a company in a particular year, we used the average votes for all such proposals at that company. If a 1997 proposal appeared in 1995 or 1996, we classified it as a second-time submission. If it appeared in both 1995 and 1996, we classified it as a third-time submission. If a proposal had been repeated in excess of three times, we classified it as a third-time submission in order to establish the overall impact of higher thresholds on proposal resubmission. We further required that all proposals must meet the respective resubmission thresholds in each year. Thus, if a proposal could be excluded based on the year-one threshold under the current rule or under the proposed higher threshold, then we assumed that it was excluded. The objective of this analysis is to capture the incremental number of proposals that would be excluded under the higher thresholds.
The results of this analysis, presented in Table 6, indicate that an additional 91 proposals that passed the thresholds of 3%, 6%, and 10% in 1997 would be eliminated under the proposed higher thresholds of 6%, 15%, and 30%. This represents 10.5% of all the proposals submitted in 1997 and 27% of those that passed the test for resubmission based on the existing thresholds. based on the analysis of the voting outcomes in Section III, the social policy and corporate governance proposals sponsored by individuals would have been most seriously affected.
It has been suggested that increased thresholds for resubmission would weaken the overall shareholder proposal process. Our brief analysis of the proposed changes in the resubmission threshold provides some support for such a contention. However, it is important to note that our analysis does not take into consideration any shareholder response to changing thresholds. For example, a natural response by shareholders confronted with higher resubmission thresholds would be to develop a portfolio of proposals that could be submitted on a rolling basis. Examination of this issue is beyond the scope of this paper.
During the past decade, shareholders have increasingly used the proxy process to communicate corporate governance and social policy concerns to corporate management. We provide an overview of recent activity in this area by focusing on the 1997 proxy season and the SEC's recent changes to Rule 14a-8.
Although individuals have been successful in using the proxy process, we find that a high percentage of the proposals sponsored by individuals are omitted. The adoption of the "plain-English" question-and-answer format is likely to make the process more accessible to individual shareholders and may, in turn, increase the number of submissions by individuals, reduce the number of omitted proposals by individuals, or do both. Similarly, the reversal of Cracker Barrel suggests that we are likely to see more workplace-types of issues on the ballot in the future.
Though the status quo has been maintained on [TABULAR DATA FOR TABLE 6 OMITTED] resubmission thresholds, it is not clear what impact the proposed changes would have had. Some have argued that the overall process of shareholder activism would have been weakened; however, we believe that it might have been strengthened. Specifically, increased constraints on proposal submissions could prompt innovation by motivating shareholders to link proposals with economic fundamentals.
It is apparent that, because of recent revisions to Rule 14a-8, the shareholder proposal landscape will change. It is also apparent that the rule remains an important avenue for shareholders seeking change in corporate behavior c n issues of corporate governance and social policy.
The authors would like to thank Jennifer Bethel, Pat Conroy, Amy Edwards, Franklin Fant, Ankar Kumar, Eddie O'Neal, Jonathan Sokobin, the Editors, and an anonymous referee for helpful comments. This project was initiated while Cynthia Campbell and Cathy Niden were visiting scholars at the 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 those of the Commission or of the author's colleagues on the staff of the Commission.
1 John and Klein (1995) discuss corporate governance and social policy proposals at S&P 500 firms during the 1992 proxy season.
2 Exchange Act Release No. 34-29093 (Sept. 26, 1997); IC-22828; File No. S7-25-97:62 Fed. Reg. 50682 (1997), commonly referred to as the "proposing release."
3 Changes in discretionary voting authority were made under rule 14a-4, and changes related to the timing of shareholder proposals were made under rule 14a-5(e). For a discussion of all proposed changes, see Stone and Kewalramani (1998) and the proposing release (1997).
4 This information is reported in two separate publications: the IRRC Social Issues Reporter and the IRRC Corporate Governance Bulletin.
5 A proposal might not be voted on for other reasons, for example, because the firm was involved in a merger or the sponsoring shareholder did not properly present the proposal at the annual meeting.
6 We employ the IRRC proposal classifications throughout the paper. The SEC does not categorize proposals by type.
7 The 0.8% vote was a Rule 14(a)-4 proposal to repeal a classified board.
8 Many companies have their boards composed of non-overlapping groups or "classes" with only one class up for reelection each year. In the case of a proxy fight for board seats, the existence of the "classified" board ensures that it will take more than one year for a dissident to obtain majority board representation.
9 The IRAA, a coalition of individual investors that focuses on corporate governance initiatives, appears to have evolved as a replacement for the United Shareholders' Association, which was very active in the early 1990s.
10 See Gillan and Starks (1998a) for a more detailed analysis of this issue.
11 In general, a company can exclude proposals that relate to its ordinary business.
12 For a comprehensive review of the literature in this area, see Black (1998), Gillan and Starks (1998b), and Karpoff (1998).
13 The number of submissions is based on a count of how many times the proposal has been voted on during the past five years.
Bacon, C.J., M.M. Cornett, and W.N. Davidson, III, 1997, "The Board of Directors and Dual Class Recapitalizations," Financial Management (Autumn), 5-22.
Bizjak, J.M. and C. Marquette, 1998, "Are Shareholder Proposals All Bark and No Bite? Evidence from Shareholder Resolutions to Rescind Poison Pills," Journal of Financial and Quantitative Analysis (December), 499-521.
Black, B.S., 1998, "Shareholder Activism and Corporate Governance in the United States," in P. Newman, Ed., The New Palgrave Dictionary of Economics and the Law, New York, NY, Stockton Press.
Brickley, J.A., R.C. Lease, and C.W. Smith, 1989, "Ownership Structure and Voting on Antitakeover Amendments," Journal of Financial Economics (January/March), 267-292.
Exchange Act Release, 1997, No. 34-39093 (Sept. 26, 1997); IC-22828; File No. S7-25-97, 62 Federal Register, 50682.
Gillan, S.L. and L.T. Starks, 1998a, "Corporate Governance Proposals and Shareholder Activism: The Role of Institutional Investors," Journal of Financial Economics, forthcoming.
Gillan, S.L. and L.T. Starks, 1998b, "A Survey of Shareholder Activism: Motivation and Empirical Evidence," Contemporary Finance Digest (Autumn), 10-34.
John, K. and A. Klein, 1995, "Shareholder Proposals and Corporate Governance," New York University Working Paper.
Karpoff, J.M., 1998, "Does Shareholder Activism Work: A Survey of Empirical Findings," University of Washington Working Paper, (October).
Kunz, R.M., and J.J. Angel, 1996, "Factors Affecting the Value of the Stock Voting Right: Evidence from the Swiss Equity Market," Financial Management (Autumn), 7-20.
Moyer, R.C., R. Rao, and P.M. Sisneros, 1992, "Substitutes for Voting Rights: Evidence from Dual Class Recapitalizations," Financial Management (Autumn) 35-47.
Smith, M.P., 1996, "Shareholder Activism by Institutional Investors: Evidence from Calpers," Journal of Finance (March), 227-252.
Stone, M.B. and D. Kewalramani, 1998 "Final Shareholder Proposal Rules Fall Short of Reform," National Law Journal (June), B9.
Strickland, D., K. Wiles, and M. Zenner, 1996, "A Requiem for the USA: Is Small Shareholder Monitoring Effective?," Journal of Financial Economics (February), 319-338.
Whidbee, D.A., 1997, "Board Composition and Control of Shareholder Voting Rights in the Banking Industry," Financial Management (Winter) 27-41.
Cynthia J. Campbell is an Associate Professor at Iowa State University. Stuart L. Gillan is an Associate Chief Economist at the Securities and Exchange Commission. Cathy M. Niden is an Economist at Lexecon, Inc.
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|Author:||Campbell, Cynthia J.; Gillan, Stuart L.; Niden, Cathy M.|
|Date:||Mar 22, 1999|
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